Compliance, Documentation, Property

Long-term record-keeping recommended

SMSF property development record keeping ATO NALI audit

Lengthy retention of records related to property development by an SMSF is recommended given the ATO’s increased focus on the past actions of some funds.

SMSFs engaged in property development within their fund have been encouraged by a legal expert to keep detailed records over a long period of time about the project and its place in the investment strategy.

Sladen Legal principal Phil Broderick said the matter of record-keeping and aligning assets with an investment strategy has traditionally been viewed as a sleeper issue, but “the ATO are hot to trot in relation to record-keeping in recent times”.

Speaking at the Chartered Accountants Australia and New Zealand National SMSF and Financial Advice Conference 2023 late last year, Broderick said SMSFs should go beyond the stated requirements for record-keeping to ensure they can answer questions the ATO may ask well into the future.

“You have got to make sure going down this [property development] track that you’ve got a proper investment strategy and make sure you’ve got evidence of that,” he said.

“In terms of record-keeping, there is no requirement for record-keeping for anything other than minutes and you should keep them for 10 years, but from an evidentiary point of view about the investment, people have already raised the concerns the ATO have around these type of things.”

He said he had worked on a fund with a non-arm’s-length income (NALI)-related audit that had a pre-1999 unit trust that had issued pre-1999 partly paid units and was making payments towards the partly paid units until 2009 when the transitional rules ran out.

“From then the SMSF couldn’t make any further payments toward the partly paid units without triggering the in-house asset rules so they stopped, but the partly paid units were still getting distributions from the unit trust in the same manner the fully paid units were,” he said.

“The ATO said it would apply NALI even though this was an arrangement from 1998 and this does show how far back it will go and how far back you need to keep records and reinforces the [SMSF] Regulator’s Bulletin [2020/1], which states the ATO is going to push you on this.”

He noted the same scrutiny would apply to the fund’s investment strategy and record-keeping should be detailed.

“The lack of investment diversity [in an SMSF] has been raised by the ATO,” he said.

“It’s not a breach, but you do have to deal with it and state the reasons for lack of diversity, such as an interest in other super funds or outside of super, or you’re prepared to accept the risk from a lack of diversity.

“These statements are all fine. There’s no requirement to have diversity, but the reasons must be documented.”

At the same conference, he also said relationships inside property developments within SMSFs were being identified by the ATO to zero in on funds breaching NALI rules.

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