Liam Shorte, director of SONAS Wealth, says one of the most common queries he receives is whether an SMSF can acquire a residential property from the trustees personally.
“If you talk to an accountant or financial adviser about whether you can buy a residential property from a related party or rent one to your family and often the answer is a simple: ‘you cannot acquire a residential property from a party or lease it to a member or related party’,” Shorte said.
However, he said this may not always be the case.
“An SMSF Specialist Advisor (SSA) will often dig deeper to explore the proposed strategy in more detail because it is not about the nature of the property, whether it is a residential property or a commercial office or industrial unit, but rather it is about the actual use of that property at the time of acquisition or when entering the lease.”
Shorte continues that there is often residential property in suburbs or regional towns used by professionals such as doctors, lawyers and accountants as their business premises, and in which no one is living.
“In this case, the residential property is actually a business real property and can be acquired from an SMSF fund,” he said.
He said the questions that need to be answered are who the property is being acquired from and how that property is being used at the time of the purchase.
“The exemption in s66 for business real property is tested at acquisition, so if it is currently not 100 per cent business real property as per s66(5) of the SIS Act, it cannot be acquired from a related party.”
“However, there is another chink in this rule, in that it does not have to be exactly 100 per cent as in the case of a farm where the use of the farmhouse for residential is incidental and therefore allowed. Another example would be the manager’s quarters in a motel. So, you can see that it pays to look deeper into the exact details of a property’s use.”
Additionally, Shorte said an SMSF can acquire a residential property and repurpose it as a business property to be let back to a related party business if the property will be used wholly and exclusively for the business at the time of acquisition.
“If some portion of property is used for personal storage, then the property is not used wholly and exclusively for business.”
“One solution may be to change the nature of the residential property before purchase with the cooperation of the vendor and lease the premises properly from them. This might involve fitting out the rooms as offices/treatment rooms.”
He added that if this is done, when acquiring or moving the property into the SMSF, it will meet the business real property definition.
“However, it’s best not to try to bend rules, the ATO and your auditor will be looking to see that the changes are long term and with a serious intention for the property to remain as a business real property.”
