A specialist lawyer has warned practitioners as to the ATO’s unfavourable attitude toward SMSF investments in property developments involving related parties and how perceived non-arm’s-length income compliance breaches need to be scrutinised carefully.
“What I’m seeing a lot of is [evidence] the ATO really, really hates related-[party] property development arrangements,” Brown Wright Stein partner Matthew McKee told delegates at The Tax Institute National Superannuation Conference held in Sydney recently.
To support his observation, McKee shared an experience an SMSF client had that he said showed the degree to which the regulator is opposed investments with these specific characteristics.
“In my case, my client had a development project in their super fund [and] had a related-party project manager who didn’t do the building work, [but] merely managed the project and he was advised to do that,” he explained.
“The project manager engaged one of the big building companies and the builder obviously provided supplies – building materials. The builder then obviously invoiced [the contracted party, being the project manager] for those building materials.
“The ATO said [those materials] have been acquired from the related-party project manager. It’s legal rubbish.”
According to McKee, the regulator’s interpretation ignored some of the basic tenets of the law.
“For goods or personal property, ownership is [established] by possession. The project manager didn’t have possession of those building supplies, he never owned them, the ownership was with the builder and then the fund.
“It’s nonsense, the ATO’s argument.”
He reinforced his point by suggesting he would never have ownership of a bunch of flowers he bought for a third party from a florist. In this scenario, he stressed the florist would have originally owned the flowers and the recipient would own them when they were delivered, but at no time would he have had ownership of the gift.
“So it’s really important to understand that’s the climate we’re living in. [The] ATO doesn’t like [arrangements like these],” he noted.
