Trustees carrying out property developments inside an SMSF must be mindful not to allow any of the associated arrangements to deprive members of retirement benefits to which they would be otherwise entitled, an SMSF specialist has said.
Smarter SMSF chief executive Aaron Dunn warned delegates at his organisation’s recent SMSF Virtual Day 2021 that unless this principle is adhered to, the fund will be in breach of the sole purpose test.
Dunn gave some examples of situations that may prove to be problematic for trustees in complying with the sole purpose test.
“We might have a development with a profit split arrangement that favours the related builder as opposed to being fair and reasonable in its outcome to the fund and the builder itself. Or [we might have] inflated [salaries] or project fees to a related project manager rather than paying what would be otherwise done on commercial terms,” he noted.
He pointed out the situation could become even more difficult to navigate if the SMSF trustees have official roles with the property development venture either through other businesses or through control of other entities. In these situations, he suggested there are some very important issues to take into account.
“[Here] we need to demonstrate that their decision-making in respect of that property [development] is solely pursuing the retirement purpose for that SMSF. So again going back to [proving the decisions are aimed at] providing retirement benefits for one or more members of the fund and [the process] is not being influenced by other goals or purposes in relation to those businesses or other entities,” he said.
To further illustrate his message, he referred to an example of a troublesome decision involving property development activities detailed in one of the ATO’s SMSF Regulator’s Bulletins.
“[The example said] if an SMSF trustee decided to cease paying its members a pension so that the fund could use its cash reserves to make an additional capital contribution into a struggling property development venture, this decision may actually demonstrate that the SMSF is being maintained for the purpose of property development over and above the benefit of providing retirement [savings] for those members in the fund,” he noted.
