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An SMSF has recently purchased a commercial property that is being used by the member for private purposes. The activity that the member is conducting is business like, but it appears to be more like a hobby as he's not generating any income from this activity. I am not sure if the member has an ABN. There is however a lease agreement in place between the SMSF and the member as the tenant. Is this sufficient to confirm this property is a business real property and therefore allow this lease arrangement to continue? Or does the absence of "business" imply it’s an in-house asset? If the member had an ABN, does that make any difference to the outcome?
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Hi Neetu
A property rented to a related party is an in-house asset unless the property is business real property as per section 66(5) of SIS.
Business real property is defined at section 66(5) as property "where the real property is used wholly and exclusively in one or more businesses".
Section 66(5) defines a business as:
"includes any profession, trade, employment, vocation or calling carried on for the purposes of profit, including:
(a) the carrying on of primary production; and
(b) the provision of professional services;".
The ATO has a ruling on business real property being SMSF 2009/1 "Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993" This ruling states at paragraph 117 that:
"Without limiting those that may be relevant, the factors that indicate that a business is being carried on include:
•the keeping of business records separate to personal records;
•the size of the operation and the extent of capital investment involved;
•whether activities are conducted continuously and systematically rather than on an ad hoc basis;
•the engagement of employees;
•a purpose and intention to carry on business;
•a level of repetition and regularity of activities constituting the business;
•whether activities are carried on in a similar manner to other like businesses;
•whether activities are planned, organised and carried on in businesslike manner;
•the scale and permanency of operations; and
•the existence of a business plan."
In your example if there no income being generated (or likely to be generated) it would be hard to argue that there is a business. If the member has an ABN this does increase the argument that there is a business as it would suggest that they are setting up the enterprise separate to personal affairs. You will need to consider all of the facts of your situation and compare them to what the ATO notes above as being indicators of whether a business is being carried on.
I also note that the ATO in their ruling note at paragraph 118 that:
"Paragraphs 23 to 93 of Taxation Ruling TR 97/11 provide further guidance on the ordinary meaning of 'business' and the application of relevant factors in determining whether a business exists. The principles expressed in these paragraphs are applicable for the purposes of this Ruling."
The TR 97/11 is the ruling "Income tax: am I carrying on a business of primary production?".
Thanks
The Auditors Institute