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Hi,
I have a client wanting to setup a SMSF and purchase a property.
They are thinking of purchasing a house on a few acres (4-5) and a large shed exists on the property.
Their idea is to fence off the shed and the area that they require and utilising it to operate their plumbing business, then rent the house and remaining paddocks out to a tenant.
They will pay rent at market value from the business to the SMSF.
The property will be similar to: https://www.domain.com.au/380-brownes-road-anakie-vic-3213-2019131629
Will this meet the business real property requirements?
My thoughts are if the remaining paddocks are used for primary production then it may be OK but if not then the property is not being used wholly and exclusively for commercial purposes and it may not be allowable to cordon of a portion for business use? But I could be wrong there!
My first question is from whom is the property being purchased? If the purchase is not from a related person or entity, I see no issue. Not business real property, but not an issue.
Hi CV
Refer example 26 in SMSFR 2008/D3 - Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993.
"Example 26: Subleasing – case 2
313. Bruce, the owner of a double-story riverside property suitable for office or residential accommodation, grants a lease to Alexander’s Accountants.
314. The agreement is for a period of 5 years. There are no terms in the agreement preventing sublease or assignment. Alexander’s Accountants occupies the entire premises for 2 years. After 2 years, Alexander’s Accountants grant exclusive possession of the top floor of the premises to the Penny family. The Penny family live on the top floor of the premises for the remaining term of the lease.
315. This is another example of a sublease arrangement. Alexander’s Accountants, has disposed of less than its full interest in the property by granting rights to exclusive possession over a portion of the area to which it was entitled to exclusive possession under the lease.
316. As a consequence of Alexander’s Accountants’ use of the property, the business use test is met until the Penny family move in. After that time, the property is not used wholly and exclusively in one or more businesses, unless the facts support the conclusion that a property investment business is being carried on, whether by Bruce or Alexander’s Accountants.
317. Alexander’s Accountants’ leasehold interest and Bruce’s freehold interest in the property is business real property of both entities for the first 2 years. Once the Penny family move in under the sublease, each of these interests is no longer business real property for the remaining 3 years of the lease."
My reading of example 26 is that if the property is partly rented out for a non business purpose (eg as a residential property) then that property is not business real property as it is not used wholly and exclusively in one or more businesses.
An option maybe to request a ruling from the ATO or get legal advice.
Thanks
The Auditors Institute