SMSF trustees entering into a joint venture arrangement need to ensure the business structure is established in a manner that will avoid it being classified as an in-house asset under superannuation law, a specialist legal firm has said.
According to Townsends Business and Corporate Lawyers superannuation online services division managing solicitor Jeff Song, the SMSF must make sure the arrangement is not deemed to be a partnership to guarantee this does not occur.
To illustrate his point, Song used an example of where an SMSF enters into a property development joint venture with a company where the sole director is the son of the super fund’s trustees and, more specifically, the directors of the SMSF’s corporate trustee.
The joint venture agreement specifies the land for the property development is owned in the name of the SMSF’s corporate trustee and the property development company as joint tenants in common.
In this set of circumstances, the property development company would be considered a related party of the SMSF, but the tenants-in-common arrangement would not see the property categorised as an in-house asset of the fund under section 71(1)(i) of the Superannuation Industry (Supervision) Act, which excludes such property from the definition of that term, Song said.
“Further, the joint venture is a commercial arrangement between parties and is not by itself a related party of the fund if it is properly set up with necessary features of a joint venture. With this structure, the SMSF would not have an investment ‘in’ a related party and accordingly does not acquire any in-house assets by the project,” he added.
“Being properly set up means that the agreement between the parties (and all the documents they issue to or enter with third parties) make clear that neither party is liable for any defaults or wrongful acts of the other and each is only entitled to a half share of any profit from the enterprise.”
The arrangement could be considered a partnership if the liabilities of the parties are not defined in this manner and if the parties were in receipt of income jointly, he noted.
“In contrast to a joint venture, a partnership would itself be a related party of the fund and the SMSF’s investment in the partnership would be an in-house asset of the fund, being an investment ‘in’ a related party,” he said.