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Husband and wife got a unit trust (7:3 ratio) with an old investment property in it with a bank loan . They are now demolishing the old investment property held by the unit trust and constructing 4 brand new residential townhouse with bank finance. The question is if the husband and wife form an SMSF, can SMSF purchase two townhouses from the unit trust outright once the construction is over with or without LRBA finance. SMSF is not investing in the unit trust or the construction activity but only purchasing the townhouses once the construction is completed by the unit trust.
Is there any difference if the townhouse is a rooming service house ( commercial residential)
Thanks in advance
Thank you very much
Hi Antony
Thanks, your question is can a SMSF acquire (purchase) a townhouse from a related party unit trust.
Under section 66 of SIS a SMSF cannot acquire an asset from a member or a related party unless it is:
1) listed shares, or
2) business real property (BRP), or
3) units in an ungeared unit trust (& rules followed).
Acquire means to pay for the asset or to receive it in-specie.
Normally a SMSF cannot purchase residential property (such as a town house) from a member.
A residential property would not normally be considered to be BRP so a SMSF could not normally acquire it from a member or a related party. As an example residential property could be considered to be BRP if it was owned by a person or an entity (eg. Unit Trust) that was in business as a property developer.
A good reference is SMSFR 2009/1 SMSFs: business real property for the purposes of SIS. I would need more details to be able to advise if your example meets the definition of the property being BRP.
A good reference is example 37 of the ruling that states:
"Example 37: Land development
366. Trevor is a land developer whose business involves purchasing land for development, obtaining council approvals, hiring contractors, building, selling.
367. Trevor purchases land for development and obtains approval to build seven units on the land.
368. Trevor is a member and trustee of an SMSF. As trustee of his SMSF he wishes to purchase one of the units.
369. Taking into account the use of the property in Trevor's land development business at the time surrounding the purchase, the units will meet the requirements of the business use test if purchased:
•off the plan[106] before any activity occurs on the land;•after construction has commenced;•after the selected unit reaches lockup;•after all units have been completely finished but the landscaping is in progress;•after the entire development has been completed and the units are being actively marketed;•after the units have been completed for 2 years and the remaining units have been sold but one unit remains and was rented to an unrelated party at market rates; and•one unit used as a display home.
370. At each stage above, the units are being used wholly and exclusively in Trevor's land development business and will therefore meet the requirement of the business real property definition. In circumstances where the unit is purchased shortly before or after development activities are undertaken on the land, the application of the broader approach to the 'wholly and exclusively' test[107] ensures that the business use test is met. However, the presence of additional facts such as private use of the unit, an indefinite hold on development activities or the failure to pay market value may change the outcome because of the 'wholly and exclusively' test and may give rise to other regulatory issues. "
In relation to your rooming service house question you could compare this to example 15 (agency example) & example 21 (Doctor's surgery) of the ruling (refer below) and based on your circumstances this should give you an answer.
If the rooming service house meets the definition of being BRP then yes a SMSF can acquire it from a related party.
Thanks
SMSF AAA
"Example 15: Agency - no relevant business use
283. Ms Harrington owns 10 residential units that are leased to long term residents. Ms Harrington uses the services of an agent to manage the premises.
284. Ms Harrington would like her SMSF to acquire some of the units rather than sell the units to a non-related party.
285. The units are not business real property as they are not used wholly and exclusively in a business. Ms Harrington does not carry on a property investment business as she uses an agent to manage the properties. The premises are not used in the agent's business, which is to provide services to Ms Harrington. "
"Example 21: Doctor's surgery in residential premises
302. Dr Mary owns a house used exclusively by her medical practice.
303. Dr Mary is a member of the Yianni SMSF. Dr Mary, in her capacity as trustee of the SMSF, wants to acquire the house for market value and then lease it back so the medical practice can continue to operate from the house.
304. Although the house was built to be residential premises, it is not used as such. The real property is used wholly and exclusively in Dr Mary's medical practice business. For the purposes of the related party asset acquisition rule in section 66, the property is business real property of Dr Mary. Once acquired by the Yianni SMSF, it is also business real property of the fund and is therefore not an in-house asset of the SMSF."