The Truth About using SMSF for property development
I often get asked, “Can an SMSF be used to develop property”?
The short answer about using SMSF for property development is YES, but be cautious and do it under proper advice. There is no specific legislation that disallows an SMSF from operating a property development business. However, a property development project in SMSF will face the challenge of complying with the below requirements for SMSF:
- The Sole Purpose Test
- The Related Party Test
- Restriction on SMSF trustee to be the builder
- Charge over the property
- Trust Deed and Investment Strategy
The Sole Purpose Test
SMSF exists for the “sole purpose” of providing for its members’ retirement. The sole purpose test ensures that the concessional taxed superannuation savings provide only members’ retirement or death benefits.
Property development can easily cross the line from being an investment to a commercial. While a commercial venture is not directly prohibited, it may contradict the sole purpose test as commercial activity intends to provide income today instead of retirement.
However, outsourcing the development project and merely funding it through the SMSF creates a long-term asset. In that case, you may not be undertaking commercial activity.
The Related Party Test
SMSF law prohibits providing non-retirement benefits to members and related parties. However, there may be some scope for the SMSF to utilise the services of a related party to carry out these works at market price in an arm’s length manner.
Also prohibited is buying assets from a related party (there are some exceptions for listed shares, etc.). This prohibition will also apply to a related party builder who supplies building materials like bricks, wood, etc., as part of the building contract, as ATO considers the building materials to be an asset purchase.
However, there may be scope for the related party builder to act as an ‘agent’ for the SMSF when they acquire the materials required to carry out the work and then use them in the completion. So speak to your accountant to explore the possibility.
Restriction on SMSF trustee to be the builder
SMSF trustee is not allowed to receive any benefit for duties or services as a trustee except when the trustee is appropriately qualified and provides such services to the general public for his living. Even then, the remuneration of the trustee must be at arm’s length prices.
For many SMSFs wanting to undertake property development, the trustees involved won’t be in the property development business and may need some form of a workaround.
Charge over the Property
An SMSF must generally not give a charge over a fund asset. Many building contracts, however, provide for control over the land and property. Therefore, SMSFs must carefully inspect each relevant document, especially standard building contracts, and exclude any mortgage, lien, or other encumbrance.
SMSF Trust Deed and Investment Strategy in Using SMSF for Property Development
The SMSF deed must specifically allow for a business. Many older trust deeds may be outdated and may need to be updated.
The investment strategy of the SMSF must also permit property development. As property development is inherently risky and may involve unexpected cost overruns, delays, and the market’s vagaries, the risk profile of members will also need to be evaluated and adjusted.
Further, property development must be in the interest of all members, and all members must agree.
Conclusion
In summary, the compliance around SMSF is strict and more so when you undertake any commercial or property development activity thru SMSF. It is strongly recommended that you take expert advice before starting any property development in SMSF and maintain adequate compliance records.
Nav Accountants and Advisors are experts in SMSF and Property development advice.
Reach out to us if you need detailed guidance on using SMSF for property development.
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