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The recent case of YPFD v Commissioner of Taxation considered whether the taxpayer owner of a number of residential rental properties was 'conducting a business'. This article:
The Administrative Appeals Tribunal (Tribunal) recently considered an appeal from the decision of the Commissioner of Taxation (Commissioner) to deny a number of deductions broadly relating to YPFD's rental property investments.
While much of the Tribunal's reasoning relates to the particular deductions claimed, including items such as attendance at speculative property seminars, the decision provides useful guidance on the factors relevant in determining whether a taxpayer is conducting a business when they are investing in residential property.
Such guidance is useful for taxpayers considering investing in property through their SMSF or acquiring property in their SMSF from a related party.
While the Tribunal was generally critical of YPFD's evidence, on the question of whether the taxpayer was carrying on a business of letting rental properties during the relevant period, the relevant facts were:
Citing a range of authorities on the test for determining whether a taxpayer was conducting a business, the Tribunal noted:
The Tribunal determined that the taxpayer was carrying on a business of letting rental properties. In deciding this, the Tribunal was satisfied that:
The decision may be relevant in 2 SMSF contexts.
Firstly, SMSFs are generally prohibited from acquiring an asset from a related party. There is an exemption to this general rule where the SMSF acquires 'business real property'. The Tribunal's decision in YPFD reinforces the notion, previously acknowledged in a 2009 SMSF Ruling published by the Commissioner that in some circumstances rental properties can satisfy the definition of 'business real property'.
Secondly, certain restrictions apply to SMSF investments in related trusts or companies, where those investments would amount to 'in-house assets' (which cannot total more than 5% of an SMSF's assets).
However there are exemptions available in some circumstances — for example, if the trustee of the related trust does not 'conduct a business'. The Tribunal's decision in YPFD highlights the risk that a trustee of a related trust may breach these provisions if the trustee's letting of rental properties is on such a scale to amount to conducting a business. This would mean that the SMSF's investment in that related trust would be an 'in-house asset', and, could represent no more than 5% of the SMSF's assets.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Superannuation or Commercial teams.
You can read earlier ClearLaw articles on a wide range of SMSF topics.
 YPFD v Commissioner of Taxation  AATA 9.
 See Self Managed Superannuation Funds Ruling - SMSFR 2009/1 'Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993' .
 See regulation 13.22D of the Superannuation Industry (Supervision) Regulations 1994 (Cth).
Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
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