DBA Lawyers special counsel Bryce Figot explained that SMSFs undertaking property developments can sometimes fall into traps in terms of the related-party acquisition rules. The SIS Act makes it clear, he said, that the trustee of a regulated super fund must not acquire an asset from a related party.
Where the SMSF is using a related-party builder, this can become a very big problem where they acquire building materials personally, Mr Figot warned.
One technique that SMSF practitioners and trustees like to implement in practice to try and address these risks is drop in place a document that says that anything that the related-party builder acquires for the SMSF’s building project is acquired as an agent.
“So, really, the super fund has acquired it right from the get-go. [However], I’ve got a lot of concerns about that sort of thing operating in practice. Firstly, doctrine of sham, even if all the parties sign a piece of paper saying we intend for the related party to be an agent for the SMSF, sure the piece of paper says that, but is that truly what the parties actually intend?” he questioned.
“Probably what they intend is something different, namely, the related party does buy it and receives trade discounts.”
The other concern with the related party buying it, paying for it and getting reimbursed, he said, is the issue of how much of a gap there can be between when a related party buys something and when the SMSF reimburses the related party, so that it is a reimbursement and not a borrowing.
“Eleven years ago, the ATO put out a ruling on what is a borrowing, and I think a lot of people in the industry have sort of forgotten that ruling tells us that the commissioner’s view is that in order for a reimbursement to not be a borrowing, the reimbursement must basically occur immediately,” he noted.
“Now you might say that immediate means different things to different people, but at the very least, that means same day and in practice that’s just so hard to do. I’m yet to meet a builder who can say that, ‘yes, our bookkeeping is so up to speed that we can get the reimbursements happening the same day’.”
Mr Figot said the best-practice method is that the SMSF goes to all the third-party suppliers and the SMSF actually acquires the assets directly from those third-party suppliers.
“It’s easier said than done, I acknowledge that. I think it’s important that advisers give their clients the right advice which is not necessarily the advice they want to hear, but that’s the vanilla way to do it,” he stressed.
“If you go through an ATO audit and you have all the tax invoices and bank accounts showing that the SMSF bought those physical items directly from the supplier, that is the gold standard that will allow you to conclusively and easily, and with the least amount of professional fees, respond to an ATO audit.”
