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Self Managed Super Fund (SMSF) Article
Owning Property in a SMSF

By Tony Negline.

This article may be out of date.

15th June 2005

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Self Managed Super Funds are a very powerful story for anyone wanting to invest in commercial, retail and industrial property.

The chapter titles tell the story - tax concessions when you make super contributions; tax concession on investment earnings; you fund can invest in business premises if that’s what you want to do; capital gains are only taxed at 10% and lastly tax concessions available when you are taking the money out.

These facts make SMSFs very attractive for anyone running their own business especially when they want the super fund to own the premises where they, or their relatives, conduct their business affairs

The super laws contain some very important restrictions on how the trustees, members, their relatives and other entities they control (such as trusts, companies or partnerships) can use the money in a super fund for their own purposes.  In general terms, only five percent of the market value a super fund’s assets can be used by these people.  This is called the ‘in-house assets’ test.

However this five percent restriction does not apply to a Self Managed Super Fund that owns “business real property” which is leased to anyone – including the trustees, members, their relatives and so on.

It is very important to understand what business real property is.  BRP is a freehold or leasehold interest in real property, that is, land and buildings, and any interest in Crown land (other than leasehold interest) which is capable of assignment or transfer and the property is used wholly or exclusively in one or more businesses.

Clearly business real property does not include property which is used partly for running a business and partly for residential purposes.  For example, suppose a SMSF owns a retail shop and above the shop is a small flat which is zoned residential and is therefore rented out accordingly.

It is highly unlikely that a SMSF would be deemed to be running a residential property rental business (in any event the Australian Taxation Office does not like SMSFs running businesses) so this particular property will almost certainly not satisfy the requirement to be used wholly and exclusively by one or more businesses.

As a result such a property cannot be leased to the SMSF’s members, their relatives or companies, trusts or partnerships that any of these people control.

This restriction does not apply to farmers.  A SMSF can own a farm and lease it to the member, ie, the farmer, as long as no more than 2 hectares of the land contains a dwelling that is used for private or domestic purposes.  The predominant purpose of the whole property cannot be for private or domestic purposes.

Clearly subject to these restrictions small businesses can use their SMSF monies to own their business premises.

This can be a handy way for a business to gain access to cash or expand into larger premises.  For example suppose a business owns their current offices which are worth $250,000.  The business owners also have a SMSF which has $400,000 in it.  Ideally the business needs bigger premises but it doesn’t have the cash to buy the new place outright or expand the existing premises and doesn’t really have the cash flow to support any new borrowings for either of these options.

There are a number of alternatives available.  The business owners could sell their current premises to someone else and have the super fund acquire newer larger premises.  In this way, the business would generate some additional funds.  The business owners could sell their business premises to the SMSF and use the remaining funds in the SMSF to expand the premises.  The SMSF could buy newer larger premises and lease these to the business; this option would enable the business to sell the existing premises thereby freeing up some much needed cash.

Any lease arrangement between a trustee and a related business must be done at arm’s length.  This means that the SMSF trustee must make sure the arrangement is documented in the same way that commercial property leases are done in the local area including the provisions for a market rent, for regular rental reviews, for late or no payment penalties and so on.

The trustee must be prepared to enforce its rights (including imposing penalties) in exactly the same way that they would if an unrelated business was leasing the property.  The conflict of interest for a SMSF trustee in these circumstances is pretty obvious and it is common for trustees to miss rental reviews and allow their related businesses too much slack when is comes to paying rent on time.

In the recent past it has been fairly common for super fund auditors to turn a blind eye to these same issues because invariably the auditors also look after the trustees other affairs including the business and personal accounting and tax needs.  However because of new harsher requirements demanded of auditors by the ATO such a lenient attitude won’t be seen as often as in the past.

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