SMSF trustees considering entering a joint venture for property development purposes have been warned such arrangements are likely to attract attention from the ATO due to their complexity, according to a legal expert.
“The ATO, time after time and all the bulletins and taxpayer alerts, really have concerns with joint ventures and probably rightly with some of the things they’ve seen, because joint ventures tend to be a bit looser,” Sladen Legal principal Phil Broderick noted during an Institute of Financial Professionals Australia webinar hosted last week.
“There’s no issues per se [with entering a property development project as a joint venture]. SMSFs can be partners in arrangement, partners in a partnership, and that partnership can carry on a property development activity in the same way that the SMSF can carry on a property development activity, as long as what we get back is what we put in.”
To illustrate his point, Broderick used a case study where an SMSF entered into a joint venture for a property development project. The situation saw fund’s contribution being significantly smaller than the share of profits it received, raising red flags for the ATO.
To this end he noted the disproportionate return to the SMSF prompted raised suspicions a possible breach of the Superannuation Industry (Supervision) (SIS) Act may have occurred.
“[In] that example, they only gave a 23 per cent contribution but got a 50 per cent profit. That was a problem, but if we gave a 50 per cent contribution and got a 50 per cent return, that would be fine,” he explained.
“[You also need to be aware of], what the partnership is doing. For example, let’s say there are three parties, they are tenants in common and registered providers on the land. [You have to determine whether] one of the other parties [has] put a mortgage on the land. That would breach [the provisions preventing having a charge over an SMSF asset].”
As such he suggested careful planning and thorough documentation are essential from the outset, as improper management or carelessness could lead to significant compliance issues down the line.
“You have to be very careful and make sure it’s all properly documented at the start, and then you’ve got to make sure the clients manage the joint venture properly. As we know, clients can sometimes be a bit loose with where they send money and take money and try to journal it all later,” he added.
“Particularly if the other party has a property and the joint venture has the SMSF contributing cash. I think they’re the most problematic cases.”
