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Can rental properties be ‘Business Real Property’

The case of YPFD and Commissioner of Taxation [2014] AATA 9 provides some helpful insights for self-managed superannuation fund (SMSF) trustees on the circumstances when their residential properties may be considered 'business real property'.

The relevance to SMSF trustees is that real estate owned personally or by a related party generally cannot be transferred to their SMSF unless the property is 'business real property' (real estate used wholly and exclusively in a business). In YPFD the Tribunal considered whether the applicant taxpayer was in the business of letting residential rental properties.

In this case, the taxpayer:
  • was employed full time as an industrial chemist;
  • owned nine rental properties with her husband;
  • spent a lot of time in connection with the properties, including quarterly inspections;
  • was involved in advertising for tenants; and
  • was actively involved in managing the properties including advertising for and sorting arrangements with new tenants, arranging repairs etc. notwithstanding that they had appointed real estate agents to manage the properties.
The Tribunal considered numerous facts and concluded there was a business, giving particular weight to the fact that the taxpayer intended to make a profit, the extent of the taxpayer's active involvement, her oversight and part management of the rental properties and her intention to engage in the business of renting properties regularly and routinely. The Tribunal reached this conclusion even though the taxpayer:
  • had never made a profit from the rental business:
  • was not necessarily operating in a business-like manner; and
  • had no written business plans.
The Tribunal also noted that some reliance on estate agents to manage the properties did not necessarily mean the taxpayer was not carrying on the business of letting rental properties.

SMSF trustees should exercise caution before acquiring residential real estate from related parties in reliance on YPFD, as determining whether a property is 'business real property' involves a detailed analysis of all circumstances and the facts in YPFD were quite unusual.