Business real property use must be restricted

business real property use

SMSFs with business real property are not required to use every part of it as long as they can show it is not being used for any other purpose.

SMSFs holding business real property within a fund will not be caught out by the ATO if part of the asset is unused, but must also ensure it is not being used by any parties unrelated to the business occupying the property.

Smarter SMSF chief executive Aaron Dunn said for any property to be considered as business real property within an SMSF it had to be “wholly and exclusively” used in one or more businesses, but this raised questions as to how far that measure goes.

Speaking during a webinar today, Dunn said: “We have very similar definitions here, but they are not identical requirements, so we need to silo these to understand each of the interpretations of what is wholly and what is exclusively.

“Wholly here is suggesting the entire area of the property should meet the business use requirement and then exclusively here is suggesting the property is required to meet the business use requirement to the exclusion of any other use.

“The fact that a property or part of a property is not being used at all will not fail to meet the wholly and exclusively test,” he added, pointing to a recent case seen by his firm.

“We looked at a premises, a residential premises, and it was now a doctor’s practice, but there were some rooms that weren’t really being used to any extent.

“It was a medical practice as the front garden had been turned into a car park and there were consulting rooms, so the question became was it actually wholly used for the operation of the business.

“Technically it wasn’t as there was some parts to that building that were not being used at all, but when we looked at the exclusively aspect, there was no other reason that those rooms were not being utilised.

“We were comfortable that the exclusively test applied in addition to the wholly test when we applied a level of materiality to it and this meant it would satisfy that business real property definition.

“So, things like minor or insignificant or trifling non-business use still allows for us to accommodate this business real property requirement under the threshold.

“The ATO also does say we will use a common-sense approach to accommodate some of the departures from a very literal application here.”

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