A residential property that is personally owned can be transferred into an SMSF if so desired as long as the trustees can prove it is being used for business purposes and not merely as a rent-generating investment, a financial services law firm has stated.
Townsends Business & Corporate Lawyers said the issue of whether or not a property could be considered ‘business real property’, and therefore eligible for inclusion in an SMSF, was a common issue for fund members looking to transfer a property into their fund.
“While the term ‘business real property’ seems to suggest that a property has to be a commercial property (or other non-residential property) to qualify as such, this isn’t always the case,” the legal firm said in a blog post on its website.
The firm noted that while superannuation laws prohibited SMSF trustees from acquiring property from a member and/or a related party to the fund, exceptions applied when the property was business real property, and this was defined by the use of the property.
“The question is not whether or not the property is a commercial or residential property, but is rather whether or not it is being used for a business,” it stated.
It pointed to an example of an SMSF member who owns 20 residential townhouses built as a project, and works full-time managing and leasing the townhouses, which are managed collectively in a ‘business of property investment’.
In the example, the member plans to sell five of the townhouses to his SMSF, of which he is the only member and sole director of the corporate trustee of the fund, to pay off a mortgage over the properties.
This would be possible if the property was being used in a business at the time of the transfer, where it would meet the definition of ‘business real property’, and Townsends noted that while the tenants’ use of the properties was private and did not pass this test, the SMSF member’s use may constitute a business of property investment.
The legal firm, however, cautioned that not every property investment, that is, the buying and renting property for income, was a business and the ATO used a number of measures to ascertain if a business was being conducted.
These measures included the keeping of business records; the size, scale and permanency of the operation and whether its activities are conducted continuously and systematically; a level of repetition and regularity and whether activities are planned, organised and carried on in a businesslike manner; and the existence of a business plan.
“This guidance from the ATO is helpful and we gather that generally there needs to be sufficient scale of activity, repetition, continuity and system for it to be a business,” Townsends stated.
“However, remember that there is no absolute rule of thumb with this question and trustees should seek advice before committing to acquire a property from a related party.”