This question occasionally pops up in the SMSF community: could an SMSF invest in a commercial charter vessel in the same way it might invest in a property for business use? On the surface, it may seem plausible, but a closer look at the regulations reveals significant challenges.

The Basics: Business Real Property (BRP)

To understand whether a charter vessel could qualify as Business Real Property, and therefore either be able to bought from a related party or leased to a related party, it’s important to define what constitutes BRP under the SIS Act. SMSFR 2009/1 is the BRP bible, and provides clarity on this:

• Real Property Definition: Paragraph 11 explains that “real property” refers to land and includes buildings or fixtures permanently attached to that land.
• Exclusions: Paragraph 12 notes that items not permanently affixed to land are not considered part of the real property.

Since a charter vessel is not land or a fixture attached to land, it does not meet the definition of BRP. Therefore, it cannot be treated as such for SMSF investment purposes.

The 5% Rule and Related Party Transactions

In this scenario, the SMSF member would also own the business operating the vessel. This arrangement raises concerns under the 5% in-house asset rule, which limits an SMSF’s investments in related-party transactions to no more than 5% of the fund’s total assets. Purchasing the vessel for exclusive use by the member’s business would almost certainly breach this rule.

ATO’s Stance on Similar Scenarios

Historically, the ATO has been fairly firm in rejecting attempts to classify non-land assets as BRP. One notable case involved a business renting out pleasure boats from a marina. The SMSF’s accountant advised that the fund could purchase outboard motors and lease them to the business, exceeding the 5% threshold. The ATO quickly intervened, ruling that such arrangements do not comply with the legislation.

Common Compliance Issues

Situations like this often arise when SMSFs transfer from other auditors who have not understood what qualifies as BRP, or have delayed lodgements due to the issue being known. In many cases, the trustees are aware of potential compliance breaches and hope to avoid detection. Unfortunately, these strategies seldom work, and the non-compliance typically surfaces during audits.

Final Thoughts

While the idea of an SMSF investing in a charter vessel might sound appealing, the asset does not meet the definition of BRP, and any investment would likely breach the in-house asset rules.

As always, SMSF trustees should seek expert advice before making any unconventional investment decisions.