SMSFs should not read the definition of BRP too narrowly as its has some exceptions that remain despite changes to other LRBA rules.
The definition of business real property (BRP) should not be viewed in a narrow way following changes to the rules of what can be acquired using a limited recourse borrowing arrangement (LRBA) as some non-business use of a property is allowed.
Heffron director SMSF technical and education services Leigh Mansell said the change to ban the acquisition of residential property via an LRBA has raised questions about what constitutes BRP given it is the only type of property acquirable under an arrangement.
“The definition of BRP lives in the super law and is essentially real property used wholly and exclusively in one or more businesses, and that could be anybody’s business,” she said during an online update today.
“There’s been no definitional change to what BRP is. We have a Superannuation Industry (Supervision) (SIS) Act definition and we also have ATO SMSF Ruling (SMSFR) 2009/1.
“In that ruling the ATO expressed their interpretation of what it means by ‘wholly and exclusively’.
“If you were just looking at the legislation in isolation, you would say, “to meet the definition it would strictly need to be every last inch of that property at all times. It needs all of it, at all times, to be used in a business, otherwise it’s not going to meet the BRP definition.
“However, when you go to the SMSF ruling on this it’s not that black and white because the ATO stated you still might have business real property even if a bit of that property is not being used at all.
“There might be a small chunk of it not being used at all, and the ATO has said, in that case, as long as the property is being used to an appreciable degree in one or more businesses it won’t fail to meet the definition of BRP.”
“There is another limb within the ATO ruling that identifies there might be some non-business use which is mission critical in relation to the person using the property for the purposes of running their business.”
Mansell illustrated this with the well-known scenario of a motel that requires a manager to live on site full time adding the regulator was aware that this was a necessity for that motel business to run.
“That wouldn’t be a problem from a BRP definition. The ATO has also recognised minor, trifling or insignificant non-business use would also be okay and not jeopardise the property meeting the definition.”
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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