5 Apr 2023
SMSFs, in general, are not allowed to engage in transactions with related parties. This restriction is in place to ensure that a super fund’s assets are primarily used for retirement purposes and not for any non-arm's-length dealings. There are a few exceptions to this rule, this article focuses on the purchase of commercial properties.
Related parties typically include the fund members, standard employer sponsors and Part 8 associates. Part 8 associates usually refer to relatives of each member, entities and individuals who have a significant influence over the SMSF, even if they are not directly related by blood or marriage. Although Part 8 Associates include a member’s relatives, cousins are excluded. Â
Transactions with related parties can potentially lead to conflicts of interest and could compromise the sole purpose of SMSFs, which is to provide for members' retirement.
However, there is a specific exception to this rule, and it revolves around business real property. Business real property refers to commercial or industrial property that is wholly and exclusively used for business purposes. This means that the property's primary and sole purpose must be for conducting a business, such as office buildings, factories, warehouses, and retail spaces.
Section 66 of the SIS Act provides the definition of a Business Real Property and it is important that all parts of the definition are met before relying on this rule.
Under Australian superannuation laws, SMSFs are allowed to purchase business real property from related parties, provided that they have met the eligibility criteria and have proper documentation to prove it. Below are some factors to be mindful of.
1. Market Value Transaction: The property must be acquired at its market value. This means that the purchase price should reflect the fair and reasonable market price of the property. Independent valuations are often necessary to determine the market value accurately.
2. Arm's Length Transaction: All aspects of the transaction should be conducted as if the parties were unrelated. This includes setting commercial rent rates and adhering to customary terms and conditions for such transactions.
3. Wholly and Exclusively Used in Business: The property must be wholly and exclusively used for conducting a business. It must not have any non-business-related use. This stringent requirement ensures that the investment aligns with the core purpose of SMSFs, which is to provide for retirement and not to facilitate personal or non-business-related activities.
4. Documentation: Proper documentation is essential. SMSFs should maintain records of valuations, leases, and other relevant documents including evidence of how the property meets the Business Real Property test.
This exception is designed to allow flexibility and investment opportunities while maintaining strict regulatory oversight to ensure compliance with the law. As superannuation laws can change over time, it is advisable to seek guidance from qualified professionals to navigate this complex landscape effectively.
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