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Christopher Skelding

Aug 22, 2023

LRBA - Residential Property.

in SMSF Technical Forum

I am auditing a fund with a LRBA. The asset being purchased under the arrangement is a residential unit.

There are two members of the fund, where one member has a sole trader business.

There is a rental arrangement between the members business (where his staff and workers are using the unit for work related accommodation) and the Super Fund. The rent charged is at commercial rates with the lease being prepared and managed by a real estate agent.

Any comments would be appreciated on whether this arrangement is appropriate..

Thanks Chris

1 comment

Comments (1)

The Auditors Institute Ltd

Aug 29, 2023

The concern here is whether the residential unit leased to one of the members of the super fund (who carries on business as a sole trader) will be "business real property" as defined in subsection 66(5) of the SIS Act, so as to avoid the potential application of the "in-house asset" rules, which can apply where an asset of the fund is leased to a related party.

One of the exceptions as to what constitutes an "in-house asset" as per subsection 71(1)(g) is real property subject to a lease arrangement that is "business real property".

The definition of business real property is in subsection 66(5):

business real property, in relation to an entity, means:

(a) any freehold or leasehold interest of the entity in real property; or

(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

(c)if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph - any interest belonging to that class that is held by the entity;

where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

The ATO has considered what is meant by "business real property" in SMSFR 2009/1.

Where, for example, a residential dwelling is used as the premises from which a business is clearly conducted, such as where a dwelling is used wholly and exclusively as a doctor's consulting rooms, or as the offices for a legal practice, then this definition of business real premises is satisfied. Refer to Example 21 in SMSFR 2009/1.

It is less clear that this is the case where the residential unit is used to provide accommodation to a sole trader and their employees who are either on work-related travel or living away from home for work purposes.

The argument that would have to be made - to satisfy the definition of business real property - is that where a sole trader leases the residential unit, they are using it in their business by providing accommodation to themselves and their employees whilst they are either on work-related travel or living away from home. Essentially, this argument rests upon the assumption that the ultimate use by the sole trader and their employees of the residential unit as private, is merely incidental to the purported business use from the prespective of the sole trader's business.

The examples in SMSFR 2009/1 where the ATO overlooks the ultimate private use (accommodation for individuals) are where the property in question is used in a business of providing short-term accommodation - such as a motel with a manager's residence (Example 16) and a property used in Bed and Breakfast that constitutes a business (Example 18).

The concern with the situation at hand is that the ATO could take the view that a residential unit that is used to provide residential accommodation is not capable of being viewed as "business real property" where that accommodation is not being provided in the context of a business of providing short-term accommodation (as was the case with Examples 16 and 18 of SMSFR 2009/1).