SMSF Purchasing from a Member

Hi ASB,

To enable your SMSF to purchase a property from a member, it must be considered 'business real property' – meaning it has to satisfy the business use test which is: "used wholly and exclusively in one or more businesses"

SMSF Ruling 2009/1 deals with the definition of 'business real property' in more detail.

The following example (#13 of 37 examples) would be relevant to your situation:

Example 13: Letting holiday flats – no business

• Ms Hend owns 2 holiday flats, which she lets for short-term accommodation at a popular holiday destination. Ms Hend and her partner manage and maintain the flats, which includes cleaning and repairing the flats, and financial tasks such as banking.
• Ms Hend and her partner set up the Hend SMSF and both become members of the fund. They propose that the Hend SMSF acquire the flats from Ms Hend.
• The elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on. However, the scale of the operation is such that it is not considered to be a business. As there is no business conducted in respect of the premises, the property is not business real property . Any sale of the flats to the Hend SMSF would contravene the related party asset acquisition rule in section 66.

Based on the above, your unit in the snowfields would not be considered business real property.

The only other example I could find from Ruling SMSF 2009/1 is the following (#19):

Example 19: Strata titled hotel complex

• Mr Chou owns a studio apartment in a strata titled hotel complex. The contract for purchase includes a requirement that the unit is leased for fifteen years to Xin Pty Ltd, hotel business, with rent paid to Mr Chou based on occupancy of the complex. The contract specifies that the freehold owner has no right to reside in the unit during the time it is leased to Xin Pty Ltd.
• Mr Chou wishes to sell the unit to his SMSF.
• The real property is used wholly and exclusively in Xin Pty Ltd's hotel business and is business real property of Mr Chou for the purposes of acquisition. However, if Mr Chou or a related party of the SMSF intended to stay in the unit at any time, there may be in-house asset implications.

You haven't provided enough information to enable me to be able to determine whether example 19 could apply to your situation.

It really comes down to whether there is a business involved – i.e. if there was one company that rents a large number of units in the same area an then handles all the bookings etc (similar to example 19 above) then it may be considered business real property as it is used wholly and exclusively in that business.

There is no work-around solution if the property cannot be considered business real property to enable you to acquire that particular unit.

There is nothing stopping you selling your unit to a third party and buying another completely different unit (can't be the same unit) in the name of the SMSF from an unrelated party – however you would obviously incur additional selling costs which is not ideal.

The other bigger picture issue is diversification – you haven't mentioned what other investments your SMSF has apart from the other unit it already owns – so maybe two very similar units at the same location are not ideal in terms of the risk aspects?  I know the yield seems good – so you will have to balance that against any potential risk.

I hope that the above is helpful and provides some clarification.  If you have any other questions please let me know.

Kris