Speaking to SMSF Adviser, NAB director of SMSF and investor behaviour Gemma Dale said the general public continues to see property development in an SMSF as an “aspirational opportunity” but often does not have any understanding of the difficulty and complexity in structuring these types of arrangements.
“We never cease to get questions about property development inside super – never – even if I’m talking about a totally unrelated topic,” said Ms Dale.
“It’s been 10 years since legislation for limited recourse borrowing arrangements was introduced, and people still see that as something that’s really exciting, and then when you explain to them how it actually works they then get really disappointed.”
While most trustees don’t have plans to do property development on a grand scale, she said, many do have plans for building and have a loose understanding of what’s actually possible inside super.
Many investors have seen the rise in property markets in the past five years, and may or may not have benefited from that, and see accessing their super as a way to further invest in that, she said.
“Property is still such a love affair for so many people, and it’s very apparent that they just don’t have an understanding of how the legislation works. [In some cases] it’s probably just been a hint from someone else, and they’ve made some assumptions about what they can do,” she said.
“Property development [in an SMSF], is very rarely permissible, it’s very difficult to organise, and these are clearly people who did not have a strong background in property development.”
Last year, the ATO flagged certain arrangements involving SMSFs and related party property development ventures as an addition to its Super Scheme Smart program.
EY executive director Matina Moffitt has likewise previously discussed some of the compliance risks with property developments where the development is conducted through a unit trust and the SMSF invests in the unit trust.
Ms Moffitt also said that professionals need to engage with members early on to inform them on their obligations in needing to value their unit trust assets.
“That’s great that they have those unit trusts but you know that you have to value those assets at market value to support what the SMSF needs,” said Ms Moffitt.
"Nobody has warned them that if their SMSF invests in that unit trust, there could be a demand or a request from the super fund to say, ‘I need those assets valued at market value’, and they do get caught out.”