SMSFs holding business real property (BRP) within their portfolio must be able to show the property was always used for business and not reclassified as such for a short time to allow it to be transferred into the fund, an SMSF technical expert has noted.
Smarter SMSF chief executive Aaron Dunn said for an SMSF to hold BRP it must hold an interest in real property that satisfies the business use test in ATO SMSF Ruling 2009/1 in which the property is used wholly and exclusively by one or more businesses.
Speaking during a recent webinar, Dunn added this use must be established and cannot be contrived either at the time of adding the BRP to the SMSF or at any time afterwards.
“When we look at this wholly and exclusive requirement, we need to look at the character of the real property’s use and that will determine whether the business use test has been satisfied or not,” he said.
“It’s not simply saying let’s reconstruct a particular arrangement here to determine what was maybe previously a residential property into commercial property, click a box and move on and then turn it back again.
“Considering something at a particular point of time, especially for the acquisition of an eligible interest [in BRP] isn’t solely going to look at an absolute period of time, but is going to require a holistic assessment of the facts and circumstances and extend to the surrounding periods.”
He noted any change in the nature of real property had to be substantive and the ATO considered that change had to be long term and enduring in nature.
“We can’t reclassify or repurpose something for a particular point in time to allow ourselves to circumvent the related-party acquisition rules,” he said.
“There is an expectation that we look beyond the immediacy of that issue and we look at the history that may have been before, but also what would happen after to determine for that related-party acquisition whether we actually had business real property or not.”
