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Self Managed Super Fund (SMSF) Article
Sale of assets to a fund isn't always viable
By Tony Negline.
This article may be out of date.
1st April 2009
It is to be expected that some Self Managed Super Fund trustees will want to look at investment opportunities that don't involve financial markets.
One strategy they might want to consider is selling assets they personally own to their small super fund.
This transaction might also help investors who are personally short of cash and need to rejig their financial affairs.
Let's look at residential investment property as an example. Ordinarily it would be assumed that it's not possible for super fund members to sell these assets to their super fund.
However there is a range of circumstances when it may be possible. As with all small super fund investments it's essential to make sure that a number of points are assessed before a super fund trustee can actually begin implementing the transaction.
A super fund can purchase "business real property" – or BRP – from the fund's members, their relatives or entities controlled or deemed to be controlled by the members or their relatives. BRP at a basic level is any real property used wholly and exclusively in the running of one or more businesses unless the property is held in the capacity of a trust estate.
So our key issue will be to determine whether or not a particular residential property is BRP – that is, if it's an asset used in the running of a business.
What questions do we need to answer in order to work out if a business is being operated? In Self Managed Super Fund Ruling (SMSFR) 2009/1, issued in January, the ATO said that some of the following factors might be relevant in working out if a business is being conducted:
- the keeping of business records separate to personal records
- the size of the operation and the extent of capital investment involved
- whether activities are conducted continuously and systematically rather than on an ad hoc basis
- the engagement of employees
- a purpose and intention to carry on business
- a level of repetition and regularity of activities constituting the business
- whether activities are carried on in a similar manner to other like businesses
- whether activities are planned, organised and carried on in businesslike manner
- the scale and permanency of operations
- the existence of a business plan
It should not be assumed that a business isn't being conducted because one of these factors doesn't apply. It is all a matter of fact and degree. Anyone with any doubt should seek expert advice.
The ATO's SMSF ruling includes a few examples which help in understanding when a residential property business is being conducted.
Example 1: "Ms Hend owns 2 holiday flats, which she lets for short-term accommodation at a popular holiday destination. Ms Hend and her partner manage and maintain the flats, which includes cleaning and repairing the flats, and financial tasks such as banking.
"Ms Hend and her partner set up the Hend SMSF and both become members of the fund. They propose that the Hend SMSF acquire the flats from Ms Hend.
"The elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on. However, the scale of the operation is such that it is not considered to be a business. As there is no business conducted in respect of the premises" and consequently the super fund cannot acquire the properties.
Example 2: "Mr Wood owns 20 residential units that are leased to long-term residents. Mr Wood manages and maintains the flats on a full time basis living on the income generated from the leases. The units are not mortgaged.
"Mr Wood would like his SMSF to acquire some of the units rather than sell the units to a non-related party.
"The scale of the operation together with the elements of repetition and purpose indicate that Mr Wood is carrying on a property investment business" and as a result his super fund could acquire one or more of the units.
Example 3: "Penny and Julie purchased a serviced apartment in a large block of similar units. The contract for sale requires that Penny and Julie make the unit available exclusively for short term stays using the services of a management company nominated by the developer of the complex. Earnings from the unit are returned to Penny and Julie by the management company after fees and reimbursements have been deducted."
Penny would like her self managed super fund to own the apartment
" … Penny does not carry on a property investment business. The use of the apartment by guests does not have a nexus to the management company’s business as this use involves the exercise of rights granted by Penny and Julie, not the management company." Therefore the property cannot be purchased by Penny's super fund.
Before a super fund acquires residential property they need to consider if the investment suites their investment strategy. They especially need to work out how owning the asset assists in meeting possible future cash flow requirements.
There are three other topics to discuss here which we will leave to other occasions. Firstly the issue of land development including the ability of a super fund to conduct a land development business, secondly vacant land as business real property and finally property transactions and the GST.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.