Self-Managed Super Funds and Property Development

Posted at 08:54h in News, Property, Superannuation by Simmons Livingstone

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It’s no secret, Australians love property. Many Self-Managed Super Fund (SMSF) trustees are drawn to property development because it offers a tempting combination: a special 15% tax rate on income while building up funds and the possibility of tax-free returns in retirement. This unique tax advantage serves as a strong motivation for those dreaming of significant profits through property ventures.

Yes, SMSFs can explore property development, but trustees must follow certain rules. The most important one is the sole purpose test, which requires the fund’s main goal to focus on providing benefits for retirement, ill health or death. Violating this essential principle can lead to serious consequences, like losing special tax treatment and facing civil and criminal penalties.

Considering the significant risks linked to property development, trustees need to be cautious. They must prevent their SMSF from turning into a mere source of funds for unrealistic dreams, especially when dealing with related parties. It’s essential to maintain a balance and ensure that the SMSF remains aligned with its primary purpose and doesn’t become a financial risk.

There are various avenues through which SMSFs can invest in property development, subject to their fund’s investment strategy:

Direct Property Development:

Purchase land from an unrelated party and develop it within the SMSF.
Challenges include restrictions on acquiring land from related parties and the inability to borrow for property development within the SMSF.

Related Ungeared Trust or Company (Under SIS Regulation, Section 13.22C):

SMSFs can invest in a company or trust involved in property development alongside related parties.
Strict criteria include no leasing to related parties, no borrowings, no business activities and dealings conducted at arm’s length.
Profits are distributed to the SMSF according to its share and compliance ensures the development is not considered an in-house asset.

Unrelated Property Developments:

Investing in unrelated entities provides flexibility in fund asset allocation, subject to investment strategy and trust deed allowances.
Rules govern the percentage of ownership by SMSF and related parties to maintain the entity’s status as unrelated.

Joint Venture Arrangements:

SMSFs can engage in joint ventures for property development, subject to strict criteria.
Careful consideration is needed to determine the nature of the arrangement, with attention to avoiding it being treated as an in-house asset.
Before entering a joint venture, seeking professional advice in tax, legal and financial aspects is crucial.

As SMSFs explore the possibilities of property development, careful navigation through the regulatory landscape is paramount. Trustees must seek comprehensive advice well in advance, covering tax implications, legal compliance and financial considerations. With the right approach and adherence to regulations, SMSFs can unlock the potential benefits of property development while safeguarding their financial future.

For more information, speak with your Simmons Livingstone advisor on 1800 618 800 or via email at admin@simmonslivingstone.com.au.