Hi Hassan

A similar issue has been raised previously.

Yes if real property (eg one or more of the units) is used in the running of a business it is considered business real property and the SMSF can acquire it from a related party (i.e. XYZ Pty Ltd) under section 66 of SIS. I have treated XYZ Pty Ltd as a related party of the Fund as Mr ED (the member of the SMSF) is the sole director of XYZ Pty Ltd (the land / property developer).

For guidance from an old APRA circular II.D.3 - Acquisition of assets from related parties - paragraph 20:

"Property that meets this definition includes land on which business is conducted (eg. shop or factory) and land that is the subject of a business (eg. land held by a property developer for development or redevelopment, or in the process of being developed or redeveloped). The question of whether rental property owned by a related party is business real property that can be acquired by the trustee will depend on the facts of the case. Generally speaking, a single residential rental property will not be treated as business real property unless it forms part of a business of owning and leasing residential property."

The ATO ruling on business real property is SMSFR 2009/1 and refer the below for guidance:

"Example 37: Land development

366. Trevor is a land developer whose business involves purchasing land for development, obtaining council approvals, hiring contractors, building, selling.

367. Trevor purchases land for development and obtains approval to build seven units on the land.

368. Trevor is a member and trustee of an SMSF. As trustee of his SMSF he wishes to purchase one of the units.

369. Taking into account the use of the property in Trevor's land development business at the time surrounding the purchase, the units will meet the requirements of the business use test if purchased:

•off the plan[106] before any activity occurs on the land;

•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; and

•one unit used as a display home.

370. At each stage above, the units are being used wholly and exclusively in Trevor's land development business and will therefore meet the requirement of the business real property definition. In circumstances where the unit is purchased shortly before or after development activities are undertaken on the land, the application of the broader approach to the 'wholly and exclusively' test[107] ensures that the business use test is met. However, the presence of additional facts such as private use of the unit, an indefinite hold on development activities or the failure to pay market value may change the outcome because of the 'wholly and exclusively' test and may give rise to other regulatory issues."

As noted above in the APRA ruling it will depend on the facts of your clients situation. If there is any uncertainty they should get legal advice or request a ruling from the ATO.

Thanks

SMSF AAA