SMSFs warned on building contract traps that breach super rules
SMSFs planning to enter into a building contract for their properties have been warned of potential clauses that may cause serious contraventions of super laws.
Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler said a recent review of a contract for a client that wanted to engage in building work found that it would have resulted in a serious contravention if the SMSF had signed it without getting changes to the contract.
“In particular, I removed the provisions that authorised the builder to charge the property by placing a mortgage or security interest over the land and a security interest under the Personal Property Securities Act 2009 (Cth) over any personal property such as equipment and materials,” Mr Butler said.
“These types of clauses are typical of what is usually found in building contracts, as builders want to make sure they get paid and can potentially result in a contravention of super rules (e.g. Reg 13.14 of the Superannuation Industry (Supervision) Regulations 1994 [Cth]) with potentially significant adverse consequences.”
Mr Butler said this is a typical clause that needs to be deleted as it can result in a contravention with significant adverse consequences.
“Some builders will not like this and you may have to explain, since an SMSF is the client, the super rules do not allow this,” he said.
“Deletion of this clause, however, can place the builder at a disadvantage as they cannot simply enforce their mortgage or security and have the property sold to realise their costs, interest and any legal recovery costs etc.
“Moreover, entering into a building contract involves considerable responsibility, risk and ongoing management of the relationship with the builder and related trades on the way through a building project to ensure a successful outcome with minimal cost overruns on the contracted amount and interest applies for overdue payments etc.”
Mr Butler noted that most building contracts do not provide a firm quoted amount as there are often prime cost and provisional cost items, as well as unforeseen items like further work being required on foundations or on some other part of the works which only unfolds after the builder commences their work.
“Thus, careful cash flow budgeting is also required as an SMSF may have a limited budget available and cannot generally borrow to fund improvements and new building work,” he said.
“We also insert general protective provisions in building contracts to minimise any other contravention arising under the Superannuation Industry (Supervision) Act 1993 (Cth) and Superannuation Industry (Supervision) Regulations 1994 (Cth).
“If there is any doubt about the contract, SMSF trustees should seek appropriate advice from a suitably qualified lawyer or expert.”
However, Mr Butler said many SMSF trustees do not get legal advice on these matters and are likely to be exposed as a result. In many instances, they rely on the advice of their accountant, financial adviser or SMSF administrator, who may not be qualified or experienced in this field and who may wear considerable liability if there is any claim made against them.