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Audit Scenario:
Members owns a residential property (their home)
Council has given approval permitting the construction of the dental surgery only for one dental chair on the residential property and money from the SMSF was used to build a dental surgery on the residential property.
There is an argument that the SMSF owns the dental surgery building but not the land. The building is taken up as an asset in the financials of the SMSF.
The members lease the land to the SMSF where the dental surgery is built. A lease agreement is in place.
The SMSF leases the dental surgery back to the member (who are dentists). A lease agreement is in place.
Would the permission from the council to build the dental surgery on the residential property constitute BRP?
Is s65 breached when the SMSF built on the residential property?
Is s109 arms length dealings breached?
Is there a breach of s62 sole purpose, the member using the dental surgery where the surgery is not considered BRP?
Are there any other sections that may have been breached?
There is a problem if the residential property is sold how would the superfund get their share of the sale for the dental surgery?
Hello Wafaa
Thanks for your question.
The concern here is that this proposed investment would breach section 66 of the SIS Act as the asset in question, being a building on real estate (the dental surgery) is not itself an interest in "business real property".
Under property law concepts, a building on land is ordinarily taken to be part of the land.
The permission of local council to build on the residential property does not assist from a SIS Act perspective.
Should such an investment proceed, assuming it represents more than 5% of the fund's total assets, it would also cause a breach of section 83 of the SIS Act (in relation to in-house assets).
ATO ruling SMSFR 2009/1 makes it clear that a residential property that also supports a business is not capable of being BRP (putting aside the potential exemption regarding primary production land with a residential premises - not relevant to the situation at hand).
Refer to Example 23 (from this ruling) provided below:
Example 23: Mechanic - home garage
309. Stuart Japes is a member and trustee of Japes SMSF. Stuart is also a mechanic who works from his home garage and employs two of his friends (both of whom are not members of Japes SMSF) as mechanics.
310. Stuart wishes to sell the block of land on which his house and garage are constructed to the Japes SMSF.
311. While the property is real property and a business is operating on the property, the property is also partly used as a residential property. The residential use of the property is not incidental and relevant to Stuart's business. That use is also not of a minor or trifling nature. The property is not business real property of Stuart. As a result, he cannot sell the land to his SMSF without the SMSF contravening the related party asset acquisition rule in section 66.
The Auditors Institute