Law firm highlights complexities with related party builders
While there is nothing prohibiting an SMSF from engaging a related party to provide services, trustees need to be careful as it can result in compliance issues in some cases.
In a recent article, Cooper Grace Ward Lawyers senior associate Keeghan Silcock said while it may be possible for an SMSF to engage a related party builder, there are a few different things to be mindful of.
Ms Silcock explained that there is no general prohibition against SMSFs from engaging a related party to provide services which means that an SMSF can engage a related party builder to provide construction services.
“However, there is a prohibition against an SMSF acquiring assets from a related party,” she cautioned.
“So, if you are engaging a related party builder to provide services to your SMSF, it’s important that in the provision of those construction services, the builder does not also provide goods and materials to the SMSF.”
SMSF clients, she said, may also consider putting in place and agency agreement between the related party builder and the fund as the provision of goods and materials during the course of the build is an important part of the provision of construction services.
This allows the builder to be used as the agent of the SMSF to acquire goods and materials for construction.
“The agency arrangement would operate separately to the building contract between the related party builder and the SMSF,” she said.
“It [is] really important that the SMSF and related party strictly comply with the terms of the agency deed so that the builder only acquires goods and materials as agent for the fund and doesn’t provide those goods and materials directly to the fund itself.”
To ensure that the parties properly comply with the terms of the agency deed, the related party builder will need to contract with the other parties on behalf of the SMSF in the name of the SMSF, she explained.
“All of the invoices for goods and materials should be issued to the SMSF in the fund's name itself, and not to the builder,” she said.
“This can add an extra layer of complexity to the building arrangements, and it’s something that would need to be not only established properly from the outset, but also then complied with throughout the course of the build.”
Some of the other issues that need to be considered when engaging a related party builder include ensuring that the terms of the building contract between the parties are on arm’s length commercial terms and that there is third party evidence to substantiate this, said Ms Silcock.
“You’d also need to ensure that the related party builder and none of the other suppliers or parties involved in the build put a charge on the assets of the fund as that can cause compliance issues for the fund.”