Hello Umesh
Thanks for the question.
The SIS Act consideration is whether the property is genuinely going to be used as “business real property” given the intended tenant is a related party, so that there is not a breach of the in-house asset rules.
A helpful source of information for this question is SMSFR 2009/1
A link to the is ruling is provided below: https://www.ato.gov.au/law/view/document?Docid=SFR/SMSFR20091/NAT/ATO/00001&PiT=99991231235958
Provided below are two examples from SMSFR 2009/1
Example 21: Doctor’s surgery in residential premises
302. Dr Mary owns a house used exclusively by her medical practice.
303. Dr Mary is a member of the Yianni SMSF. Dr Mary, in her capacity as trustee of the SMSF, wants to acquire the house for market value and then lease it back so the medical practice can continue to operate from the house.
304. Although the house was built to be residential premises, it is not used as such. The real property is used wholly and exclusively in Dr Mary’s medical practice business. For the purposes of the related party asset acquisition rule in section 66, the property is business real property of Dr Mary. Once acquired by the Yianni SMSF, it is also business real property of the fund and is therefore not an in-house asset of the SMSF.
Example 24: Inner city design studio
312. Lisa owns double story premises from which she runs a design business in the inner suburbs of Sydney. During business hours Lisa and her employees use the ground floor as their public consultation area. They use the top floor as a lunch room and meeting area.
313. Lisa travels often. She finds herself in Sydney for only about two weeks in every month. During non-working hours, when she is in Sydney, Lisa uses the top floor as her primary residence. She cooks meals in the kitchenette and sleeps on a futon that doubles as a couch during the day. She stores clothes and other personal effects in a wardrobe and small cupboard in one corner of the room.
314. Lisa is a member of the Gus SMSF. Lisa wants to sell the premises to the trustee of the Gus SMSF at market value.
315. The property is not business real property of Lisa. Although the premises are primarily used in her business, Lisa’s regular use of the top floor as a residence is not incidental and relevant to the business and is more than a trifling use. Acquisition of the premises by the Gus SMSF will breach the related party asset acquisition rule in section 66.
The challenge in the situation at hand will be ensuring that the property, if acquired, is not used for any residential purposes, as was the case with Lisa and the inner city studio in example 24, above,
Would be happy to hear the thoughts of other auditors on this matter.
Best regards
The Auditors Institute