Can an Self Managed Super Fund (SMSF) acquire real property – used for short-term accommodation – from a party related to the members of the SMSF without breaching the prohibition on related party acquisitions under super law?
One answer to this question is whether the seller of the property, being a related party, is using the property for the purpose of carrying on a business under the ‘business real property’ test. It appears to be difficult to satisfy this test if the alleged business of the seller is one of leasing out a property for the purposes of short-term accommodation. Whether the Australian Tax Office (ATO) would regard these activities as carrying on a ‘business’ depends on a number of factors. This article:
- outlines the ‘business real property’ test
- discusses SMSF Ruling 2009/1 (Ruling) on the meaning of ‘business real property’
- discusses the option of seeking a Private Ruling from the ATO.
Melissa Ramov, Maddocks Lawyers
What is the ‘business real property’ test?
The acquisition of real property by an SMSF from a related party is a permitted related party acquisition where at the time of acquisition, the property is ‘business real property’ of the seller. The law defines ‘business real property’ as follows:
‘… where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not)’
Accordingly, in order to satisfy the ‘business real property’ test, at the time the SMSF intends to acquire the property from the related party seller, the seller or the seller’s tenant (where the seller is leasing out the property), must use the property ‘wholly and exclusively in one or more businesses’. If the business activities involve leasing out the property as short-term accommodation – it may be difficult to establish an argument that the seller (or the tenant) is carrying on a business.
The Ruling draws a distinction between operating a business, and conducting investment activities. For example, on the similar question of when an SMSF may be regarded as conducting a property investment business (and whether the SMSF’s various properties are ‘business real property’), the Ruling states that:
‘it would be unusual for the [business real property] indicators to be met to such a degree to distinguish the activities of the fund from the normal investment duties of a trustee’.
Therefore, the threshold for the running of a short-term accommodation business requires clear indicators that a business is in fact carried on. The extent of the short-term accommodation activities should be greater than simply investing in property in an ad-hoc manner or on a small scale. It is often the case that short-term accommodation leasing activities occur on an ad-hoc basis (e.g. summer holidays) and on a small scale – making it difficult to establish that a business is being carried on.
Which factors point to the carrying on of a business?
In order to determine whether a business is being carried on by the relevant entity, the ATO in its Ruling considers the following factors:
- the scale of the relevant entity’s leasing operation is a key consideration
- the regularity and repetition with which the owner of the property conducts the activities
- the nature of the operation: are there indicators of activity being undertaken which take the activities from mere investment activities, to the conduct of a business
- further to the above point, whether the entity asserting that it is carrying on a business:
- has a business plan
- maintains business records
- has an ABN
- is registered for GST purposes.
Given that short-term accommodation activities through platforms such as AirBnB and Stayz have become more prevalent in recent times, it has become much easier for property owners to conduct regular and repetitive leasing activities, and to maintain business records which evidence those activities. Given that the Ruling was published in 2009, it does not make reference to leasing activities conducted through such platforms. Accordingly, the Ruling does not address factors such as:
- whether the number of properties held by the relevant entity is an important factor: the Ruling made a distinction based on the number of properties the relevant entity held. However, now it may be sufficient for an entity to conduct a business with a single property
- indicators necessary to demonstrate a short term leasing ‘business’ is being conducted, such as whether the property is always available for leasing, the number of times a year it is successfully let and the extent to which related parties may let the property.
It is clear the Ruling needs to be updated to reflect these new realities.
Applying for an ATO private ruling
It is better to have certainty on these matters before an SMSF proceeds with a related party acquisition. If the ‘business real property’ test is not established and the SMSF proceeds with the related party acquisition – it could result in a breach of super law.
Given the potential difficulty in establishing an argument for the seller carrying on a ‘business’ of offering short-term accommodation – the best strategy would be to seek legal advice and apply for an ATO private ruling.