What does business real property mean?
What does business real property mean?
This Ruling explains the meaning and practical application of the term business real property as that term is used in the laws governing self-managed superannuation funds (SMSFs). Transactions involving business real property and related parties are treated concessionally under those laws.
Business real property in relation to an entity is defined as meaning:
- any freehold or leasehold interest of the entity in real property, or
- any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer,
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 a beneficiary of a trust estate.
Two basic conditions must therefore be satisfied before an SMSF or any other entity related to or dealing within an SMSF can be said to hold business real property:
- the SMSF or the other entity must hold an eligible interest in real property
- the underlying land must satisfy the business use test, which requires the real property to be used 'wholly and exclusively in one or more businesses' carried on by any entity.
An eligible interest in real property is:
- a freehold interest in real property
- a leasehold interest in real property, or
- an interest in Crown land that can be assigned or transferred
that is not an interest held as a beneficiary of a trust estate.
These concepts take their ordinary meaning in the business real property definition. The final Ruling provides further details about these meanings, including the status of jointly-owned land, strata-titled land and real property held under company title.
Once it is established that the relevant entity holds an eligible interest in real property, that interest can only be business real property if the underlying land satisfies the business use test.
The business use test requires the real property be used wholly and exclusively in one or more businesses, whether or not that business or those businesses are carried on by the relevant entity.
The character of the real property's use determines whether the business use test is satisfied. A holistic assessment, which takes into account all the facts and circumstances relating to the use of the property, is applied to work out whether the test is satisfied.
The subject of the business use test is the underlying land, rather than any interest held by the relevant entity in the real property that may become business real property on applying the definition. The use of the land itself must be considered.
For these purposes, use of the property refers to any activities, operations or actions occurring on the land in question. Any and all such use of the property must meet the requirement under the business use test that the real property is used 'wholly and exclusively in one or more businesses'. Land upon which activities, operations or actions occur can be contrasted with land that is idle or dormant and is therefore not being used.
Under the business use test, use of the land is more easily connected with a business where the business itself is the user of the land.
However, use of the land can also be connected with a business carried on by an entity that allows use of the land even if the activities, operations or actions occurring do not inherently have a business character. 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 final Ruling covers a wide range of circumstances that fall within the definition and provides a large number of examples to assist you in understanding the practical application of the concessions. These examples include:
- primary production business with private residence
- primary production business - annual crops
- primary production business with multiple dwellings
- poultry farm used in a primary production business - unused paddocks
- incidental use of the poultry farm
- temporary agistment on otherwise vacant land
- vacant land
- water licence (not an eligible interest in real property)
- fishing licence (not an eligible interest in real property)
- leasehold interest in real property with non-severable interest in an afforestation arrangement attached
- letting holiday flats - no business
- residential property held in a property investment business
- agency - no relevant business use
- motel with manager's residence
- bed and breakfast - existence of a business
- strata-titled hotel complex
- management company
- doctor's surgery in residential premises
- shop co-located with an uninhabitable residence
- mechanic - home garage
- inner-city design studio used in a business
- storage of personal items
- shares in a company that owns business real property
- units in a unit trust - not an eligible interest in real property
- commercial units held under company title
- instalment warrant over real property
- lease of commercial retail premises
- indoor market
- substance over form in determining the nature of an interest in real property
- assigned lease
- land development.
The current legally binding rulings regime established does not apply to advice in respect of the Superannuation Industry (Supervision) Act 1993, therefore advice that is legally binding on the Commissioner cannot be given to trustees. ATO employees, such as auditors, will follow the views expressed in the final version of this ruling.
However, if the Commissioner later takes the view that the law applies less favourably to you than the final version of this ruling indicates, the fact that you have acted in accordance with the final ruling would be relevant to determine a response to breaching the law. The Commissioner may, having regard to all the circumstances, decide that it is appropriate to not take any action in response to the breach.
A compendium of comments received in relation to the draft Ruling and the Tax Office's responses to those comments SMSFR 2009/1EC - Compendium (as at 28 January 2009) is included on our website.
We can provide written advice on the Commissioner's view on regulatory matters, but we do not have the legal authority to provide binding private rulings on regulatory matters. Currently binding private rulings can be provided only for income tax related issues for the fund.
Last Modified: Tuesday, 8 December 2009