Can I Live in a House Owned by My SMSF?
Usually not, the circumstances in which you can live in a house owned by your SMSF are very limited.
Primary Production Land
You can live in a house which is on primary production land (farming land) which is owned by your SMSF, and the farming business is operated by a fund member, family member or other related party.
To do this the primary production land must:
- be used in one or more primary production businesses (note if you are unsure if you qualify as carrying on a business checkout the ATO Tax Ruling 97/11)
- the house and surrounding gardens and other private area must not exceed two hectares (approximately 5 acres)
- the predominant use of the land must be for business purposes and not private or domestic use including a property used as a hobby farm
The house may be rented to a fund member, a relative of the member, or another related party. Alternatively, it can be rented to an unrelated third party who has no ties to the members, while the farming operations can still be owned and managed by a member or a related party of the fund.
Example of farming land which is used for primary production business with a private residence.
The Smith Family Vineyard in the Hunter Valley is owned and managed by the Smith Family Unit Trust (SFUT). The land which is 25 acres is owned by the Smith Family Superannuation Fund, which is an SMSF setup for this purpose (SFSFD). Ted and Sandy Smith are the members of SFSFD and the unit holders of SFUT. Ted and Sandy have two young children and live in a house situated on the 25 acres. The house and surrounding gardens, play area and lawn take up 2 acres.
The SFUT has a grape supply agreement with two of the vineyards in the Hunter Valley. The SFUT carries on a business of primary production. The vines form part of the land owned by SFSFD but the grapes are owned and farmed by SFUT.
SFUT pay rent to SFSFD for use of the farm at market rates and a formal lease agreement is in place between both parties which reflects commercial terms and conditions. Market value rent in relation to the private residence used by Ted and Sandy also has to be considered.
Motel with a Manager’s Residence
This is obviously not a house, but it is an example of when a member can live in a property owned by a SMSF.
The lease by a related party of a SMSF must meet the definition of ‘business real property’ to be an exemption to the in-house asset rules.
Usually, the private use of a business property would normally exclude the property from being business real property as it is not used wholly and exclusively in a business. However, the ATO in SMSFR 2009/1 at example 16 indicated the private use of one of the motel units by a live-in manager is incidental and relevant to the business and the interest in the property is business real property.
Example of a member residing in a property owned by their SMSF does not breach the in-house asset rules.
The motel is owned by Ted and Annabelle’s SMSF, T&A SMSF and Ted and Annabelle’s company, Lucky Motel Pty Ltd (Lucky Motel) lease the property from T&A SMSF at market value. The motel is operated by Lucky Motel. Ted and Annabelle, as employees of the company, live in one of the motel units as they manage the day-to-day operations of the motel and are on 24-hour call.
Therefore, the lease is incidental and relevant to running the business operated by Lucky Motel and the occupation of one of its units by Ted and Annabelle does not give rise to an in-house asset.
Does the occupation of the manager’s unit by Ted and Annabelle trigger the anti-avoidance rules?
When considering the application of the in-house asset rules the SMSF trustee must also consider if the transaction will trigger the anti-avoidance rules. It looks a bit suspicious if, in the above example, the members of the SMSF can live in a property owned by the SMSF.
Anti-avoidance rules in relation to in-house assets are included in S85 of the super laws (SISA) which prohibits entering into a scheme with the intention of artificially reducing the market value ratio of the fund’s in-house assets which would result in the avoidance of the in-house asset rules.
Let’s examine the example above.
Lucky Motel is obligated to pay the lease to T&A SMSF and holds the exclusive right to occupy and use the motel. Since Ted and Annabelle’s occupancy of a unit is integral to the operations of Lucky Motel, any rental arrangements are solely between Lucky Motel and Ted and Annabelle. It is unlikely that this arrangement is a scheme to diminish the asset’s market value ratio, and therefore, it would not breach the anti-avoidance rules in relation to in-house assets.