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BACKGROUND
15 Hectares of rural land on fringe of country town available to be purchased for $600,000.
Three groups of people looking to come together to purchase the land via their smsf' s. They are unrelated parties and conduct their existing businesses separately
They intend to purchase land via a company. Each super smsf will own a parcel of shares within the company:
Brown smsf $294,000 * $1 shares = 49% of the company.
Green smsf $294,000 * $1 shares = 49% of the company.
Blue smsf $12,000 * $1 shares = 2% of the company.
Total cash within the company is $600,00,
They will need to obtain a loan of $1,200,000 from a bank to cover subdivision costs being council fees, surveying, land clearing, road construction, power connection, etc. Total costs of project $1,800,000.
QUESTION ONE
Are the three smsf permitted under smsf law allowed to come together and purchase the shares in the company that will then purchase the land and develop it?
QUESTION TWO
Once the company is established ( knowing the owners of the shares in the company = smsf ), is the company permitted to get a loan to fund the acquisition of the land and fund the development. The land would form part of the security being offered to the lender?
MY OPINION
The company in question will not be considered a related party of any of the smsf' s, as no fund owns greater than 50% of the shares in the company, no fund controls the company.
The company is a separate legal entity in its own right, it is free to conduct its business as it sees fit within sis legislation requirements. That by using the land in question as security the sis act and will have not have been breached / contravened. It is anticipated equity will be 33% with loan of 67%.
That the land in question is classified as business real property. It has previously been used as cattle grazing and horse agistment land, it has timber growing on the land and this timber has previously been harvested. During the course of clearing the land the existing timber will be harvested from the land and sold to timber merchants.
That it is not an issue for this the proposed transaction to proceed by the smsf's and no contravention/ breach will be triggered. The funds are free to proceed with the investment in the company and that the company can borrow to sub divide the land and then sell to an open market.
Looking forward to your opinions, please highlight any problems you may see.
Hi Campbell
Based on what you have advised my view is that yes the SMSF's can invest in the shares in the company on the basis that it is not considered a related party as each SMSF own less than 50% of the shares.
As the company is not considered to be a related party to each SMSF then the company is able to gear the property that it owns / purchases.
Preferably legal advice would be obtained to review the structure / paperwork prior to the investment by a SMSF. The related party rule would need to be closely reviewed to ensure the company not caught and considered an in-house asset.
The issues to consider include:
1) Does the investment comply with the Fund's trust deed / investment strategy & the sole purpose test?
2) Is the investment made on an arm's length / commercial basis?
3) Are dividends received on an arm's length basis?
Any non-arm's income would be caught by the NALI (non arm's length income) income rules and be taxed at 45%.
4) Have the in-house asset (IHA) rules been breached?
Re the IHA rules the company would be considered a related party if it is sufficiently influenced or controlled.
Section 70E(1)(a) of SIS states:
"For the purposes of sections 70B, 70C and 70D:
(a) a company is sufficiently influenced by an entity or entities if the company, or a majority of its directors, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); and
(b) an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company."
A great reference re the IHA rule is SMSFR 2009/4: "Self Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993".
https://www.ato.gov.au/law/view/document?DocID=SFR/SMSFR20094/NAT/ATO/00001
Thanks
SMSF AAA