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Member of the SMSF operates a scaffolding business in the mines in far North Western Australia (WA). Currently, his business incurs significant expenses on rent for FIFO (Fly-In-Fly-Out) workers who need accommodation while working. He is contemplating using his SMSF to purchase a residential property where his workers can stay.
•His SMSF would own the residential property in town. • The FIFO workers would reside in the house during their work shifts. • The scaffolding business would pay market rent to the SMSF for renting the property.
Given that this is a commercial business transaction, there is a question of whether the property could be classified as business real property, potentially aligning with superannuation rules. Do we need to consider any other compliance matter while auditing the fund.
It is assumed that the scaffholding business is operated through a structure such as a company or trust that the fund member controls or has an interest in. It is assumed that this strucuture would be a Part 8 assocate of the member of the SMSF.
A concern here is whether a residential property leased to a related party of a member of the super fund 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 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 premises is used to provide accommodation to the employees of a related party of a member of super fund, 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 the related party of the fund member is leasing the residential premises, that they are using it in their business by providing accommodation to 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 related party's employees of the residential premises as private, is merely incidental to the purported business use from the prespective of the related party'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 premises 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).
It would be interesting to hear the perspective of other fund auditors on this question.
I think that example is OK as the proeprty is being used by the business in its business activities for FIFO workers.
I have a more clear cut case where someone wants to buy a residentail house in SMSF and lease it to his mortgage broking business - my questions is shoudl they do a residential lease or commercial lease?