Forums / Getting Technical / Legal & Accounting / SMSF developing an owned Property – certainty needed

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  • Profile photo of Warren K.Warren K.
    Participant
    @tdh777
    Join Date: 2018
    Post Count: 4

    Hi All,

    We are very close to purchasing 2 properties through our SMSF and need help from anyone experienced in this area.

    One has a house (and thus an immediate revenue stream although initially negatively-geared) and the other (adjoining) block is vacant land.

    There is opportunity for significant capital growth by ultimately developing the properties as the land area is significant and all zoned standard residential.

    1. We know we cannot use borrowed money to develop the properties.

    2. We know we cannot develop the properties while there is any borrowing on them (ie until they are fully owned by the SMSF).

    3. We have received conflicting advice as to whether we can develop the properties when the SMSF fully owns them. AMP Super (informally) says Yes, my Accountant says No (it would be SMSF “carrying on a business”) , another SMSF specialist says “Yes, just have to be careful about structure and any building contracts – no liens or mortgages allowed etc”.

    Based on everything I have read (including ATO rulings, SIS Act etc) I am rather inclined to go with the “Yes, just tread extremely carefully” position. [BUT IF ANYONE CAN SAY DEFINITIVELY OTHERWISE, PLEASE DO SO !]

    4. If we assume that we CAN develop the properties once fully owned, the financial/legal challenges are around the funds needed to perform the subdivision (council contributions, other costs etc) which are nearly 400K.

    We won’t have 400K of spare cash in our Super fund after the purchases, so here are our options (at this stage – anyone else with other suggestions very welcome !!)

    a) Get money from elsewhere (eg LOC over existing properties) and use 3-year bring-fwd rule to get the 400K into the SMSF after July 1. Downside – the money is then stuck in Super Fund but the interest being paid on the Equity loan on the house is outside SMSF – and you can’t use SMSF funds for personal benefit so no pay back/repayment possible. :-(

    (plus the interest paid on the money will not be deductible to the SMSF as it will not be its expense – it will be our expense. It would not be deductible against the original property purchase price, or against improvements, or ongoingly.)

    b) Find investor with 400K of Super to join our SMSF (temporarily) and fund the subdivision. Downside : they will be entitled to between 33% and 50% of the development profits as a member of the SMSF – seems a lot for lending us their money for 12 months.

    c) We do the whole project outside SMSF. Downsides : the government will get an extra $200,000 in CGT –
    money that would frankly have helped us significantly in retirement, and we can’t use the SMSF money towards the project.

    Seems like a rock and a hard place at the moment…

    So any advice/suggestions (or interest as a potential JV partner!) greatly appreciated.

    Thanks.
    Warren Kinny

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Warren,
    Although I’m not one who has enough experience to help you to answer this one, I wanted to reply to bring your question back into view for those who CAN answer it to take a look. It seems you have already done a lot of digging, and have provided a very complete set of “What-ifs” for others to contemplate – you deserve accolades for that.

    I hope some of our experienced members can point the way forward for you – some of them only come by once a week, and I wanted your question to be “front and centre” for them to find it,

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Hi Warren

    You really need legal advice on this as it relates to trust law and the interpretation of legislation.

    “We are very close to purchasing 2 properties through our SMSF”
    The trustee of the SMSF may be close to purchasing 2 properties.

    The trustee cannot use borrowed money to develop.
    You cannot develop the properties that you don’t own, but the SMSF can as long as the fund isn’t using borrowed money. You also have to be careful about your involvement.

    Have you considered a widely held unit trust? 3 unrelated SMSFs could hold units in the unit trust with the unit trust borrowing and developing.

    Could the fund develop one block at a time?
    Could you buy jointly with the fund? You could borrow to do so, but not mortgaging this property.
    2 separate SMSFs owning one each or both as tenants in common?
    Joint venture with a builder and the SMSF?

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Warren K.Warren K.
    Participant
    @tdh777
    Join Date: 2018
    Post Count: 4

    Hi Terry,

    Thanks for your input and to make appropriate corrections and bring the question up to date :

    Yes, being technically correct, “The trustee of our SMSF is considering purchasing 2 properties in line with the fund’s current written investment strategy.” Except where clearly referring to us as individuals (eg 4(c)) all references to “we” in my original post refer to us in our role as directors of the corporate Trustee of the SMSF or to the Corporate trustee of the SMSF itself (as an incorporated body).

    To answer your further suggestions / questions :

    Have you considered a widely held unit trust? 3 unrelated SMSFs could hold units in the unit trust with the unit trust borrowing and developing.

    Yes, we have considered, and at this stage we are most likely to be pursuing a unit-trust structure. Final makeup of the unitholders is undertermined. It may be a related-party Trust (Sec 13.22(c) trust) or an unrelated party Unity trust (limit 50% ownership to any one group of related unitholders).

    Could the fund develop one block at a time?

    Yes, again this is a key part of the overall strategy.

    Could you buy jointly with the fund? You could borrow to do so, but not mortgaging this property.

    Again yes, as alluded to in 4(a) we (as individuals) have access to additional funds. However at the time of writing the initial post I believed that it would have to be contributed to the fund as non-concessional (bring-fwd) contributions. We now know that it can be lent to the fund instead as one option.

    2 separate SMSFs owning one each or both as tenants in common?

    Also open to this idea and happy to hear from potentially interested parties.

    Joint venture with a builder and the SMSF?

    Again, as per 4(b) of my original post we are very open to the overall concept but did not want to give away 50% of the profits simply for making money available for development to the project (based on a
    strict purchase price/development price ratio).

    We now understand that the SMSF can enter into an appropriately structured Development Agreement with a Builder / “JV partner” to achieve the desired financial outcomes without compromising its compliance with relevant portions of the SIS Act.

    Again, we are happy to receive responses form potentially-interested parties.

    Thanks Terry.
    Warren.

    • This reply was modified 1 year, 9 months ago by Profile photo of Warren K. Warren K..
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    You could potentially lend your personal money to the SMSF to do this, but watch out as this could result in NALI income non arms length income which would be taxed at 45%.

    read some papers by lawyers
    A good one is
    http://www.13wentworthselbornechambers.com.au/wp-content/uploads/2016/10/2016-SMSFs-and-Property-Development.pdf

    and
    https://sladen.com.au/news/2014/9/8/smsfs-engaging-in-property-developments

    Beware of anything written by a non-lawyer.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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