Townsends Business & Corporate Lawyers senior solicitor Jeff Song said that while it is possible to develop a property in an SMSF and still comply with the superannuation laws, SMSF clients should be aware that there are a number of compliance issues that can arise.
For example, knock down and rebuild is likely to be considered as the running of a business, Mr Song said.
“While an SMSF is not completely prohibited from running a business, extra caution needs to be taken so that it doesn’t breach superannuation laws including the sole purpose test,” Mr Song said.
Like any other investment, he said, the property development must be for the sole purpose of providing retirement benefits for the members.
“This is not always a simple question, but at the very least means you, or anyone related to you, cannot make personal use of the property or unreasonably benefit from the investment,” he said.
“If you are thinking of building a holiday house for your personal use, then look for another investment vehicle.”
He also explained that the investment must be allowed under the current trust deed and be in line with the investment strategy.
“Legal advice should be sought to see if any amendment to the trust deed is required,” he added.
Using related entities to carry out development work can also cause added complications, he explained.
“From a compliance perspective, it would be safer to engage entities that aren’t related to the fund. If, however, an associated entity is involved, the SMSF’s dealing with the entity must be on arm’s length terms and appropriate documentation should be in place to support this,” he said.
“Before members or their families are engaged for any paid service, be mindful of the prohibition against providing financial benefits to the members or other related parties and ensure there is rationale for engaging their service and their pay rate.”
He also stressed that SMSF professionals and their clients should not acquire assets such as building materials from related parties of the fund.
“When you purchase materials for the project, make sure the fund trustee buys directly from third parties or obtain advice about having an agency agreement in place for purchasing materials through related parties,” he said.
“Be aware that developing a property in your SMSF is not for the faint-hearted, as it will attract greater scrutiny from the auditor and the ATO.”
To complete a full development in a SMSF is extremely rare usually it is via a vehicle with other investors, such as a superannuation unrelated investment trust or through a JV. Borrowing and charging assets are the key sticking points as are the issues noted above.