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Dear experts I need your help to understand the above issue. My client is a service provider under NDIS. His company is registered under NDIS to provide support to the NDIS participants in his company's managed residential properties either leased or owned by his trust. My question is whehter the trustees can buy a residentail property under his SMSF to lease that property to his business for the above purposes?
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Hi Dipak
Yes a SMSF can buy a residential poperty from an unrelated party. A residential property can be rented to a related party of the SMSF if the property is used in the running of a business. Yes if a related party is running a business of renting out residential property (under a NDIS scheme) the SMSF should be able to rent the property to them.
Refer SMSFR 2009/1 - Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993, that states:
"Use of residential property
170. An owner of residential property often leases the property to a residential tenant. In these circumstances, it is only the tenant's physical use of the property[80] that is assessed under the business real property definition. Even though this use of the property is ostensibly for a non-business purpose of the tenant, it remains possible for that use to be connected to a property investment business carried on by the owner."
And also:
"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."
Thanks
SMSF AAA