SMSF and property development

Date of article: 17 July 2020
Last updated: 17 July 2020

The ATO released the Self-managed Super Fund Regulator's Bulletin SMSFRB 2020/1 Self-managed superannuation funds and property development on 13 March 2020 dealing with the potential tax and regulatory consequences of SMSF entering into property development arrangements.

Whilst the ATO accepts that property development can be a legitimate investment for SMSFs where it complies with all aspect of the Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry (Supervision) Regulations 1994 (SISR), the ATO has concerns with some arrangements that may contravene the SISA and/or SISR, such as using SMSF assets to fund property development venture that is inappropriate or used to inappropriately divert income into the SMSF.

The ATO encourages trustee to obtain professional advice and advice from the ATO prior to entering property development arrangement in the SMSF.

Joint venture arrangements

In an arrangement where the property is the asset of the SMSF, and the trustee of the SMSF enters into a joint venture arrangement with a related party for the carrying out of the property development, the ATO cautioned that:

• the contributions made by the SMSF must be reflected in the proceeds received
• if the SMSF’s return from the arrangement is excessive when compared to the contribution, the income may be non-arms length income
• the arrangement is not a investment in or loan to the related party.

Care must be taken to ensure that the joint venture is a true joint venture, and the SMSF’s interest is not an investment in or loan to the related party – the capital outlay should be reflected by the SMSF’s proprietary interest in the real property that is being developed.

The Bulletin provides a discussion on the following topics in the contact of property development:

• in-house assets
• ungeared related companies or unit trusts
• the use of LRBAs
• non-arm's length dealings and non-arm's length income
• joint venture arrangements
• providing financial assistance to a member or a relative
• record keeping
• sole purpose test.

A copy of the Bulletin is available here for your convenience: SMSFRB 2020/1

Do you need help with your situation, help obtaining formal advice/ ruling from the ATO, or if you wish to discuss the above, please contact us. Our contact details.