Property Developments in Super
Regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994 (SISR) requires trustees of self-managed super funds (SMSF) to report the fund’s assets
Property can be held directly by a SMSF (with or without utilising borrowings to acquire) or via an SMSF’s investment in a unit trust or company. Depending on how the property was acquired and which entity it is held in, will determine how a development can be undertaken.
Key considerations are:
1. Related Unit Trust/Company – specific rules apply to an SMSF’s investment in a related party unit trust/company. For example, if the property is used for security or the Unit Trust borrows to undertake the development then the Unit Trust would become an In-House Asset for the SMSF and the SMSF would be required to redeem its units within 12 months.
2. Limited Recourse Borrowing Arrangement (LRBA) – if the SMSF has borrowed to purchase the property, trustees need to ensure that amounts borrowed are not used for the development and that the character of the property is not significantly changed. If the LRBA requirements are not satisfied the borrowing would be prohibited.
3. Non-Arm’s Length Dealing or Income – all transactions and terms of a property development arrangement must be on an arm’s length basis. If a related party builder is used, then the Trustees need to ensure the fees paid for the builder’s services would be considered arm’s length. Otherwise the Trustees risk having all income received (including capital gains) from the property taxed at the top marginal tax rate.
4. Joint Ventures – if a joint venture is undertaken with a related or unrelated party the key is ensuring that the contributions (assets or time) are reflected in the proceeds received. Typically it should be the SMSF contributing the land to the joint venture to ensure the arrangement is not considered to be a loan or investment in the other entity.
5. Providing Financial Assistance/Loan to members – it needs to be clear from the arrangement that the SMSF is not providing a loan or financial assistance. An example of this would be a SMSF becoming an investor in a development only due to the related party having insufficient funds to finish the project.
The acquisition of property or development of property is a complex area with a number of rules and regulations to consider.
It is essential that advice is obtained prior to undertaking any action as the cost to correct issues or to un-wind the transactions can be significant.
If you would like to discuss this further with one of our superannuation specialists, please contact the Superannuation team.