DBA Lawyers special counsel Bryce Figot explained one of the key areas where SMSF property developments can fall over from a compliance point of view is with the related-party acquisition rules.
Mr Figot noted there is a provision in the SIS Act that says the trustee of a regulated super fund must not acquire an asset from a related party.
“Ten years ago, the commissioner put out a relevant ruling in which he gave the example of a related party performing some building work on real estate owned by the super fund. Now as part of that, the ruling said that if the SMSF owns property and a related party built something on that property, then you also own whatever is affixed onto that property,” Mr Figot said.
“[This means] that if a related party comes onto the SMSF’s land to install a ducted air conditioning unit from a related party, that’s a big no-no.”
The commissioner, he said, gave a counter example of a related-party plumber who fixes an SMSF’s tap and as part of the process also installs a washer.
“The washer is so small that it doesn’t matter. So, someone between a washer and a ducted air conditioning unit, you have a problem,” he warned.
The ATO, in SMSF Regulator’s Bulletin 2020/1, reiterated these concerns, he said.
“One of the concerns that the Regulator’s Bulletin lists in paragraph 8 is with arrangements that include the SMSF acquiring assets from a related party, and that’s going to be a big deal if the related party is a builder, for example,” he explained.
“Basically, every builder operates on a cost-plus basis, which means the client, the SMSF, signs a contract with the builder saying build me a house and I’ll pay you a fixed amount and included in that fixed amount is not just services but all of the materials.”
Mr Figot said this is the standard arm’s-length way to conduct a contract with a builder. However, if its a related-party builder, this could actually be a contravention, he warned.
“Instantly, there’s a very big contortion that SMSFs and related parties are going to have to go through, and I can tell you, there’s no builder in the world that’s going to take that modification of standard operating practice meekly,” he stated.
“They all get pretty hot under the collar when you say ‘no cost-plus contracts’. You’re going to have to do something a bit funky if you want it to comply with the law, and instantly they’re unhappy to hear that, to say the least.”
