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An SMSF owns an apartment in a complex normally leased out through a Motel chain. The members use the apartment occasionally throughout the financial year (total of about 10-14 days a year) and only pay the cleaning fee charged by the Motel chain which is a lot less than the normal rack rate charged to unrelated parties by the Motel. The Trustess of the SMSF were aware of this "deal"made available to all owners of apsrtments in the complex allowing "free"use of their apartment (other than payment of cleaning costs per night) at the time of acquiring the apartment.
The benefit received by the members is realtively minor - on average about $200 per night when compared to what an unrealted party would pay for the apartment.
Would this be a breach of the Sole Purpose Test? If not, the In-House Asset rules?
Hello Anthony
The use of the apartment by members of the fund for only having to pay the daily cleaning fee is problematic from the perspective of the sole purpose test (section 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act)).
This is the case, even though any party that has an arrangement with the motel operator (SMSF or not) could presumably take advantage of the same deal.
There is also a strong likelihood that this arrangement gives rise to an in-house asset concern under sections 71 and 84 of the SIS Act.
Whilst not disclosed in the question, there are broadly two ways an SMSF with an interest in a hotel/motel room, can provide that room to the hotel/motel operator.
The trust of the SMSF could lease the apartment to the operator of the motel, to be used in their business of providing short-term accommodation. At first glance, where an interest in real estate is used in this manner it would be ‘business real property’ and hopefully it would be excluded from being an ‘in-house asset’.
However, under section 71(2), an interest in real property can still be an in-house asset where it is leased under an arrangement that itself does not give rise to an in-house asset (such as a lease to a 3rd party motel operator) and that under the terms the lease with the other party, it is subject to, amongst other things, “a lease arrangement” with a related party of the fund.
The problem in the scenario at hand is that “lease arrangement” is a very broadly defined term that captures that use of the apartment by the fund member(s) (without needing to consider the circumstances under which the use arose).
The other mechanism by which an apartment owned by a superannuation fund is used in a motel operator’s business is where there is an agency or management agreement entered into with motel operator that grants the rights to use the apartment to guests sourced by the agent/motel operator. In this scenario, the agent/motel operator is acting on behalf of the underlying owner, and the granting of the right to use the property by guests is unlikely to give to rise to an interest in business real property from the perspective of the trustee of the superannuation fund.
The literal consequences for breaching the in-house asset rules, where the asset is non-fungible (such as real estate) are very draconian. That is, in order for the interest in real estate that is considered to be an in-house asset to be less than 5% of the fund’s total assets, the fund is likely to be required to dispose of the entirety of its interest in the asset.
Accordingly, the trustees of the fund may want to seek specialist advice as to what their options are.