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I've been asked to comment on the following proposal and would just like an external party to review and comment to ensure I don't miss anything vital. I have many notes and questions but would like to post this without my comments at this stage.
1. Two companies own land (one owning 45%, one owning 55%).
2. The super fund member is the sole shareholder and director of both companies
3. Together they wish to develop the property for use by a related party business (run by a separate trading company) either on completion of the development or within 5 years at most. The development cost is anticipated to be in the order of $4,000,000.
4. The companies don’t have the cash to develop the property but the super fund does
5. The client is querying whether the super fund can enter into a joint venture (JV) or other type of arrangement with the related party companies owning the land to develop and then lease the land and improvements that will be constructed on it to the trading company
6. The intention is for the super fund to pay all the development and construction costs in relation to the project out of its own resources. No external finance will be required. It is not intended that the super fund have any interest in the land.
Hi Lynda
The ATO released a Bulletin on property development being SMSFRB 2020/1 Self-managed superannuation funds and property development. The Bulletin can be found at:
https://www.ato.gov.au/law/view/document?DocID=SRB/SRB20201/NAT/ATO&PiT=99991231235958
In relation to joint ventures the ATO states:
"75. In a joint venture with a related party, SMSF trustees also need to ensure that their stake in the joint venture does not amount to an investment in or loan to that related party and is therefore an in-house asset. We would expect the SMSF to hold a proprietary interest in the real property that is being developed, and to be comfortable that the SMSFs investment is 'in' that property and not an investment 'in' the related party.
76. However, where the SMSF has only provided a capital outlay for the arrangement, and has no rights other than a contractual right to a return on the final investment, we would be concerned that they may instead hold an investment in or loan to the other party, depending on the terms of the joint venture agreement."
As per paragraph 78 of the Bulletin one of the ATO's concerns is that:
"Within a property development context, circumstances that could cause us concerns in respect of financial assistance would be where:
the SMSF becomes an investor in the property development being carried out by the related entity because otherwise there would be insufficient funds to complete the property development".
The ATO recommends obtaining professional advice and also consider contacting the ATO for advice re property developments.
Thanks
The Auditors Institute