In an online update about the new LRBA regulations, Dunn said in regard to LRBAs there are different obligations to ensure that the arrangement complies both at the Commonwealth level in relation to the SIS Act but also relevant state-based duties.
“I think it’s fair to say, whilst the guidance is there and available for us, it doesn’t really tell us how long that piece of string is when it comes to if the terms of an arrangement need to be altered to settle and whether those changes ultimately continue to meet the obligations under the post-10 August change,” he said.
Dunn added the other area of the new regulations for which there had been some clarity supplied was the continuity of the business real property definition and in particular replacement asset rules and what happens once a loan has been repaid.
Tim Miller, Head of Technical and Education for Smarter SMSF, said under the existing LRBA arrangements, if the nature of the property was changed, such as moving a property from commercial to residential, then it is classed as changing the nature of the asset, and therefore a breach of Section 67 A.
“That’s already in existence. What the tax office has said is with the capacity or with the requirement for property to satisfy the definition of business real property, one of the key things to be business real property is that it must be an ongoing concern,” he said.
“SMSFs can invest in property, and it’s irrelevant what the nature of that property is until it’s relevant, and relevancy comes to the leasing arrangements and other things. So, in this instance, what we really need to drill down on is if the property is acquired via an LRBA from 10 August onwards, it must satisfy the definition of business real property.”
Miller continued that it means that the property, from acquisition onwards must now meet that definition.
“It’s not just that you tick the box once; it’s that you tick the box whilst that LRBA is in effect to the point where the asset is sold,” he said.
“If we go through all the way to the in-house asset exclusion that exists to the point that the asset is transferred to the trustee of the SMSF away from the bare trust, it must be ongoing or a property that satisfies the definition of business real property.”
Dunn added the ATO has provided some context, and states that if there is an arrangement where the fund has a lease it is considered business real property.
“When the lease expires, and the party finds a different tenancy to move in, the fact that it’s vacant for some period of time isn’t necessarily going to taint the business real property definition, but if the purpose or intent of that vacancy changes, then we come up with a potential issue,” he said.
Miller said the key the ATO has identified is that a short-term vacancy is not an issue as long as the super fund, at that point in time, is looking to fill that vacancy, but if a tenant moves out and the trustee deems it appropriate to sit on the property for a period without having a tenant, then the the transaction is going to be problematic, and it’s going to fail the LRBA requirements.
