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Antony Joseph

Jul 30, 2023

Construction of house.

in SMSF Technical Forum

Two unrelated super funds create a company in equal shares , that company purchases a plot of land in Melbourne and constructs house using a third party builder. Both super funds have balances in excess of 500K and they are not taking loan for construction.

Once the construction is over the house will be sold .

Question : Can the super funds undertake this activity .

2 comments

Comments (2)

THE AUDITORS INSTITUTE

Jul 31, 2023

Hi Antony

Thanks, there are several issues to consider.

Firstly 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.

An article that discusses these rules can be found at:

Even if the company was considered to be a related party then the Fund could also invest in the company (or trust) on the basis that it is an investment in an "ungeared" entity as per SIS Regulations 13.22C & D. (You would need to ensure compliance with all the requirements)

SIS Regulation 13.22D does require that an investment in a related entity fails the "ungeared" entity rules if:

"the company, or a trustee of the unit trust, conducts a business".

This means that if the company was considered to be a related party to the SMSF the SMSF would need to be careful to ensure that the property development was not considered to be the running of a business. Arguably a one off development of a property by a company would not be considered to be the running of a business however it will depend on the exact facts of the arrangement.

Re other SIS sections you would also need to consider:

Section 62 - check that investment strategy allows investment in the company.

Section 109 - check all transactions are done on an arm's length basis .

Thanks

THE AUDITORS INSTITUTE

Antony Joseph

Aug 03, 2023

Replying to

Thank you