An Overview of Business Real Property

The Business Real Property definition is one that kind of sounds strange when said out loud. What makes a property a property a ‘business real property’? Sounds complicated. Well, for the purposes of superannuation - it means (per SISA s.66(5) SISA and further defined in SMSFR 2009/1):

                Any freehold or leasehold ownership either in part or in full in real property or say in crown land or any other type of interest that might hold real property – and that property is used in at least one business. Yes, even crown land can be held under strict arrangements.

Further, the SMSF or other entity must hold the interest and the land must satisfy the business use test which essentially requires all of the property to be used in a business. The ATO even say that you can the SMSF can buy a business real property from yourself or another related party of yours – provided it is at market value. Because there is more or less an exemption for doing it when the property is a business real property.

Now - freehold is the most common and typical way you might think you own a property. You buy a house and land for example – and its yours – your name is on the title and you are entitled to that property forever – ownership does not expire. In Australia we use the torrens title system.

But a leasehold is different, and that simply means you have rights only for a fixed term – could be 50 years or 99 years for example. Someone else like the government, a company or individual holds the freehold.

So why is all this important to you and how can you benefit from it?

You may want to be able to acquire a property in your super fund from yourself – say you personally own a property, and decide hey, I’d like my superannuation to own this instead of me, that way I can still control it, but my superannuation owns it instead of me. In this scenario - legislation prevents you from doing so UNLESS the property is business real property.

Under SISA s.66 – the acquisition of assets from members of superannuation funds are prohibited.  The way the law is written is interesting. It is written as though it is a blanket rule. Then goes on to say that there are exceptions – low and behold the first exception is the exception of the acquisition of business real property.

So this is read as you cannot acquire real property unless its business real property.

There is one more point id like to touch on and that is the definition of wholly and exclusively. This is where a Business use test must be passed and that points to the underlying use of the land. In cases where primary production businesses (i.e Farms) are involved, the area that is private land (i.e dwelling on the farm) must not exceed 2 hectares, and it is the rest of the property that is predominantly the business. Although there is no strict percentage rule for the private area including the dwelling versus the whole farm.