Property funding via contributions a grey area

property funding contributions

SMSFs using contributions strategies to fund a property development may still trip over tax rules yet that are yet to be clarified.

SMSFs looking to develop property, but unable to source financing through a borrowing arrangement, may be able to use contribution caps to increase the fund’s assets, but this could create other issues around tax, a technical specialist has said.

SuperGuardian education manager Tim Miller said where an SMSF was unable to access funding via a third-party borrowing arrangement, it may also be restricted from borrowing to buy units in a unit trust that would take on the property development due to related-party and safe-harbour provisions.

“It is here then that contribution caps can be relevant because we are looking at how we fund money into superannuation,” Miller said during a recent SuperGuardian webinar, noting there were a number of measure that could be considered.

“Where does the bring-forward rules fit into this, as well as the transfer balance cap, now we are into $1.7 million at the top end and $1.48 million at the lower end of the bring-forward rules?

“What ability do we have to make contributions and what ability do we have for the smaller-balance funds to use carry-forward concessional contributions?”

He noted some SMSFs would also be able to use the small business capital gains tax rollover relief and then the retirement exemption to contribute $500,000, but added these strategies had to be questioned in light of recent ATO activity around investment strategies and non-arm’s-length expenditure (NALE).

“With this last strategy there is a 15-year exemption that can be used, which is in contemplation of retirement, but again I came back to whether undertaking property development at the point of retirement is an appropriate investment strategy for the fund, given its liquidity needs and other issues,” he said.

“With reference to what we have received previously from the commissioner [of taxation] versus what we’ve got now in relation to non-arm’s-length income, I suspect the ATO is going to take a hard line towards NALE and there’s every reason to suggest that they will based on the Law Companion Ruling  they have released.

“When that happens a lot of historical rulings that we’ve received with reference to what is a contribution and acquiring an asset from related party, and the difference between a service and an asset and therefore paying for that service, all those areas are going to funnel into the NALE area and become an important issue for us to contemplate.”

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