SMSF property development arrangments on ATO radar

In a recent regulator bulletin outlining ATO’s concerns about new and emerging arrangements that pose potential risks to SMSF trustees and their members, the growth in SMSF property development was highlighted as a main issue.

Any SMSF property development arrangement is on ATOs radar. The ATO notes that these arrangements SMSFs enter into to develop real property may cause issues with the sole purpose test, in-house assets, LRBAs, and NALI provisions to name a few. It notes that arrangements involving SMSF property development will be closely monitored to ensure that there are no contraventions to superannuation law.

Any Self-Managed Superannuation Fund entering into a property development arrangement which involve the purchase and development of real property for subsequent disposal or leasing should beware, the ATO is keeping a close eye on these types of agreements, irrespective of whether they are with related or unrelated parties.

As outlined in a recent regulator bulletin, the ATO is concerned with an increasing number of SMSF property development arrangements which the investment activity in developing real property is undertaken utilising joint venture arrangements, partnerships, or investments through ungeared related unit trusts or companies.

Whilst SMSF property development can be a legitimate investment, provided it complies with Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulations 1994; the ATO’s concern centers around inappropriate use of these investments to divert income into the superannuation environment, ventures that could be detrimental to retirement purposes, or arrangements used to manipulate a members’ transfer balance accounts.

For example, an asset such as a SMSF property development site that is held or partly held by an SMSF could be undervalued when member(s) enter into retirement phase, which means that less would be counted towards the transfer balance cap and more earnings within the SMSF could be treated as exempt current pension income.

The regulatory issues that can arise in property development is causing particular uneasiness for the ATO include:

• sole purpose test – does the arrangement mean the SMSF is maintained for a purpose outside those permitted.
• operating standards – meeting record-keeping requirements and ensuring assets are appropriately valued and recorded at market value and keeping SMSF assets separate from members’ assets;
• loan/financial assistance – whether direct or indirect support is provided a member or their relative;
• LRBAs – if there is a borrowing, does it meet the requirements to be exempt from the prohibition on borrowing for limited recourse borrowing arrangements;
• potential contravention of in-house asset rules;
• issues with acquiring assets from a related party;
• payments out of the SMSF – does the payment constitute an illegal early release of superannuation; and
• whether investments are maintained on an arm’s length basis and if not whether the terms and conditions of the transaction are not more favorable to the other party than would be expected in an arm’s length dealing.

In addition to the above, trustees of SMSFs should also be familiar with other income tax matters which may arise in these arrangements including non-arm’s length income (NALI) provisions, and the general anti-avoidance rules. The ATO notes that particular care should be taken where a SMSF property development arrangement involves related parties.

To complicate things further, purchase and development of real property for a SMSF property development arrangement would also most likely involve GST matters such as registration, correct reporting and in some cases the application of the margin scheme.

The ATO notes that it will be monitoring SMSF property development arrangements involving SMSFs, particularly those that include LRBAs and related party transactions to ensure that there are no contraventions to superannuation law. It warns trustees and members of SMSFs that there may be significant adverse consequences including the forced sale of assets or the winding up of an SMSF should contraventions occur.

Confused about SMSF property development arrangments?

Superannuation laws and regulations surrounding SMSFs are traditionally a very complex area of law. Throw in SMSF property development, whether it be through a joint venture, partnership or some other arrangement only serve to make an already complex area more confusing. If your SMSF is involved in property development or are thinking of getting into it, Hunter Partners can ensure you’re abiding by all the rules. Contact Hunter Partners today.

Hunter Partners are Accountants, Tax Agents and Financial Planners. We can assist you with all aspect of your accounting, tax and financial planning requirements, call Hunter Partners on (07) 4723-1223.