Retirement income entities - acquisition of residential property from members

Will a contravention of Section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA) occur where a superannuation fund purchases a residential property, which is managed by a property manager, from a member of the superannuation fund?

Yes. A contravention of section 66 of the SISA will occur where a superannuation fund purchases a residential property, which is managed by a property manager, from a member of the superannuation fund.

The property is a residential property.

The property is owned by a member of a self managed superannuation fund (SMSF).

The property is managed by a property manager.

Income is received by the member, based on the occupancy of the property, after taking into account expenses incurred with to respect to the property.

Subsection 66(1) of the SISA prohibits a SMSF from acquiring an asset from a related party of the fund unless one of the exceptions in subsection 66(2) of the SISA applies.

'Business real property' of the related party is one of the exceptions contained within subsection 66(2), provided that it has been acquired at market value.

Business real property is defined in subsection 66(5) of the SISA. The definition requires business real property to be used wholly and exclusively in one or more businesses (whether carried on by the SMSF or not)

The term business is defined in subsection 66(5) of the SISA to include any profession, trade, employment, vocation or calling carried on for the purpose of making a profit.

The question of whether an entity is carrying on a business is determined on a case by case basis. There are a number of factors that need to be taken into account to determine whether an enterprise is carrying on business.

Taxation Ruling TR 97/11 provides several indicators that a business is being carried on. These include (but not limited to): • significant commercial activity • purpose and intention of the taxpayer in engaging in the activity

The onus is on the taxpayer to show that a business is being carried on. If a business is not being carried on, then the property cannot be characterised as business real property.

In this situation, it is considered that the property manager may be engaged in an enterprise but is not carrying on a business with respect to the property.

This is because: • The property manager does not have an interest in the property but merely acts as an agent for the member • The member must approve all acts done by the property manager to the property and retains ultimate control over the property. • The property manager collects income as an agent for the member • All expenses in respect of the property are ultimately the responsibility of the member

The property that the SMSF is attempting to acquire is not used in carrying on a business by either the member or the property manager. The property manager acts at all times as an agent for the member of the fund with all income and expenses arising from the property being attributable to the member. Therefore, the property is not business real property.