By Ross Higgins, Partner and Harry Giannakidis, Partner
If Self-managed superannuation funds (SMSFs) are to be involved in a property development, there are a number of superannuation law issues to be considered, including:
- the sole purpose test;
- in-house assets rule;
- prohibition of acquiring certain assets from related parties;
- prohibition from superannuation funds borrowing with exceptions for certain limited recourse borrowing arrangements (LRBAs);
- prohibition from making loans or providing financial assistance to members or their relatives;
- requirement for arm’s length dealings and the non-arm’s length income (NALI) provisions which can result in an SMSF being taxed at 45%;
- prohibition on charging of super fund assets and more.
Property development also raises lots of general tax and structuring issues. Key issues are asset protection and tax including income tax, GST, duty and land tax. The “lumpy” nature of real estate means the structuring is key from the outset, as restructuring or changes can trigger tax and duty problems. The purchase contract is also critical as if certain terms are not included (e.g. going concern or margin scheme) it may be too late to do anything to rectify it.
There are pathways to ensure tax imposts are minimised and the superannuation law (Superannuation Industry (Supervision) Act and Regulations, commonly referred to as the SIS Act and the SIS Regs) is complied with, but great care must be taken to achieve this.
The ATO is responsible for overseeing SMSFs. The ATO said in its SMSF Regulator’s Bulletin (SMSFRB 2020/1) in March 2020 that, amongst other things:
- it had noticed more SMSFs entering into property development arrangements and stated that “We will continue to monitor property development arrangements involving SMSFs, particularly those that include LRBAs and related-party transactions, to ensure that SMSFs are not contravening any of the provisions”;
- it is concerned about any arrangements that are being used to inappropriately divert income into superannuation; and
- if SMSF trustees are considering developing property or investing in a related property development entity or venture, it strongly encourages the trustees to seek independent professional advice.
This does not mean SMSFs cannot be involved in a property development. However, it does mean that proper advice and guidance is critical. As highlighted in the Bulletin, in certain circumstances if the in-house asset rule in relation to investments in “ungeared related unit trusts or companies” under reg 13.22C of the SIS Regs is breached it may mean that the “tainted” asset can never be returned to its former exempted status, even if the trustee fixes the issue; the “tainted” asset will have to be disposed of by the end of the following year of income.
We can assist you:
- in liaising with you, property lawyers, your financiers, your accountant and any financial adviser, as appropriate;
- in providing advice on all tax law and SIS Act and SIS Regs issues; and
- documenting the transactions entered into,
so that the tax structure is sound, tax imposts are kept to what is appropriate and the SMSF complies with the SIS Act and SIS Regs.
We would be pleased to discuss any property development projects with you that may involve SMSFs.