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Private Super - Issue 5 March 2010

Issue 5 March 2010

nest eggBusiness Real Property – Investment opportunities

In the last issue of Private Super we outlined some of the matters that need to be borne in mind when a fund trustee is considering either purchasing business real property from a person or entity that is associated with the fund or the members or leasing it back to them.

To recap, business real property is defined in section 66 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) as:

"(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 in belonging to that class that is held in 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.”

Having determined what business real property is, there are a number of issues that need to be considered in order to determine whether a potential transaction falls within the exemption offered by section 66 of the SIS Act.

Of these, one of the more important tests is that the property is used wholly and exclusively in a business, regardless of whether that business is the business of an entity related to the fund or not.

To illustrate this point we have provided a number of examples below:-

Primary production business with a private residence

Where land is used in a primary production business it will be regarded as business real property provided no more than 2 hectares is used for domestic or personal purposes.

The example below which is contained in Australian Taxation Office Ruling SMSFR 2009/1 indicates that you need to be acutely aware of the use to which the land is put.

Lesley-Anne owns and operates a cattle farm with 40 hectares. She breeds cattle in a primary production business. Lesley–Anne lives on the property and has built a large home. She is also a keen gardener and maintains a large hedge maze and ornamental lake and garden. The total area of the property that she uses for private or domestic purposes is about 3 hectares.

Lesley–Anne is a member of the Jasper SMSF. She wants to sell the property to her SMSF. Because Lesley–Anne uses more than 2 hectares for private and domestic purposes, the exception applicable to rural business real property under Section 66(6) of the SIS Act, will not apply.

Doctor's surgery in residential property

In this example Dr Mary owns a house used exclusively by her medical practice.

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.

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 purpose 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 able to be leased back to Dr Mary and her associates.

Of course just because you can transfer property to a self managed superannuation fund does not mean you should. In next month’s issue of Private Super we will examine the advantages of holding business real property inside a superannuation fund as well as some of the estate planning issues that need to be considered if you do.

For further information please contact Mark Wilkinson on 02 9322 5479.

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