Grey areas in related-party property agreements
SMSFs should seek legal advice before entering into joint venture agreements to purchase or develop property with a related party, as some structures could be in breach of SIS rules, according to SuperConcepts.
In a recent blog post, the SMSF service provider’s executive manager of SMSF technical and private wealth, Graeme Colley, said trustees could be caught out by the structuring of different agreements when it came to property investment as joint ventures and partnerships were treated differently under tax and super laws.
“A joint venture needs to be distinguished from a partnership for taxation, superannuation and other purposes,” Mr Colley said.
“When it comes to SMSFs, it is often claimed that the fund has invested in a joint venture to develop land or undertake other similar activities. Whether or not some of these arrangements meet the requirements of a joint venture over a partnership can be highly debatable.”
He explained that to be considered a joint venture, participants in the agreement usually needed to contribute money and skills, bear any debts and take any profits in a proportional way rather than jointly, as would occur under a partnership.
“The advantage of a joint venture is its flexibility as it can provide different rights and obligations to each participant,” Mr Colley said.
“It may also be able to allocate the risks of the joint venture in different ways to each of the joint venturers for the mutual benefit of the parties.”
However, as there was no precise legal definition of a joint venture, agreements entered into by SMSF trustees with the intention of being a joint venture could in fact be classified as a partnership, meaning they could fall foul of in-house asset rules, Mr Colley said.
He pointed to ATO SMSF Ruling 2009/4 which describes an amount contributed by an SMSF towards the acquisition of an asset by a company that is related to a fund member.
While there was no requirement on the SMSF to indemnify the borrowings of the company, it is entitled to receive contractual payments from the related company which the ATO classifies as an investment in a related party.
“It is unlikely that the arrangement would be a joint venture, as the example indicates that the related company pays a share of profits to the SMSF due to the amount paid by the fund,” Mr Colley said.
“The receipt of income jointly is a feature of a partnership under the tax definition and not a joint venture.”
However, a further ruling from the ATO in 2009/16 described a joint venture-type agreement with a related trust for the purchase of rental property as also being a breach of the in-house asset rules, so there were still grey areas around these structures that needed further legal investigation, Mr Colley said.
“Whether a joint venture or partnership is in existence for taxation and superannuation purposes depends on the facts and relationship of the parties,” he said.
“If there is any doubt, legal advice of an administrative ruling from the ATO should be obtained to confirm that the arrangement is as intended to avoid any compliance issues and penalties being imposed on the fund.”
