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Self Managed Super Fund (SMSF) Article
Many subplots on vacant land
By Tony Negline.
This article may be out of date.
12th August 2009
Since the GFC an increasing number of small super fund have been looking for ways to make money other than via listed shares. Over the last 18 months we've been an increasing number of questions about property development and super funds.
Typically the inquirer wants to know how to make sure all the itty bitty super rules are dealt with properly.
In this article we're going to look at the issue of super funds buying vacant land and developing it. We'll also look at whether or not property can be considered to be trading stock.
In another article we'll consider if a super can actually be a property developer. A property developer is not necessarily running a property development business. Determining if a business is being run can be quite complex and in many cases expert advice will be essential.
A good place to begin our discission on vacant land is to work out who owns the land and the purpose for which it's being used and the reason why a super fund wants to hold that land.
If a related party owns vacant land then a super fund may only purchase it if it is "business real property" (BRP) which is a special legislative term. The ATO have issued a very good but lengthy ruling about BRP (SMSFR 2009/1).
In SMSFR 2009/1, the Tax Office makes the point that vacant land might be business real property if the land is being used. "That is, there are activities, operations or actions occurring on the land". For example vacant land used as a car park if a car parking business is being run.
The tax office ruling contains four examples which provide some very useful background information to determine if vacant land is BRP:
Example 1: Nicole Chisholm owns 50 hectares of vacant pastoral land. She hasn't previously rented the land but during a drought, she allows "a friend who conducts a primary production business to graze cows on the land in return for a fee that reflects market value".
This arrangement lasts for 6 months and after this Nicole doesn't intend to lease the land to anyone again.
Whilst Nicole's friend was leasing the land she wonders if the land could be acquired by her Self Managed Super Fund.
The Tax Office believes that it is not business real property because it is only temporarily being used in the running of a business. As a result Nicole cannot sell the land to her super fund.
Example 2: "Andrew and Carolyn own a vacant block of land zoned for business use." Their son, Flynn, "parks trucks and other machinery that he uses in his business on the vacant block." There is no written lease and Flynn doesn't pay to use the land.
The ATO believe that the land is not business real property. Importantly the zoning of the land doesn't impact their conclusion.
Example 3: "Brendan and Millie own three blocks of land adjacent to each other. Their factory and retail outlet is located on one block, another block contains the car park for the business, and the third block is vacant."
The ATO believe that the land used for the factory and retail outlet and the car park are BRP but the third block has no business use and isn't business real property.
Example 4: "Trevor is a land developer whose business involves purchasing land for development, obtaining council approvals, hiring contractors, building and selling."
One of his developments has approval to build seven units on the land and he would like his Self Managed Fund to buy one of these units.
The ATO say that the unit will be business real property if purchased:
- before any activity occurs on the land – that is off the plan
- after construction has commenced
- after the selected unit reaches lockup
- after all units have been completely finished but the landscaping is in progress
- after the entire development has been completed and the units are being actively marketed
- after the units have been completed for 2 years and the remaining units have been sold but one unit remains and was rented to an unrelated party at market rates
- when one unit is used as a display home
The ATO ruling goes onto to show that Trevor needs to be careful. If the unit is used for private purposes or there is an indefinite hold on development activities or the flat is not purchased for market value then the unit may not be business real property. Further there may be other super rules that come into play.
Bryce Figot of DBA Lawyers in Melbourne believes this final example looks at a situation similar to that discussed in the High Court St Hubert's Island case decided in 1978 which involved land in Brisbane Water near Woy Woy in New South Wales.
This case actually looked at whether virgin land acquired by a land developer for substantial improvement, subdivision and sale was trading stock.
All five presiding High Court Justices agreed that land could be trading stock but for reasons not important here two Justices decided that the land in the St Hubert's Island case was not trading stock.Justice Anthony Mason said in his judgement, "just as raw materials and partly manufactured goods form part of the trading stock of a manufacturer, so also virgin land which has been acquired by a land developer for the purpose of improvement, subdivision and sale in the form of allotments will form part of his trading stock."
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