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Self Managed Super Fund (SMSF) Article
Mixing holidays and superannuation
By Tony Negline.
This article may be out of date.
28th September 2005
Recently a reader, Peter, asked an interesting question.
“I own a unit in an apartment complex which is managed by a separate company as short-term accommodation for tourists. Can I transfer it into my Self-Managed Super Fund?”
As always, the initial answer to this question is, “it depends but probably not”. Ordinarily a super fund cannot acquire an asset from:
- a member or
- a member's relatives or
- any entity that the members or their relatives control or
- entities that the members or their relatives are deemed to control.
However there are two exceptions – a fund can acquire shares listed on any stock exchange or business real property.
Business real property is defined as land or buildings used wholly or exclusively in one or more businesses.
We therefore really need to work out if the unit is being used in the running of a business.
Over the last few years the Australian Taxation Office has issued three Interpretative Decisions – 2002/732, 2003/807 and 2004/92 – which discuss this very issue from three different perspectives that cover most of the typical arrangements.
ID 2002/732 discusses whether a breach of the law occurred when a SMSF acquired a property from a fund member which is rented to third parties. The property has been owned by the member between 1994 and 2001. This ID refers to Income Tax Ruling 2423 (which was released in December 1987) which says that a person who owns one or two residential properties is not normally deemed to be carrying on a business. In this case therefore the ATO believe a breach of the super laws did occur and the super fund in question shouldn't have bought the property from the member.
ID 2003/807 says that a SMSF can buy a single unit in a large block of units which is owned by a fund member and the units are used for short-term accommodation. In this particular case, the unit block is operated by independent professional managers in an arm's length arrangement on a pooled income and expenditure basis. Net income is distributed to all unit holders on the basis of the number of units owned not on the basis of occupancy rates for individual units. Neither the SMSF member nor any associate of the member has ever occupied the unit. The ATO takes the view that the operation and running of the complex of units amounts to the carrying on of a business. Taking all these issues together, the ATO concludes that the unit can be bought from the member.
ID 2004/92 looks at a residential property owned by a SMSF member and the property is managed by a property manager. Income is received by the member, based on the occupancy of the property after taking into account expenses incurred with respect to the property. The ATO believe that the property manager may be “engaged in an enterprise but is not carrying on a business with respect to the property” because the manager acts at the owners agent, before the manager does anything in relation to the property they must seek the owners approval and the owner is ultimately responsible for all property expenses. Therefore the property is not business real property for the owner or the property manager and the fund cannot buy it from the member.
Peter, our reader, took the view that the circumstances described in ID 2003/807 reflects their personal circumstances. Should Peter therefore sell the property to his SMSF?
Taxpayers need to be careful about automatically relying on Interpretative Decisions because as the ATO itself says, these documents “are an edited and summarized version of a decision on an interpretative issue on [the] law” administered by the ATO. However “IDs ... may have been complex legal argument applied to complex facts, a general similarity to the circumstances in an ATO ID will not necessarily lead to the same tax result.”
Therefore if a taxpayer who relies on a particular ID that has circumstances that are materially the same as those described in the ID and it is subsequently found to be incorrect, then penalties will not apply on the outstanding tax. However, the ATO might impose penalty interest. It is often necessary to check that there has been no amendment in the law once has ID has been published because once the law has been changed, that new law applies.
Added to this, if a SMSF acquires an asset from a member or one of their associates then severe penalties – one years jail or the monetary equivalent – can be imposed.
If the asset is sold to the fund, then there are capital gains tax, stamp duty and legal costs to consider. What does the SMSF itself have to sell before it has sufficient money to buy the asset. The SMSF may only purchase the asset on an arm's length basis.
Therefore Peter is probably best to seek specific assistance to make sure that his own circumstances sufficiently fall within ID 2003/807.
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.