Keeghan Silcock, senior associate with Cooper Grace Ward Lawyers, said although SMSFs are prohibited from purchasing assets from related parties, there is an exception if the property is business real property.
“For the property to be business real property, the land and the buildings need to be wholly and exclusively used in a business,” Silcock said.
“One issue that we see some clients falling foul of is where the activities undertaken on the land are insufficient to amount to a business. For example, where the entity which owns the property is leasing the buildings.”
An SMSF could be under the assumption that leasing residential apartments to third parties is a leasing enterprise, but it is difficult to ensure it satisfies the ATO’s requirements, Silcock said.
“For the entity to be carrying on a leasing business, there needs to be extensive operations of a leasing nature.”
“It’s usually insufficient for that entity to just be leasing that one property.”
She said if the property is considered business real property, the next step is to determine how the purchase price for that property is paid by the fund to the related entity.
“What we need to do in SMSF land is to pay market value consideration from the fund as the buyer to the related entity as the seller of that property. There needs to be appropriate evidence of market value,” she said.
“It needs to be within three months of the transaction occurring and take into account the true characteristics of the property. The consideration for the property needs to be paid on settlement, just as if it was a normal transaction.”
She continued there are a couple of things that can be done to pay for that consideration that might not otherwise be possible in another structure.
“One option is having some or all of the purchase price treated as an in-specie contribution by members to the super fund. Effectively, they’re contributing to the fund and the fund then gets to set off some of the purchase price that would be payable to the related entity for the property,” she said.
“Another option that clients can look at is a limited recourse borrowing arrangement so that the fund could borrow from a financier or related party to fund some of the purchase price that’s payable for the property.”
SMSFs also need to consider duty and tax if they are buying business real property from a related party, Silcock said.
“Even though it is a transaction between related parties, the fund still has to look at duty and tax in a completely normal sense, as if this were occurring between third parties. In terms of duty, this depends on the state and territory the property is located,” she said.
“There may be an exemption or concession available, but the starting point is that duty would apply at normal rates. If the property is in Queensland one option may be to look at whether trust cloning is available which may be available where the property’s currently sitting in a trust and can be potentially transferred to the fund without duty.”
