Holiday Homes in SMSFs — a narrow opportunity

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The ATO's Superannuation Ruling SMSFR 2008/2 (Ruling) provides guidance on the circumstances that the Commissioner views as constituting an acceptable "incidental advantage" and therefore that do not breach the Sole Purpose Test.

Acceptable

Factors that suggest that a benefit is incidental are:

• The benefit is an inherent or unavoidable part of other activities that are consistent with the provision of benefits under section 62.
• The benefit is remote or isolated or is insignificant.
• The benefit is provided by the SMSF on arm's length commercial terms (for example, the benefit is provided at market value) and at no financial detriment to the SMSF.
• All the activities of the trustee are in the best interest of the beneficiaries and exercised with care skill and diligence.
• All the activities of the SMSF trustee are consistent with the SMSF trustee's covenants set out in section 52 of the SISA.
• All the SMSF's investments and activities are undertaken as part of, or are consistent with, a properly considered and formulated investment strategy.

Unacceptable

Factors that suggest the Sole Purpose Test is being breached are:

• That the SMSF trustee negotiated for, or sought out, the benefit.
• The benefit has influenced the decision-making of the trustee to favour one course of action over another.
• The benefit is provided by the SMSF to a member or another party at the cost of financial detriment to the SMSF.
• There is a pattern, or a preponderance of events, that viewed as a whole amounts to a material benefit being provided that is not a core or core and ancillary purpose.

Applying the Ruling to holiday homes and similar property

The Ruling summarises the Commissioner's view of situations that may be judged as "acceptable incidental advantages", and as "unacceptable incidental advantages".

The Ruling gives sixteen examples of situations that commonly arise in SMSF investments and discusses what factors the commissioner will apply when deciding on the acceptability of the advantage, such as:

• membership rights (such as in a golf club);
• works of art;
• collectables, such as antiques, classic cars and wine;
• "discount card" shares as opposed to ordinary shares; and
• holiday homes.

The two examples below are given in the Ruling that concern holiday homes provide an insight into how the Commissioner is likely to apply the rule.

Acceptable maintenance of a beach house: merely an incidental benefit

In line with an SMSF investment strategy, the SMSF trustees invest in a holiday house in North Queensland. The property is managed by agents and available to third parties for short term rental at commercial rates. In the off-peak season when the house is not rented, the SMSF trustees stay in the holiday house to carry out maintenance. The SMSF trustees pay the normal arm's length commercial rates to the agent for the stay.

The Commissioner's view is that this incidental advantage does not breach the Sole Purpose Test because the benefit is:

• incidental to the legitimate purpose of maintenance of the investment in accordance with the Sole Purpose Test;
• relatively insignificant; and
• provided at market value.

Unacceptable separately negotiated purchase of holiday house: more than an incidental benefit

The members of an SMSF own a holiday house in a popular tourist destination where they holiday every year. The SMSF trustees invest in a block of holiday apartments at a nearby destination. When investing, the trustees negotiate for the SMSF members to be able to stay in the apartments free of charge — that arrangement is not a standard feature of the sale of the apartments. As soon as the trustees invest in the apartments, the members sell their nearby holiday house.

The Commissioner's view is that this advantage is more than incidental and so breaches the Sole Purpose Test because:

• it is clear that the benefit to the members is an intentional part of the investment; and
• the purpose of the investment is not exclusively for the sole purpose of providing retirement benefits.

Can you take advantage of the Ruling?

The purpose of an SMSF's investment cannot be for the trustees or members to gain an advantage from the use of any assets — even if the advantage is minor.

However, the Ruling indicates that in limited circumstances, the following may apply to the use of holiday houses and similar trust assets:

• The use may be acceptable if it is for an acceptable incidental purpose, infrequent, and not in peak holiday times.
• If the holiday home is available for other people to rent only when the SMSF trustees or members do not wish to use it, then it is likely the use will be more than incidental.
• The use must be an inherent or unavoidable part of the investment. Although using a holiday house for a family holiday is inherent, it is easily avoidable. The facts surrounding the use must show that the use is remote or isolated or insignificant. Using the property to do unavoidable and necessary maintenance can be legitimate — especially if it is done infrequently and in off-peak times.
• The benefit must be provided on arm's length commercial terms and at no financial detriment to the SMSF.