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Residential property as business real property for a SMSF related party transfer

1. Introduction

This briefing paper aims to provide strategic guidance to the Trustee of a self-managed super fund (SMSF) that is prohibited from acquiring residential property from a related party but is allowed to acquire business real property. The paper discusses five potential strategies that are in compliance with the Commissioner of Taxation's ruling SMSFR 2010/1, which states that residential property can be considered business property under certain conditions. The following example serves as a basis for the discussion:

Example: A residential property used as a daycare center is considered business real property because it is primarily used for a business purpose.

2. Strategy Ideas

2.1. Convert residential properties to business use

To invest in residential properties that can be considered business real property, the SMSF can acquire properties with the potential for conversion to business use. This could include, for example, acquiring a residential property and leasing it to a business owner who intends to operate a retail store or professional office out of the property if zoning rules allow.

2.2. Acquire residential properties with existing business tenants

To minimise the risks and costs associated with converting properties, the SMSF can target residential properties that already have business tenants in place. In this case, the residential property would already be considered business real property due to the existing business use.

2.3. Partner with related parties for joint ventures in business real property

While the SMSF is prohibited from acquiring residential property from a related party, it can still engage in joint ventures with related parties to invest in business real property. By pooling resources, the SMSF and related parties can acquire a residential property, convert it to business use, and share the costs and profits associated with the investment.

2.4. Diversify investments in different types of business real property

To maximise the potential for returns and minimise risk, the SMSF can diversify its investments across different types of business real property. This can include residential properties converted to various business uses, such as retail, office, medical, or educational facilities. By diversifying, the SMSF can spread its risk across different industries and sectors.

2.5. Utilize professional property management services

To ensure the acquired properties maintain their status as business real property and comply with relevant regulations, the SMSF can engage professional property management services. These services can help manage the conversion process, secure appropriate business tenants, and handle ongoing property management tasks such as rent collection, maintenance, and lease negotiations.

3. Conclusion

By following the strategies outlined in this briefing paper, the SMSF can successfully invest in residential properties that qualify as business real property under the Commissioner of Taxation ruling SMSFR 2010/1. By converting residential properties to business use, acquiring properties with existing business tenants, partnering with related parties in joint ventures, diversifying investments, and utilising professional property management services, the SMSF can maximise returns and minimise risk while complying with the relevant regulations.

Before you do anything strategic always contact us at Abbott & Mourly Lawyers for the best and most strategic SMSF advice.

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