SMSF, purchasing reidential property, partly used for commercial purposes

Hi forum,

I don't think I have ever come across this particular question before and admit my up-to-date knowledge of the SIS act isn't fantastic

I have a client who wishes to purchase residential property through their SMSF, no problem so far.

They also want to use part of the property to run their business through (psychologist).

Is this simply a no-no as the property cannot be re-classified in part to commercial, thus as residential, cannot be linked to the trustee/member in any way?

Many thanks,

 

what is the other part of the property going to be used for ?

 

I would assume rented out. What are the implications if it's rented/not rented?

 

A commercial use of an SMSF owned property is allowed AFAIK eg leased by a related party. Living in the same property is a breach (except in limited circumstances) eg commercial hotel with managers unit.

 

They wouldn't live in the property, just rent a room for their psych business. They have also mentioned a granny flat type arrangement to run the business out of that dwelling, keeping the house "separate".

 

The acqusition of "mixed use" property will have the following implications:

1. Cant be acquired from an associate / relative due to the residential use element being on same title
2. The residential element can be leased to an arms length non-associate. It cannot be occupied by or used by or leased by a associate, relative etc even if the rent is arms length
3. The commercial element can be LEASED to the psychologist and this should be continually checked to ensure it is not excessive or too lower rent is paid. I suggest a valuer appraise value and rent each two years for audit purposes.
4. GST may be impacted as the acquisition cant be a going concern basis which means GST must be paid, then any credit is claimed. GST applies to the commercial element of the sale, not the residential premises element. The contract should address this and questions should be asked about the prospective tax invoice.
5. The residential element cant generally be unused as this may contravene the sole purpose test. If it were understood to be inhabitable prior to acquisition and will remain so, legal smsf advice on the issue may be required and it may be acceptable. This may mean there is no residential element to the taxable supply and that may support the GST position. The lease likely also needs to be for the whole of the property.
6. The fund investmnet strategy also needs to address the investment and each element.

 

Thanks Paul. Points 1, 2 & 3 are straightforward.

Points 4 & 5 are where I am struggling a bit!

 

4. Going concern requires that the whole of the property prior and after transfer are for the same use and that all the matters required are supplied. The psych lease would occur after transfer and that fails. It must exist prior so that the vendor transfers ownership and the lease rights
5. If the resi portion is unused the arguement about sole purpose is easier to mount. That is why I suggest smsf legal advice. However it may be possible for the resi portion to be acquired and then used as a part of the psych practice without concern provided the lease addresses that. If the resi portion is unused there is a issue with the fund investment strategy to acquire what is effectively 2 elements of property and one of them is unused and not producing income. This suggests a sole purpose concern.

 

Thanks so much Paul - really appreciate it.