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ATO flags SMSF property development concerns

ATO SMSF property development

Property development in an SMSF is legitimate but the ATO remains concerned about schemes moving funds into super or damaging retirement incomes.

Property development via an SMSF is a legitimate investment, according to the ATO which has urged fund trustees to understand the regulatory issues involved in order to prevent their fund from being in breach of relevant laws and regulations.

In its recent “SMSF Regulator’s Bulletin 2020/1”, the regulator flagged an increase in the number of funds entering into property development arrangements and noted some funds choosing to invest in property development via joint venture arrangements, partnerships or investments through an ungeared related unit trust or company might be unaware of the complex compliance issues involved with such arrangements.

“Property development can be a legitimate investment for SMSFs and the commissioner does not have any concern with SMSFs investing in property development where it complies with the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994,” the ATO stated.

“However, these types of investments can cause concerns where they are used to inappropriately divert income into the superannuation environment, or if SMSF assets are used to fund property development ventures in a manner that is inappropriate for and sometimes detrimental to retirement purposes.

“Property development ventures may also involve complex structures and the manner in which they are implemented can lead to inadvertent but serious contraventions of the regulatory rules.”

Trustees entering into such arrangements needed to be aware of a number of regulatory concerns, such as whether or not the venture amounted to the SMSF being maintained for a purpose outside those permitted by the sole purpose test, as well as whether the SMSF continued to meet relevant operating standards, the regulator pointed out.

It also said trustees needed to be conscious of income tax matters, such as non-arm’s- length income (NALI) provisions and general anti-avoidance rules, particularly where the property development arrangement involved other related parties.

“We would be concerned where circumstances indicate that the arrangement has been used to manipulate the members’ transfer balance accounts, for example, by deliberately undervaluing an asset when it enters retirement phase and counts towards the transfer balance cap, allowing a greater amount of earnings within the SMSF to be treated as exempt current pension income,” it added.

“We have previously seen property purchases funded by poorly implemented limited recourse borrowing arrangements (LRBA) and/or funding arrangements in SMSF-related entities result in breaches of the superannuation regulatory provisions and/or give rise to application of the NALI provisions.”

It stated property development arrangements involving SMSFs, particularly those that included LRBAs and related-party transactions, would continue to be monitored.

In March, the ATO said trustees should be wary of using ungeared related companies or unit trusts to invest in property development via their SMSF without fully understanding the key conditions.

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