BRP definition requires urgent fix
The current definition of business real property (BRP) is not fit for purpose under new rules that prevent residential property acquisitions in a fund via a limited recourse borrowing arrangement (LRBA) and should be updated promptly, according to the SMSF Association.
The claim was made in a submission to Treasury regarding tranche 2 of draft legislation to make changes to capital gains tax and negative gearing, where the professional body noted the LRBA restrictions were unrelated to those measures, but were made to gain support for them in the Senate.
The submission stated the term business real property “was designed to provide clarity on exceptions to the related-party acquisition rules and the in-house asset rules, which also involves certain related-party arrangements”.
“The BRP definition is not fit for purpose for use in the LRBA provisions,” it added in reference to it being used in those provisions to make a distinction between residential property and other property available for acquisition by an SMSF.
“BRP is a precise and specific definition that does not refer to or consider the zoning of the property. What constitutes BRP is substantially a fact-based determination requiring the property to be wholly and exclusively used in a business and looks at the nature of the connection between the use and a business.”
The association also critiqued the timing of the application of the BRP test under the new LRBA restrictions, noting it had become limited in its scope and application.
“BRP is applied at the time of acquisition and, in some cases, it is a continuous test applying throughout the holding period,” the submission noted.
“The LRBA amendments do not address circumstances where the fund acquires property not used in a business at the time of its acquisition, but it is intended to be used in a business post-acquisition.”
Examples provided by the industry body of property that would not meet the definition of BRP included vacant land that was in use by a business for storage, parking or primary production activities, a newly constructed commercial property yet to be used by a business and residential property that may be used as BRP after acquisition, such as a doctor’s surgery and professional offices.
The submission called for a legislative solution to address concerns where an SMSF may acquire property for use in a business that did not meet the strict definition of BRP, adding the ATO’s SMSF Ruling 2009/1 on the matter was out of date.
“The ruling is aged and needs modernisation to ensure it operates effectively in a contemporary setting,” it said.
“However, any review or update is unlikely to provide a remedy or relief for SMSF trustees seeking to acquire property that falls outside the strict BRP definition given the purpose of the ruling.
“Further, trustees do not have the luxury of time and cannot wait for an updated ATO ruling. They need an urgent and common-sense legislative solution.”
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
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