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Scenario as below
ABC SMSF owns a house plot at Geelong
ABC SMSF and DEF SMSF ( unrelated SMSF's) start a company XYZ Co. in 50 : 50 shares
XYZ co. will engage an independent builder to construct a house in plot at Geelong . XYZ will not take a loan from outsiders.
In the event if the building contract exceeds the contributions from ABC & DEF super funds , members will give temporary loans until the construction completes complying with rules .
Once the construction is over , the house will be sold to public and proceeds will be distributed.
Is this scenario complying with super laws.
Thank you .
Hi Antony
Thanks.
I assume the investment in the company by ABC SMSF is greater than 5% of its assets.
If the SMSF's investment in XYZ Co is not considered to be a related party (per the SIS requirements) then yes the SMSF can invest in the company. That company as it is not a related party could borrow money to complete the property construction and that could be from the members of the Funds. Any money borrowed would need to be on an arm's legth basis and you would need to consider that if any loans from members that this should be done at the same amount from each member of both SMSF's (in case any loan from a member was deemed to be an investment in the company and impact the 50 / 50 ownership / control requirement).
As noted in a previous question that you raised a SMSF can invest in a company or trust that is not considered to be a related party. If the company / trust was considered a related party then the in-house asset rules (& the 5% limit) would apply (unless it met the requirements of being a 13.22C & D SIS Regulations "ungeared" entity).
Normally an entity is considered an unrelated entity when the Fund owns or controls no more than 50% of the shares or units.
As a result a SMSF can invest in up to 50% of the shares or units in an entity & this by itself will not make it a related party.
I would recommend in your example that the SMSF's get legal advice to ensure they have complied with the requirements of SIS. They also need to ensure that they comply with the non arm's length income (NALI) and expenditure (NALE) requirements.
In relation to the joint venture between ABC SMSF & the company this needs to be correctly established to ensure it is not treated as an "in-house" asset. Again legal advice should be obtained to ensure the joint venture is correctly established.
The ATO addresses property developments through a SMSF at:
TA 2023/2 "Diverting profits of a property development project to an SMSF, through use of a special purpose vehicle, involving non-arm’s length arrangements."
SMSF Regulator's Bulletin SMSFRB 2020/1 "Self-managed superannuation funds and property development."
An articles that covers a joint venture property development can be found at:
Thanks
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