SMSF trustees must use acquired business real property solely for the purposes of operating a business to avoid triggering in-house asset rules.
SMSF trustees can only use business real property (BRP) exclusively for commercial activities because doing otherwise may lead to in-house asset compliance issues, a technical expert has warned.
BT Financial Group advice strategy and technical specialist Tim Howard highlighted an example where an SMSF client had used a limited recourse borrowing arrangement (LRBA) to purchase a commercial property from an unrelated third party.
The property in question was a single-title entity, featuring a commercial space on the ground floor and a residential apartment on the upper level. The client’s intentions were to rent out the commercial space to a related third party in addition to leasing the residential unit to an unrelated tenant.
Howard pointed out this arrangement was likely to trigger the in-house asset rules stipulated in section 71 of the Superannuation Industry Supervision (SIS) Act.
“Is this going to be an in-house asset issue? Is it going to be an issue where we have a property on a single title that we are using for a dual purpose?” he said during a BT Academy SMSF investment strategy webinar held today.
“The acquisition is okay. We are buying a single-title property under a LRBA from an unrelated third party.
“However, where we’ve got this dual-purpose usage and we are renting out the residential space on this single-titled asset, that will mean the property is not wholly or exclusively being used in a business, which would mean that it fails the BRP definition.
“[This] would mean that the commercial portion of the property that the related business is renting would be an in-house asset of the SMSF.”
He added leaving the residential space vacant or having an employee reside on the property solely for business purposes would not trigger the in-house asset provisions.
“Often you can get a commercial space with a residential space above it, an example might be a hotel where you need a manager staying there [or] you might have a bakery where the baker sleeps upstairs so they can start baking at 3am,” he said.
“That would still meet the definition of using property wholly and exclusively for a business and that would be fine. However, in the [stated] example, we’ve got completely separate uses that aren’t connected to a single title.”
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