Concerns from ATO on property development and SMSFs

The regulator of self managed superannuation funds reports that it has noticed an increase in the number of trustees entering into arrangements involving buying and then developing property (either with related or unrelated parties) that is subsequently sold or leased.

While it says this is not specifically prohibited, its recently released SMSFRB 2020/1 indicates that these arrangements need to be carefully approached to ensure compliance with SISA and SIS regulations. For example, could investments of this sort be viewed as having a collateral purpose (that is, not within the sole purpose test), or if it crosses a line regarding the in-house assets rules.

Where the ATO’s concerns are particularly awakened is over arrangements in which the investment activity is undertaken utilising joint venture arrangements, partnerships or investments through an ungeared related unit trust or company.

Complex structures used in property development can also obscure, the ATO says, where income may be inappropriately diverted into the concessionally treated superannuation arena, possibly in a way that may also be contrary to proper retirement outcomes.

Trustees must be aware of issues that could expose compliance weaknesses, it says, such as ensuring proper arm’s length dealings, including but not limited to:

  • the purchase of land or other assets
  • the value of services provided
  • the terms (including the use of personal or related party guarantees) of any borrowing arrangements of the SMSF or other entities involved in the development, and
  • the return on investment and income or capital entitlements.

Manipulation of the transfer balance account (through deliberate undervaluing) is another concern when a fund enters retirement phase and the asset would count towards the cap. Your relevant clients should be  made aware that the ATO is taking an active interest in property developments undertaken by SMSFs.

As guidance, the SMSFRB 2020/1 has listed several areas that may warrant a trustee’s brushing-up on the issues of concern. The ATO has published a table of these issues (with links to the appropriate paragraph number within the SMSFRB.

In-house assets 20
Ungeared related companies or unit trusts 24
The use of limited recourse borrowing arrangements 38
Non-arm’s length dealings and non-arm’s length income 54
Joint venture arrangements 71
Providing financial assistance to a member or relative 77
Record keeping 79
Sole purpose test 89

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