SMSFs warned on ‘messy’ property developments

SMSFs warned on ‘messy’ property developments

Warning

An industry lawyer has stressed the importance of SMSFs having properly structured agreements for property developments, with SMSFs often falling into traps with GST.

Speaking at the SMSF Summit, Cooper Grace Ward Lawyers partner Scott Hay-Bartlem said undertaking property developments through an SMSF can potentially create a whole range of issues, and it can be difficult for the SMSF to maintain compliance.

GST is a common issue that arises with property developments undertaken through an SMSF, he warned, particularly where it involves a joint venture.

“We've seen lots of joint ventures go brilliantly well until the GST situation unfolds and that completely stuffs it up,” said Mr Hay-Bartlem.

SMSFs need to be very careful with joint ventures, he said, it can become very unclear about who is making the supply.

“The super fund is the only one on the title [so] from a GST point of view, the super fund has the GST liability, and that’s where we see most of these go wrong,” he said.

“If you're in a joint venture, [then] are you actually in some sort of partnership which means you need to have the partnership supplying, or do you not have a partnership but something else? It gets quite messy.”

Two of the big issues with property developments, he explained, is that the builder can’t charge the asset and the super fund cannot borrow to build.

If it’s an unrelated builder, however, the SMSF, he said, can engage a builder to build on the land on the basis that the builder gets paid out of the sale proceeds.

“So the structure of this is more like a development agreement. It’ll have all the same sorts of things that you’re going to have in a building contract; there will be obligations, specifications, how it’s going to look and the payment rules setting out how they’re getting paid at the end,” he said.

“They'll often say that when you sell, the first X amount goes to the builder, until the builder is paid in total, or X per cent of everything or whatever you negotiate with the builder. Some of it will then go to the super fund and agent commissions and all that sort of stuff. There will be no debt on the land because the fund owns the land.”

A properly structured property development agreement can therefore eliminate a lot of the issues, he said, as the payment to the builder comes from sale proceeds at the end, the super fund makes the supply, and the builder makes the supply to the super fund.

“Your structure becomes a whole lot clearer and cleaner from a legal point of view,” he explained.

“So, the real key to this is that when everything is sold, the builder gets paid.”

If the SMSF is, however, keeping the entire property development at the end, then this kind of arrangement is much more difficult he warned.

“If you're going to keep them all, this kind of thing doesn't work nearly as well because you can't pay the builder on an ongoing basis.”

SMSFs warned on ‘messy’ property developments
smsfadviser logo
promoted stories

SUBSCRIBE TO THE SMSF ADVISER BULLETIN

Strategy