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Is this allowed?

Discussion in 'Accounting & Tax' started by XtraFL, 5th Sep, 2016.

  1. XtraFL

    XtraFL Member

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    Buy a residential house under SMSF with LRBA (80% LVR), then convert to a medical clinic with additional SMSF cash (additional 150K).

    Thanks in advance!
     
  2. Redwood

    Redwood Well-Known Member

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    Who is the tenant?
     
  3. XtraFL

    XtraFL Member

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    Before conversion, someone else; after conversion, my business
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It could be possible in limited circumstances. But the character of a property could not be changed into a different property/
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    "34. If the character of the asset as a whole has fundamentally changed, the exception under section 67A to the borrowing prohibition ceases to be satisfied from the time the alterations or additions are made to the asset. If the borrowing is maintained the trustee of the SMSF will contravene subsection 67(1)"

    SMSFR 2012/1
     
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  6. XtraFL

    XtraFL Member

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    Some changes will be required in such a conversion. For example: a garage or an extension demolished to make way for carspaces. But no major change in floor plan of the property or the facade, and it is easily converted back to residential - essentially residential zone and change of use.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Seek legal advice - which may even come from an AFSL licence holder or a lawyer.
     
    Last edited: 5th Sep, 2016
  8. XtraFL

    XtraFL Member

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    Thank you for your input. I understand that it comes down to whether a change to a single acquirable asset results in a different asset. The SMSFR 2012/1 table does not specify this. My accountant says it is okay but he is finding the relevant tax rulings.

    Terry can you explain how a lawyer can help?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You are in need to interpretation of legislation. Whether this breaches the SIS Act.
     
  10. XtraFL

    XtraFL Member

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    Fair enough.
    Does it take a specialist kind of lawyer?
     
  11. Redwood

    Redwood Well-Known Member

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    This one is a bit tricky. Effectively you are getting a residential loan, leasing it to a non related party, then perhaps with the same resi loan - leasing it to a related party. IF the asset is resi - it cannot be leased to a related party and is a specific breach. The exception is to meet the business real property test which generally a medical practice will.

    When that change to a medical practice takes place - specific advice will need to be considered as well as the terms of the loan agreement who most likely change from a resi to a commercial loan, and as part of the loan agreement - you will most likely advise of a change of condition of asset which will most likely change the rate.

    Generally, this can be done quick simply by consulting the bank and also your advisor who will apply principles of Superannation Law. Once done - you can lease to a related party if it meets the definition of BRP - I do it - so do many other small businesses. Here is an article on the ruling re repairs v improvements SMSF PROPERTY: REPAIRS V IMPROVEMENTS - Redwood Advisory SMSF

    Generally you want enough cash to cover this, but if you are leasing to your business, your lease agreement will cover this and generally you business has the greater tax advantage to pay for fit out etc...
    OF course - this is factual information only and does not constitiute financial advice.
    Cheers

    Ivan
     
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  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    A superannuation specialist would be the way to go.
     
  13. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    As per SIS Section 66

    "business real property " , in relation to an entity, means:

    (a) any freehold or leasehold interest of the entity in real property; or

    (b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

    (c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph--any interest belonging to that class that is held by the entity;

    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 beneficiary of a trust estate.

    As you can see from the definition, it is the use of the asset that determines if the asset can be BRP. So if the "house" is used WHOLLY an EXCLUSIVELY in a business, then it may be that it meets the BRP tests and can be leased to a related party.

    The following example is taken form the ATO BRP ruling, SMSFR 2009/1:

    Example 21: Doctor's surgery in residential premises

    302. Dr Mary owns a house used exclusively by her medical practice.

    303. Dr Mary is a member of the Yianni SMSF. Dr Mary, in her capacity as trustee of the SMSF, wants to acquire the house for market value and then lease it back so the medical practice can continue to operate from the house.

    304. Although the house was built to be residential premises, it is not used as such. The real property is used wholly and exclusively in Dr Mary's medical practice business. For the purposes of the related party asset acquisition rule in section 66, the property is business real property of Dr Mary. Once acquired by the Yianni SMSF, it is also business real property of the fund and is therefore not an in-house asset of the SMSF.
     
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  14. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    next question is always whether you can use borrowed funds or must use SMSF cash to do the works intended. repairs are OK. improvements are not.

    As terry says SMSFR 2012/1 is the key document. Remember the key words If the character of the asset as a whole has fundamentally changed,

    The following changes are improvements (so couldn’t finance them via the LRBA) but do not change the character of the asset (so would not make the existing LRBA void):
    • Extension adding 2 bedrooms
    • Addition of swimming pool
    • Addition of garage, shed and driveway
    • Addition of garden shed
     
  15. turk

    turk Well-Known Member

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    Complete novice here, so may be completely out of the ballpark,
    Can you buy the residential property privately, convert it to a Medical Clinic and then sell it to the SMSF as a commercial property, if so is that practical?
     
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  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think the question is would the proposed renovations result in a change in character of the asset.
     
  17. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    agreed i think the conversion is an issue. there is an example where a residential property is converted to a restaurant and that is a breach. change from residential to commercial will be an issue but accountant will assist in strategies to deal with it.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It needs investigating. Perhaps this won't change the character if it is still a residential property - the only thing changing is the use.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This could possibly work. Normally you cannot sell residential property to a SMSF of which you are a member. But if you could make it Business Real Property first then it would be possible.

    Stamp duty concessions in some states too.
     
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  20. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    agreed purchase the property in a structure. convert it from residential to commercial. run the property through the structure for a period of time. then undertake the transfer to the SMSF