There may be no general prohibition against SMSFs investing in property development, but given the regulatory rules, it is very difficult for SMSFs to maintain compliance, a lawyer has warned.
Cooper Grace Ward Lawyers partner Clinton Jackson said these arrangements not only raise issues around related-party transactions and arm’s-length rules, but often arrangements can also be closely linked with one or more of the members’ current business activities, which raises flags around the sole purpose test.
“From where I sit on the legal side of things, if you are doing development in a super fund, it’s one of the most difficult things to get right,” Jackson told the recent Tax Institute 2018 National Superannuation Conference in Melbourne.
“There are so many moving bits and pieces that sometimes it doesn’t work. There’s no way you can actually bring it together.
“So if you are going to do it, make sure you really spend the time at the start getting it right, because if you don’t do that early, you’ve got no chances of success.”
Many sole purpose test issues intertwine with section 65 of the Superannuation Industry (Supervision) Act 1993, which prohibits super funds, including SMSFs, from providing financial assistance to members or their relatives.
“The two things that really scare me from a sole purpose point of view was where [members] say they are going to buy this property with their property development company because they can’t do it, or their property development company doesn’t have a lot of work on at the moment so they’re just going to buy a property and engage it to do the development,” Jackson said.
“We need to start thinking, why are we actually doing this? What is the objective purpose behind buying that property? Is it for the members’ retirement benefit or is it to keep the members’ company busy throughout the period that company doesn’t have any other work on?”
He said advisers and lawyers need to be particularly conscious of how this is going to be perceived, particularly by the ATO because advisers will need to convince the tax office there is no sole purpose test issue.