The common consensus is that you can’t transfer a residential property into SMSF. The general understanding is that you can’t put a “residential” property into a SMSF if you already own that property. Instead you need to set up the SMSF then buy a new property to put into it.
However there is more to the story than people realise.
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 own business.
Commercial property is fine as people realise, 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 isSMSFR 2009/1 – see below:
http://law.ato.gov.au/atolaw/
Here are a couple of interesting quotes from sections of the ruling that suggest the “business” can the business of merely 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, but it might have an indirect effect. See IT 2423 at:
http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2423/NAT/ATO/00001
It 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, in our opinion, 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 (others 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 the need to 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.
The above information might be boring to some and interesting to others. Either way, Canterbury like to stay in the front line on all matters related to property and the myriad of ways to own it.