Leigh Mansell, director of SMSF technical and education services at Heffron, said tiny homes may be the “flavour of the month”, but there are a lot of things that need to be investigated in regard to SIS and real estate law compliance.
“[Investing in a tiny house] is actually way bigger than the super law, and given that a lot of us don’t play in the sand pit of property law, or conveyancing law, and we’re not all over local council regulations or state-based regulations, this is probably one of those times where you’d be referring your client to a lawyer that specialises in those sorts of areas,” she said.
“However, there are a couple of things to bear in mind when we’re dealing with the super law.”
Mansell gave an example of an SMSF that owns a residential property leased to an unrelated party and wants to add a tiny home to the back of the property, leasing it to a new tenant to bring in extra income to the fund.
“Firstly, you need to think of property law issues, which is where you would probably refer them to a lawyer,” she said.
“Next, the fund probably already has an existing lease in place for the house that sits on property, and what is probably on that lease is the tenant has got exclusive use of the entire property. One of the things that need to be considered if you’re going to put an extra small dwelling on the back of the land is amending the lease with the consent of the tenant.”
She continued that if the existing tenant agrees to the arrangement, there might be things that need to be adjusted, such as the exclusive use of the property and rent.
“There’ll be adjustments to the terms and conditions, and I imagine part and parcel of that adjustment might also include an adjustment to the rent that you’re getting for the top part of the property,” she said.
“You might find you then need to adjust the rent to market, and if the existing tenant has a smaller chunk of land, the rent may have to be adjusted to the current day market value.”
She warned that there is a risk in some jurisdictions that if the lease is for part of a parcel of land, this could be a deemed subdivision, especially if it is a longer-term lease.
“My research indicated [that] if a lease goes for five-plus years, this may be unlikely in a residential context, but again, you’d be looking to a lawyer to help out with this sort of intel,” she said.
“You’d also need to think about whether the client acquired that residential property using a limited recourse borrowing arrangement [LRBA] and how that may be impacted by putting a permanent small dwelling at the back of that existing property.”
She said it is important to think about whether a tiny home may fundamentally change the character of the asset because if it does, the fund may have a problem under the borrowing provisions of the Superannuation Industry (Supervision) Act (SIS Act).
“If it’s the same asset, then you’re not going to have a problem. What might work in the fund’s favour is the SMSF ruling that came out in 2012 in relation to LRBAs,” she said.
“There is an example in the ruling, where an SMSF owns residential property and adds a granny flat to the back of the property. In that particular ruling, the ATO said the LRBA was over residential property and after the improvement was made to the property, it was still residential property to the character of the asset. It would be an improvement, though, and the fund would need to pay cash for it.”
