When dealing with Self Managed Superannuation Funds (SMSF's) the term business real property is often used. One of the most frequently asked questions is what is business real property?
The term is defined in subsection 66(5) of the Superannuation Industry (Supervision) Act 1993 as follows:
"business real property" , in relation to an entity, means:
(a) any freehold or leasehold interest of the entity in real property; or
(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or
(c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph--any interest belonging to that class that is held by the entity;
where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.
Key terms in relation to the Business Real Property Definition:
· "Business" includes any profession, trade, employment, vocation or calling carried on for the purposes of deriving a profit. This includes primary production and professional services, but does not include occupation as an employee.
· "Real Property" refers to land, which can generally be identified by reference to titles held over particular parcels of land. It is important to note that fixtures, including buildings, which are attached to the land form a part of the real property.
· "Freehold interest" entitles the owner to exclusive possession of the property for an indefinite time period. It's possible for an entity to co-own real property and still hold a freehold interest, or for an entity to hold a freehold interest in a property that is strata titled.
· "Leasehold Interest" conveys a right on the part of the entity holding the interest to exclusively possess the property for a period of time that is either pre-determined or capable of being determined.
· "Crown land" is land vested in the Commonwealth, a State or a Territory of Australia.
The business use test - wholly and exclusively used in one or more businesses
Assuming that the SMSF holds an eligible interest in real property the underlying land must then satisfy the business use test in the definition. This requires the real property to be used wholly and exclusively in one or more businesses carried on by an entity. Of note is that this does not need to be the SMSF itself.
The character of the real property's use determines whether the business use test is satisfied. This will depend on questions of fact and degree. A holistic assessment of all facts and circumstances relating to the use of the property is made when working out whether the test is satisfied.
This assessment must be determined at the relevant point in time. For example, the test is applied when an eligible interest in real property is acquired by an SMSF from a related party. Nevertheless, the periods surrounding the acquisition also need to be considered. For instance, if there have been changes in the use of the property, these must be of a substantive and enduring nature to be considered in the business use test.
Additionally the business use test need only be applied to the underlying land that is the subject of the interest held by the relevant entity. For example, an owner of land may grant a lease over part of that land. In these circumstances, the lessee holds a leasehold interest in the land and therefore holds an eligible interest. If the business real property definition is being applied to the lessee, the business use test need only concern that part of the land that is subject to the lease. The mere granting of rights in relation to land such as a lease does not satisfy the business use test unless the activities, operations or actions carried on by the person who acquires these rights meet the business use test.
A minor or insignificant non-business use of the property will generally still satisfy the 'wholly and exclusively' requirement.
For additional information and case studies in relation to business real property please see Self Managed Superannuation Funds Ruling: SMSFR 2009/1 - Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993.
Why is this important to an SMSF?
Under subsection 66(1) of the Superannuation Industry (Supervision) Act 1993, an SMSF trustee or investment manager cannot intentionally acquire assets from a related party.
Importantly under subsection 66(2) Business Real Property is an exception to this prohibition.
Additionally, under section 83 of Superannuation Industry (Supervision) Act 1993, in-house assets are restricted to 5% of the total assets of the SMSF. However where the asset is business real property and leased to a related party it is exempt from the in-house asset rules.