Transferring Residential Property To Your SMSF
If you own a property that you want to transfer to your SMSF the transaction must take place at market value but it must also be a property that is used “wholly and exclusively” in a business, though not necessarily your business.
Commercial property is fine of course as is residential property that is used in a business such as a house converted to a doctor’s surgery. The ATO ruling on this is SMSFR 2009/1 http://law.ato.gov.au/atolaw/view.htm?locid=%27SFR/SMSFR20091/NAT/ATO%27&PiT=99991231235958 here are a couple of interesting quotes from the ruling that suggest the business can the business of renting out residential properties:
35….. Similarly, the use of property by a residential tenant is incidental and relevant to any property investment business carried on by the landlord.
38…. In these cases, the business to which the use of the land is connected is a property investment business under which rights to use the land are granted to others (often by way of lease). The views expressed in Taxation Ruling IT 2423 13 are relevant in determining whether this type of property investment business is being carried on.
Now IT 2423 is a very old ruling and not directly relevant to income tax or SMSF law. IT 2423 http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2423/NAT/ATO/00001 states at:
5. A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.
The ATO guide on when you are in business is intentionally useless. It gives as an example of when you are not in the business of property investment as owning only 3 properties and an example of when you are in the business of property investing as owning 26 properties with no guidance in between.
Cases since then have also taken into account the amount of involvement you have in the management of the property. For example in case YPFD AAT 2014 the taxpayer had 9 properties that were managed by a real estate agent but she convinced the tribunal that the real estate was so incompetent that she had to do a lot of the management herself. She was considered to be in the business of property investing.
PBR 1011342041791 is a private ruling (can’t rely on it) regarding 7 properties that were not considered to be a business. Nevertheless, it is worth reading for more detail on the factors considered, for example have a business plan to show how the properties will eventually become profitable. Rumour has it that this PBR was overturned on appeal so it may well be the fine line.
There should be lots more discussion, and hopefully a more specific ruling, on when a property owner is considered to be in the business of property investing, very soon. As this is the same definition that will now decide who can claim travel to their rental property and depreciation on plant and equipment that has previously been used. We will keep you posted.
If you think you might qualify to transfer a residential property into your SMSF make sure you first apply to the ATO for a ruling as the cost involved in the transfer will be far too high to risk the cost of having to reverse it all back out again.
Want to know more about SMSFs? Here is a link to our free booklet http://www.bantacs.com.au/booklets/SMSFs_Booklet.pdf