“The definition of BRP for superannuation purposes includes any freehold or leasehold interest in real property where the property is used wholly and exclusively in one or more businesses,” Mr Day explained.

“Therefore, the trustee of an SMSF could potentially acquire a residential property from a member or other related party where it satisfies a business use test and meets the definition of BRP.”

Mr Day said whether an entity is considering to be using a property in the course of carrying on a business depends on the particular circumstances of each case.

“In Tax Ruling 97/11, the ATO outlines the factors that are relevant when determining whether a business is being carried on,” Mr Day said.

These factors, he said, may include the keeping of business records separate to personal records; the size of the operation and the extent of capital investment involved; whether its activities are conducted continuously and systematically rather than on an ad-hoc basis; and a level of repetition and regulatory with activities constituting the business.

It could also include whether activities are carried on in a similar manner to other like businesses; whether activities are planned, organised and carried on in a businesslike manner; the scale and permanency of operations; and the existence of a business plan.

Mr Day noted that in SMSF Ruling 2009/1, the ATO provided a number of examples where residential property could be used as part of a business.

One of these examples was residential apartments being used as part of a property investment business.

“In this case, the example involved an individual who owned 20 residential apartments, personally managing and maintaining the apartments on a full-time basis and living off the rent generated,” Mr Day explained.

“In this case, the ATO confirmed, the scale of the operation together with the elements of repetition and purpose indicated the owner was carrying on a property investment business.”

He cautioned, however, that if a managing agent was used to manage and maintain the properties, this situation would likely result in the properties being considered passive investments only and not part of a business of property investment.

It also gave the example of a five-bedroom house which the owner had used to operate a B&B business for the past 17 years.

“In the example, the owner operated the business year-round, marketed the business via holiday accommodation websites, had a business plan, completed business tax returns and had employees. In this case, the ATO confirmed that a business was being carried on,” he said.

However, Mr Day also contrasted this situation with an example where, during school holidays, the owners of a large family home allowed guests to stay in their house on a B&B basis.

“In this case, the ATO confirmed the scale of the operation would not be sufficient to constitute a business,” he said.

Therefore, depending on the circumstances, residential property can qualify as BRP, Mr Day said.

“However, members and their advisers will need to carefully consider a range of issues, such as the size, scale and nature of the operations being carried on, when determining whether a property is really just a passive investment or being used in a legitimate business,” he stressed.

Mr Day noted that residential property can also qualify as an active asset under the small business CGT concessions where it is used in the course of carrying on a business by the taxpayer, their affiliate or connected entity and its main use is not to derive rent.

“A property used in a business of providing accommodation, such as a hotel, motel or resort, could potentially qualify both as a BRP and as an active asset,” he said.

“In this case, the property could be transferred to an SMSF from a related party and the small business CGT concessions could be applied to reduce or eliminate any resulting realised capital gains.”

However, Mr Day warned that there can be some uncertainty with this where the SMSF has acquired the property via an in-specie contribution.

While an SMSF can potentially acquire the property via an in-specie contribution, he said, it is unclear whether the member can also qualify for the concession in this situation.

“Under the eligibility requirements for this concession, [the member] would need to contribute the capital proceeds from the disposal to a complying super fund,” he said.

“However, the ATO has previously taken the position that the disposal that triggers the CGT event and the contribution of the capital proceeds cannot occur simultaneously.”

Therefore, Mr Day said it would not be possible to claim the $500,000 retirement concession in relation to the transfer of an active asset into super via an in-specie contribution.

“It is also unclear whether the in-specie contribution of a property that qualifies for either the retirement concession or the 15-year exemption can count towards the lifetime CGT cap,” he said.

“Taxpayers in this situation may wish to apply to the ATO for a private binding ruling, as FirstTech is aware it has issued a number of positive PBRs in relation to this question.”