Many Australians are drawn to the idea of their Self-Managed Superannuation Fund (SMSF) investing in property development. With a potential 15% preferential tax rate on income during accumulation and tax-free possibilities in retirement, who wouldn’t be? However, the journey comes with its share of pros, cons, and challenges that trustees must navigate.
1. The Sole Purpose Test:
To invest in property development, SMSF trustees must ensure compliance with various rules, with the sole purpose test being crucial. This test mandates that the fund is maintained for retirement, ill health, or death benefits. Breaching this rule can lead to severe consequences, including loss of concessional tax treatment and penalties.
2. Direct Investment Strategies:
SMSFs can engage in property development through various strategies:
- Directly developing property.
- Ungeared unit trust or company involvement.
- Investment in an unrelated entity.
- Joint ventures.
3. Challenges in Direct Property Development:
Issues may arise when an SMSF directly develops property, such as:
- Acquiring land from a related party is prohibited (unless it is business real property used wholly and exclusively in a business).
- Borrowing for property development is not allowed.
- Engaging related party builders requires adherence to strict rules and market value transactions.
- Goods and services tax (GST) considerations may apply.
4. Investing in Unrelated Entities:
SMSFs can invest in unrelated entities for property development, offering flexibility, but ownership percentages must adhere to in-house asset rules.
5. Joint Venture Considerations:
Joint ventures are an option but come with strict criteria. Careful consideration of the arrangement’s substance is necessary to avoid it being treated as an in-house asset. Seeking advice from financial, legal, and tax experts is essential before entering a joint venture.
In conclusion, while the potential returns from property development are enticing, SMSF trustees must tread carefully, adhere to regulations, and seek expert advice at every step to ensure a successful and compliant investment journey.
If you are currently navigating property development with your self-managed superfund and need to speak with a professional, contact support@walkerhill.com.au today!
