Shelley Banton, head of technical at ASF Audits, has said the test requires looking at the connection between the property use and business to make sure it is being used in a way that will satisfy compliance.
“The business use test in business real property is determined at the time of acquisition. It starts right from the point that the trustee considers acquiring that property, which gives a lot more scope around whether it is business real property because right from the start you’ve got to determine whether you’re thinking about if you’re going to acquire that property or not,” Banton told delegates at the SMSF Association National Conference.
“If we assume that a property isn’t business, and the trustees are considering purchasing it, they want to then make some changes to that property so it does meet the definition. They can do that, but as long as those changes are substantive and enduring.”
Banton said the requirement from the ATO is designed to stop trustees from “window dressing” properties so that they can be classified as BRP at the time of acquisition and then soon after change the nature and characteristics so they can get the property into the fund.
“The prohibition of avoidance scheme in Section 66 also kicks into play at this point. What we need to look at is, what is the underlying use of the land and to what degree is it being used in a business?”
“It’s a holistic assessment of all those facts and circumstances that are going to come into play. [As an auditor] we sometimes don’t quite get all the information that we need up front and that’s where a continuing dialogue goes on, so we can assess the facts from a holistic point of view.”
Furthermore, Banton said it is important for auditors to assess what’s happening on the land, by looking closely at activities, operations, and other actions occurring on that land.
“It must be there in play to an appreciable degree or extent. If we look at a situation where you’ve got maybe minor, insignificant or trifling non-business use, the commissioner acknowledges that having it wholly and exclusively in one or more businesses might be quite a rigid definition, so there is a little bit of flexibility there.”
Banton gave an example of Bruce, who owns a motel that he operates with his family and an onsite manager.
“So part of that business is not actually being used in the business. It’s been used for the manager to operate the business, but the use of that area that’s not being used in the business is incidental.”
“However, the manager is relevant to the operation of that business because they have to manage the motel. It is then business real property, and Bruce’s fund can acquire that property from the related party.”
Another exemption is in primary production that leads to a residential dwelling that doesn’t exceed two hectares and is not the main use of that primary production property.
“That’s two hectares in total, so it doesn’t matter if you’ve got one or three residential dwellings on that property, the maximum amount that it can’t exceed is two hectares.”
“Lastly, just because you’ve got a lease agreement in place, it doesn’t automatically mean it’s business real property.”
To be BRP and be acquired from a member it must be used in a business at the time of acquisitoon correct?
So on this basis if you have a vacant industrial block of land outside of super are you able to lease this outside of super to a related business then a month later the SMSF acquires it from the members? Or 6 months, or a year later?
From what you say it may seem you can’t if you were thinking about it but were not able to do so because it was not being used at the time you first thought about it, but then you go on to say if it is not being used and the SMSF is considering purchasing it they can as long as the changes are substantive and enduring?
It seems to contradict there a little? Can you please explain further and would a long term lease be considered a substantive and enduring change?