The ATO has released SMSF Regulator’s Bulletin SMSFRB 2020/1 which outlines its concerns in relation to SMSFs undertaking property development.
The ATO has seen an increase in the number of SMSFs entering into arrangements, with related or unrelated parties, involving the purchase and development of real property for subsequent disposal or leasing. In particular, the ATO are seeing a number of arrangements in which the investment activity is undertaken utilising joint venture arrangements, partnerships or investments through an ungeared related unit trust or company.
The ATO acknowledges that the legislation does not prohibit an SMSF from investing directly or indirectly in property development, however, certain aspects of the arrangement may give rise to breaches of the superannuation legislation and regulations.
Some of the legislative provisions that may be breached include:
- Whether the arrangement amounts to the SMSF being maintained for a purpose outside those permitted by the sole purpose test
- Whether the SMSF continues to meet the relevant operating standards, including record-keeping requirements, ensuring assets are appropriately valued and recorded at market value, and keeping SMSF assets separate from members' assets
- Whether the arrangement includes the provisions of a loan or financial assistance (directly or indirectly) to a member or their relative
- Whether the arrangement includes the SMSF acquiring assets from a related party
- If the arrangement features the SMSF borrowing money, whether that borrowing fails to meet the requirements to be exempted from the prohibition on borrowing for a limited recourse borrowing arrangement (LRBA)
- Whether the SMSF has contravened the in-house assets rules by exceeding the level of in-house assets allowed
- Whether payments out of the SMSF under the arrangement are in fact payments of benefits contravening the relevant payment standards (commonly known as illegal early release of superannuation)
- Whether the SMSF's investments are made and maintained on an arm's length basis and if they are not, whether the terms and conditions of the transaction are not more favourable to the other party than would be expected in an arm's length dealing.
The above relate specifically to superannuation legislation but additional concerns that SMSFs need to be conscious of relate to tax law, such as non-arm’s length income and general anti-avoidance provisions.
The ATO will continue to monitor property development arrangements involving SMSFs, particularly those that include LRBAs and related party transactions, to ensure that SMSFs are not contravening any of the provisions listed in their Bulletin.
SMSF trustees considering a property development arrangement should seek appropriate legal and tax advice before entering into these arrangements, as there may be significant adverse consequences for trustees and members including the forced sale of assets or having to wind up the SMSF. SMSF trustees may wish to seek specific guidance from the ATO to ensure the arrangement satisfies the legislative requirements.