Tracey Besters, a principal at Deloitte, said at the recent SMSF Association technical summit that there are many “risks and realities” regarding the issue of sole purpose and BRP in a self-managed fund.
Besters said that according to data from the Australian Taxation Office (ATO), about 50,000 funds could be facing challenges with having BRP inside SMSFs.
“[One of those challenges is determining] at what point do we actually cross over the line of sole purpose becoming a problem with the property sitting inside of our SMSF?” she said.
“Remembering that the sole purpose is all-around retirement benefits, not the current, present-day benefit that the business can receive for having the property inside of the SMSF. This is where a bit of a conflict-of-interest analysis comes into play, and we need to be careful about the conflict of interest and the sole purpose, so that is a definite risk.”
Besters gave an example of a business of 18 years that has property within an SMSF it uses, located in a “premium location” as it is close to the members’ home.
A recent valuation saw the property double in value. The business paid about 8 per cent rental return to the SMSF and assumed that with the new valuation, the rent should double. The fund can afford the increase, and the fund will benefit from this change.
The member, however, fears that in a few years, the value of the property will extend past the amount that the business can pay.
“The question is where the SMSF sits if it must be leased at market rate, considering the best financial interests of fund members is not to be kicked out of the SMSF building in a few years because they can’t afford the rent?” Besters said.
“The question that first came to my mind when I looked at this question is do we have a question of sole purpose? Is there a little bit of a sole purpose question mark going on here, given that the reason they have this particular property is the premium location, close to their home?”
Besters continued that this real-life scenario is a perfect example of the conflict that can arise in the sole purpose test.
“Is it the fact that that person says, it is a premium location because it’s close to my home, and so that’s a benefit for myself, or is it the question that that person was raising around the fact that right now, it’s not in the best interest of the members of the SMSF to be kicked out of the property? But what’s in the best interest of the SMSF?” she said.
“It’s important to remember that the sole purpose is all around retirement benefits, not the current, present-day benefit that the business can actually receive for having the property inside of the SMSF.”
She said one of the “big issues” in terms of risks and realities of property and business is not necessarily what happens at the acquisition stage, but what happens ongoing.
“How many [advisers] have seen leases on commercial properties where the terms of the commercial property lease are not now being adhered to? I’ve seen this so many times,” she said.
“The SMSF bought the property and may have acquired it under section 66 but now find they haven’t been adhering to commercial lease terms. That could be a problem as NALI is then going to be a consideration, and how do we manage that? From an in-house asset perspective, we’re looking at section 71, but also we need to be thinking about if we’re not adhering to the terms of the lease practically, then it is also a section 109 issue.”
