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Map transactions before developing property

property development transactions

SMSFs considering property development should map out the transactions required to avoid being accused of conducting a business within the fund.

SMSF trustees looking to use their fund to engage in property development must consider how any transactions related to that activity will be viewed by the ATO before creating structures to undertake the work, a technical specialist has said.

SuperGuardian education manager Tim Miller said while the ATO has indicated an SMSF can engage in property development, it would take into consideration if the fund was running a business and how the transactions between the fund and other parties were conducted.

Speaking during a webinar yesterday, Miller said any property development had to be consistent with the trust deed and investment strategy of the fund, as well as meeting the sole purpose test, but the ATO has in the past also given an indication of other areas of concern.

“The ATO has talked about employing family members and they have talked about any relationship between hobbies and pastimes and that the business is being undertaken by the fund,” he said.

“They have also questioned if the business has links to an associated trading entity and that’s a key issue where people are trying to move taxation from one entity to a lower-tax entity, such as the SMSF, and then there are likely to be issues outside the fund as well as inside it.”

He said in considering transactions, the ATO could also look at what borrowings were in place and whether any transaction could be seen as offering financial assistance to a member, and ensuring they were above board could allow further planning to take place.

“There should be consideration about identifying upfront how these transactions are going to be viewed because once we determine what we’re doing and whether or not it is in contemplation of carrying on a business, that’s going to go some way to determining how we can undertake those transactions,” he said.

“For instance, if we want to operate a property development business through the SMSF, then that automatically discounts the capacity for us to do it through an ungeared unit trust or ungeared company, because if we have one of those, then to satisfy the exception to the in-house asset rules we have to ensure that the company or trust is not carrying on a business.

“We have to do the balancing act of identifying the parties to the transaction as part of identifying how we will structure the transaction.

“That element has to be considered right from the outset because otherwise we’re going to get ourselves into trouble if we go to the expense, and through the process, of setting up the unit trust to invest the capital of the SMSF into a property development, but identify this as carrying on a business transaction that’s going to lead us into issues later on down the track.”

 

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