By Graeme Colley
In the past year, regulators and SMSF auditors took a closer look at SMSF investments and investment strategies, especially with funds that have a high concentration of investments in one asset class. The ATO published its concerns for SMSFs that have invested directly and indirectly in real estate development projects. While they consider it possible for SMSFs to undertake the property development or invest in a trust or company that undertakes development, funds may end up walking a very thin line between complying with or breaching the Superannuation Industry (Supervision) Act (SIS Act) and Regulations.
When done correctly, property developments undertaken by an SMSF can be a legitimate investment, but the ATO’s concerns relate to developments which are not solely for genuine superannuation purposes. Examples include SMSFs that throw good money after bad by propping up a poor development, or where the SMSF is used to receive excessive income and capital gains into a low tax environment. Where the SMSF breaches the tax or super laws, any income - including capital gains from the development - may be taxed at 45 per cent. The fund could also lose its complying status and the trustees could be penalised or even disqualified.
What you need to consider
There’s lots to think about with property development. It’s risky business, especially if you are inexperienced or don’t understand the building and development game. You may need support with development applications and dealing with councils, builders or tradies. Then there’s the matter of who will do the development, as well as ownership structures, distribution of profits and dealing with the tax and superannuation legislation.
At SuperConcepts, we understand how superannuation laws impact on the structures used when it comes to property development. As trustee of your SMSF, you’ll need to be careful and make sure your fund continues to be maintained only for superannuation and retirement purposes.
If your SMSF wishes to develop properties, either directly or indirectly, there are a number of questions that you need to consider:
In addition to the requirements of the SIS Act, any income and expenses in relation to the property development must be on an arm’s length commercial basis. If they are not and the income received by the fund is greater than if the development had been on an arm’s length commercial basis it will be taxed at penalty rates. Whether income is excessive includes situations where goods and services supplied for the development are provided at a discount or for no cost.
Some of the ways in which a property can be developed can include your SMSF:
Keep an eye out for our next article, which will explore the various ways an SMSF can become involved in developing property and some of the tips and traps.