Residential Property, Superannuation

Property developments okay with sole purpose

property development sole purpose

An SMSF running a property development in all reality is unlikely to be in breach of the sole purpose test.

A specialist lawyer has cast doubt as to whether running a property development inside an SMSF would actually ever present a situation where the trustees are in breach of the sole purpose test.

Sladen Legal principal Phil Broderick told delegates at last week’s Self-managed Independent Superannuation Funds Association SMSF Professionals Half Day Seminar that when looking at running a property development within a fund, trustees must always ask themselves whether they are carrying on those activities to make money for the fund to determine if the sole purpose test has been satisfied.

However, Broderick argued there would not be many circumstances where this would not be the case.

“Generally when people [operate] a property development [in an SMSF] it’s not something they’re doing to try and get money out of super, [instead] they’re trying to get more money into super,” he noted.

“So my view is [that] it’s very difficult to argue there’s a sole purpose test breach [if a property development is contained within an SMSF].”

He warned, though, certain circumstances may still exist where a breach of this kind may arise.

“In a property development context there could be situations where you are [approving] arrangements to effectively pull money out of super,” he said.

“It might be you engage a related-party builder who has charged too much [for their services] so there is leakage [and it could be seen that] you’re using it to get money out of the SMSF.”

While this scenario is possible, he observed, in his experience, it was not very probable.

“The reality is, when I see it, it’s never that way. If anything it’s the other way. [That is, the related-party builder would be] undercharging [the fund],” he said.

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