Speaking at the SMSF Association Technical Summit, Banton said the “devil is in the detail” when it comes to lease agreements and BRP.
Banton used an example of Sandy and Annie who have an SMSF and a vacant property in their names.
“They think it’s business real property because they’re leasing that to their business and they’re storing all their equipment on that property. There is a lease agreement in place. They get an independent market valuation for that property, they get the rental valuation as well, and they transfer the property in the fund, and it’s there when you do the audit,” Banton said.
“Is it BRP or not? Yes, the lease is in use? No, the evidence doesn’t support it? Maybe, provided the lease is at arm’s length? Or is more information required?”
“Well, the lease is at arm’s length, but once again, this is where the devil’s in the details because context once again is everything. What if that lease agreement was in commercial terms, but it was on a Word document and it was unsigned and it was undated? Is that going to make our answer any different? What about if the fund hadn’t received any income during that entire year that that lease agreement was in place? What happens if, as the auditor you look on Google Maps and there’s absolutely no equipment on that piece of land?
“It’s just vacant land, with virgin grass on it. There is nothing on there which is connecting that property to the business.”
Banton said there are lots of scenarios that could play out including the trustee may have construed a situation because of the location of the property, or with urban sprawl these types of properties may be in growth corridors and if they can be placed in a fund, could become quite profitable.
“Be very wary of these sorts of properties coming in because, at the end of the day, that is not going to be business real property, and you can’t anticipate the fact that there’s no income that was received by the fund for the entire year either,” she said.
“So, these sorts of things are lending themselves as to whether they are or aren’t (BRP). Would it still be vacant property if the property was held under company title? We see this in NSW, quite a bit. What about if on the vacant property Sandy let a friend graze cows there for a period of time? Is that going to change the outcome?
“What about if the vacant land is zoned for business use, and Sandy lets his friend park his truck and machinery there for free? Is that going to change the outcome? And lastly, what happens if Annie and Sandy own three blocks, one of which is a factory, one of which is the car park for a factory and there’s a lease over both of those, but the third block is just vacant land. Does that make it BRP?”
She said the answer is a “resounding” no in all situations.
“In the first one, the company owns the eligible property, not as the owner, not the super fund. So you have a situation where if I own shares in Target, for example, I can’t just go into Target and pick off clothes and whatever I want because I only own the investment in that. It’s the same here,” she said.
“This sort of investment should be listed as investment equity on the financials, not as business real property.
“Sandy letting Rizzo graze cows there, well, it’s not an agistment property that’s there for long-term use. Yes, she pays market rent, but we’ve got to be very careful about having situations that change specifically to get it into the fund.
“The ruling says if you’re making a change to any part of that property to make it into business real property, it has to be substantive and enduring of nature. In this particular case, it’s a temporary arrangement. Danny letting his friend park his stuff there for free, well, there’s no connection between business use for that property, even though it’s being used by his friend who has a business.
“And the vacant block scenario, it is just a vacant land that has no connection to business use whatsoever, and so therefore isn’t business real property.”