New simpler super: not necessarily so simple

Certainly, the super system has become much simpler since its revamping from last July but plenty of complications remain in super - particularly when trying to apply the rules to the particular circumstances of fund members.

Consider what is known in superannuation law as "business real property". This type of property is a favoured investment of some self-managed funds established by owners of small-medium businesses.

These trustee/members take advantage of special concessions in superannuation law to sell or contribute the commercial premises of their family businesses to their SMSFs and, in turn, their businesses pay commercial rents. Such premises typically include small shops, strata offices and strata factories.

Following amendments to superannuation law a decade ago, business real property is one of the few assets that SMSFs are allowed to acquire from members and other related parties. (Funds are not permitted, for instance, to acquire residential property from members.) And this type of property is one the few assets that a super fund can lease to a member or other related party without a limit on the value of the asset under the superannuation law's in-house asset rules.

A huge challenge for fund trustees can be to determine whether a piece of real estate qualifies "business real property" under superannuation law. Suddenly, the simpler super system may not seem so simple.

Although super law stipulates that a property must be used "wholly and exclusively" for business to be classified as a business real property, interpreting what this means in particular circumstances may not be so clear cut as these words seem to suggest.

The tax office, acting in its role regulator of self-managed super, has just released a new 68-page draft ruling which gives its interpretation of the law on how the real property provisions should work in practice. (It should be emphasised that this is a draft interpretation and the ATO is inviting submissions on the document in order to develop a final ruling.)

Yes, I said it was 68 pages long!

The draft ruling contains - wait for it - 27 examples or fictional case studies to demonstrate the ATO's prevailing interpretation of what is an acceptable business real property in terms of superannuation law.

These examples range from bed-and-breakfast accommodation to vineyards with private accommodation. The examples are fascinating to read. Take a look at the ruling: http://law.ato.gov.au/pdf/smsfr2008-d003.pdf

Two contrasting examples on bed-and-breakfast accommodation illustrate how personal circumstances of a property's use can matter so much when it comes to interpreting superannuation law.

In the first example of a property used as a bed-and-breakfast, a family owns a large home and allows paying guests to occupy spare rooms during school holidays. The family remains in the other rooms. The new draft ruling states, in the tax commissioner's view, that the scale of the operation is insufficient to be regarded as business property.

But the second example on a bed-and-breakfast is a different story. This time, a householder occupies a single bedroom in his five-bedroom house, and for the past 17 years has made the remaining four bedrooms available as bed-and-breakfast accommodation through the year. The householder has a business plan, advertises the rooms on the internet, and has three part-time employees. The draft ruling states that the house is a business property for the purposes of superannuation law, in the commissioner's view.

As I said, don't believe that super has suddenly become much simpler for everyone. Business real property is just one illustration.

So much depends on the circumstances. Don't hesitate in getting professional advice.