Transferring a commercial property into an SMSF can be a great way to build retirement savings and take advantage of the tax benefits available to SMSFs. The rental income and capital gains are concessionally taxed, or even tax exempt to the extent the property supports retirement phase pensions. So, if you run a business and own your business premises, or are simply an investor with a commercial property, you may have thought about transferring the property into your SMSF.
But when acquiring property from a related party, it’s vital the property meets the “business real property” test. The general rule is that SMSFs aren’t permitted to acquire assets from a related party of the fund (which includes the members, their relatives and related trusts and companies). However, there are a few limited exceptions, including “business real property” (BRP) acquired by the SMSF at market value. This is the only type of real estate that an SMSF may acquire from a related party.
BRP is property used “wholly and exclusively” in one or more businesses. The ATO says this generally means the entire area of the property must be used in business, and there should be no non-business use (eg personal use), unless it’s a very minor or insignificant non-business use.
It doesn’t matter who is conducting the business. Whether it’s the property owners (eg the SMSF members or their related trust or company) who run the business, or an unrelated third party who rents the premises for their business, the property can still qualify as BRP.
Classic examples of BRP include a shop where a retail business is conducted, a factory where a manufacturing business is operated and office space leased solely to business tenants. Farms can also potentially qualify if they are used in a primary production business.
There are many other types of property that would not be BRP, eg most residential rental premises, most holiday rental properties and mixed-use properties, where there is business use but also non-business use that is more than minor, such as a mechanic business run from a home garage.
Other issues that need to be considered include ensuring the property is acquired at market value and being aware of any capital gains tax and stamp duty liabilities when you transfer the property.
Contact us today to discuss a tax-effective SMSF strategy for your commercial property, or for expert advice on any type of SMSF property investment.