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In this scenario the SMSF owns a residential property which has an LRBA on it, it is a sole director/member fund. Originally property was leased to 3 unrelated people on separate leases, the SMSF found this too hard to manage so the spouse of the sole member/director started managing it through his rental property management business. This seems OK so far provided it is all arm's length and the business is legitimate. However, now they propose to lease the property directly to the rental property management business who will then on lease to the tenants and manage them directly, collecting income via lease he holds with the tenants, and then pay the SMSF a fixed amount in return which is a slightly lower figure but the SMSF has security of income. My thoughts are this is not going to fly as the residential property is then being leased to a related party and the purpose of use is residential underlying this. Does anyone have thoughts here? Any help greatly appreciated.
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Thanks for your reply :)
Hi CV
My view is the residential property can be rented to a rental property management business (to then be rented to unrelated parties) even though this business is a related party. This is because the property would be used in a business of property management.
Refer to my comments below & if you have any concerns the trustees could request a ruling from the ATO.
The ATO ruling SMSF 2009/1Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993 provides guidance on this topic.
Business real property (BRP) can be rented to a related party and BRP is defined as:
"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."
To support my view refer below paragraphs from SMSFR 2009/1.
Thanks
SMSF AAA
SMSFR 2009/1 extract:
"Use of property by guests of a commercial accommodation business
187. The application of the business use test in this manner does not require the entity carrying on the business to be the predominant user of the property. For example, the use of property by guests accommodated in hotels, motels and similar types of commercial short-term accommodation is incidental and relevant to the underlying business being carried on.
188. Once again, the purpose of the guests in these circumstances will regularly be of a non-business nature. The necessary connection between the use of the property and a business is reflected in the nature of the business itself. The principal activity of the business involves the granting of rights to guests in relation to the property, ordinarily in the form of a licence to occupy the premises. Therefore, the use of the property is incidental and relevant to, or is occasioned by, the business.
Use of property by a residential tenant where the property is held in an investment business
189. These principles also readily extend to residential property that is held within a property investment business. However, there are two important factual prerequisites that need to be recognised in this context.
190. First, the activities associated with the letting of the residential property must have a business character. The principles referred to earlier in the Ruling regarding the establishment of a business[90] apply here. However, it is widely recognised that the leasing of residential property can often involve investment activities carried out other than by way of business. This issue is particularly relevant where an SMSF trustee leases residential property.[91]
191. Secondly, it is necessary that any such property investment business incorporate the activity of leasing the property, and thereby allowing its use by others.
192. In the absence of a property investment business being carried on by an entity that allows other entities to use the property for their own purposes, there will be no relevant connection between the use of the property and a business. Therefore, other than in these particular circumstances, residential property is not business real property of any entity."