Property Development & SMSF

[Bud Fox]

Hi All,

Was wondering the following

1. Firstly, can anyone point me to a thread that discusses property development and self managed super funds (a recent discussion as laws that govern SMSF's tend to change)?

2. I am looking at managing my parents super (collectively about 100K) as well as mine (about 50K) and pooling it together my own funds to my already existing property development business. Is this possible?

3. Or is my company considered a related party?

4. Out of interest, say I wanted to put my 50K with into a property development fund myself, is that possible? One that I do not have any other part of aside from my super funds being in it.
(3 mates pool 250K togther, some of which is borrowed, and I say I want a 50K stake in the 800K asset (750k + 50k) ), possible?

Thanks in advance

 

[Propertunity]

Bud, an Accountant will correct me if I'm wrong (I'm sure).....but I was under the impression that a SMSF could not carry on a business - which property development might be seen as

 

[Bud Fox]

Bud, an Accountant will correct me if I'm wrong (I'm sure).....but I was under the impression that a SMSF could not carry on a business - which property development might be seen as

hmmm, not sure about that one, fair point though

this is what i read that lead me to ask the above questions, namely question 4



Superannuation Fund Loans

Superannuation property investment is now available in Australia. Self Managed Super Funds (SMSF) often want to gear their real estate investments in order to diversify risk and increase the yield on their investment, but many funds do not have sufficient money to purchase real estate outright. The Superannuation Industry Supervision Act (SIS ACT) was amended in September 2007 to allow super funds to borrow and charge their assets so long as a special structure is used

What are the Features of the Self Managed Super Fund (SMSF) Leveraged Property Investment?

You can now choose any kind of property including residential, commercial, retail, and holiday units for a property leveraged investment. Your SMSF can purchase real estate let for business purposes from a member or a related entity (ie: this does not breach the “in house asset rule under the SIS Act). Investments in property other than “business real property are permitted provided the purchase is from an arms-length vendor.

How SMSF Purchases a Property

The SMSF chooses the property it wishes to invest in, in the ordinary way. Residential property must be purchased from an arm's length vendor. Non residential property can be purchased for full value from related parties so long as the property is let for business purposes. From there:

• The SMSF obtains a loan approval.
• The SMSF's own lawyer / conveyancer acts on the purchase in the ordinary way. The purchase MUST be in the name of the Property Trustee.
• The SMSF pays the deposit, the balance purchase money (less the amount borrowed), the legal costs, and stamp duty in the ordinary way.
• On completion of the purchase the Property Trustee mortgages the property to the lender.
• SMSF then manages the asset in the same way as you would with any other real estate investment.

How the SMSF Leveraged Property Investment is Structured

• The legal owner of the real estate will be the Property Trustee.
• The beneficial owner of the real estate will be the SMSF.
• The lender has no recourse to the other assets of the SMSF, providing the SMSF with absolute protection for its other assets.
• The loans are personally guaranteed by the member/s of the SMSF (subject to credit approval).
• SMSFs can deal with the property however and whenever they like, in the same way as investors can deal with a normal investment properties (eg: lease, renovate, repair, or sell), (subject to the terms of the relevant loan and mortgage).
• All rents are paid direct to the SMSF.
• Loan repayments are made in the ordinary way from the SMSF.
• The SMSF can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan).
• When the mortgage is paid out in full, title to the property can be transferred to the SMSF or the Property Trustee can continue as registered proprietor.


Rules Governing SMSF Leveraged Property Investment

There are a number of rules governing SMSF Leveraged Property Investment which you do need to understand. While they may appear complex, properly educated professionals involved in SMSF Leveraged Property Investment transactions can readily help you.

 

[Rob G.]

• The loans are personally guaranteed by the member/s of the SMSF (subject to credit approval).

You are really being led by the nose on this one !

Cheers,

Rob

 

[MikeF]

hi Bud

Property devlopment within an SMSF breaches so many rules its not funny.

You can't even purchase vacant land with an SMSF let alone progressively build on it. See a good accountant and they will set you straight.

 

[Ausprop]

there may be ways - i use to work for a dev company that accepted super fund investments. the structure had apparantly been ok'd by an accounting outfit.

 

[Pushka]

You can't even purchase vacant land with an SMSF

Yes you can! We did, about 8 years ago. And sold it. No problems at all.

But property development is carrying on a business and get really really thorough Tax advice from someone who really KNOWS the rules relating to SMSF's.

 

[Bud Fox]

Yes you can! We did, about 8 years ago. And sold it. No problems at all.

But property development is carrying on a business and get really really thorough Tax advice from someone who really KNOWS the rules relating to SMSF's.

thanks for your help people, will look into it, either way, looks like i will need to seek acctg and financial planning advice

 

[Player]

..............You can't even purchase vacant land with an SMSF let alone progressively build on it. See a good accountant and they will set you straight.

I have purchased vacant land in our SMSF. Trust deed allows it. We will do the build (cash) as funds allow (accumulation of other rents within the SMSF and any future shares) and keep the asset in the fund for tax free rents.............assuming tax free at access age still remains and labour doesn't scrap that also

Mike, do you mean purchasing vacant land on the basis of carrying on a developing business within the fund?

 

[Rob G.]

Mike, do you mean purchasing vacant land on the basis of carrying on a developing business within the fund?

Even where not a business ...

If related parties do the actual building or contribute to the activities this could be deemed non-arm's length dealing.

This could even be treated as illegal benefits paid to associates or loans/contributions made by beneficiaries.

And don't forget Trustees must not pay themselves either.

Cheers,

Rob

 

[Player]

Interesting info Rob. Thank you for your post.

To clarify, if we engage an architect and builder (or a spec building firm) to build a (say) 4 BR house or a duplex.....is this contributing to activities?

We would not pay ourselves anything or reimburse ourselves anything as the SMSF would undertake the construction as a cash build.

We would not lay a brick. We would never live in it. It is to provide rental income for the future or (unlikely) to sell in future.

I'd be interested on your further take on things.

 

[Pushka]

I suspect you can do a 'one off' buy land and build a house under your super fund as your intentions are different to those whose business it is to do developments to earn a living.

 

[geoffw]

At one stage you used to be able to do a joint venture with an SMSF. I don't know if that is still possible.

Rob Balanda has material on Joint Ventures which I believe covered JVs with SMSFs.

 

[MikeF]

Mike, do you mean purchasing vacant land on the basis of carrying on a developing business within the fund?

Sorry I meant to say that if you were thinking of gearing the vacant land purchase as the banks will not lend under the relatively new SMSF borrowing rules as they see vacant land as unacceptable security.

As to a SMSF paying cash for vacant land there are some advisors that say it's OK and some that say it's not for a number of reasons including their take on it not meeting the sole purpose test.

 

[Pushka]

As to a SMSF paying cash for vacant land there are some advisors that say it's OK and some that say it's not for a number of reasons including their take on it not meeting the sole purpose test.

Sole purpose test? I dont get that.
We bought a block of waterfront land because we knew in a few years time it would be a great investment. It was, it more than doubled in value within three years, and then we sold it.

 

[Propertunity]

Sole purpose test? I dont get that.
We bought a block of waterfront land because we knew in a few years time it would be a great investment. It was, it more than doubled in value within three years, and then we sold it.

Pushka,

The ATO has always been concerned that an SMSF carrying on a businesses may be in breach of the sole purpose test. This is because conducting the business — rather than providing retirement benefits — may become the sole purpose of the fund.

You can read more here:
http://www.cleardocs.com/clearlaw/superannuation/smsf-sole-purpose-test

 

[Qlds007]

Mike beat me to it as i think he was meaning your cant gear into a SMSF and purchase vacant land.

Nothing to stop you purchasing on the basis your investment strategy allows it.

Purchased a large block of vacant land in Rockampton which was subdivided into 14 lots subject to Dept of Nat Resources registering the separate titles.
Paid the equivalent of $9000 / lot and just settled on the last one all of which we sold at $39500 / lot.

My SMSF allows for such activity and in no way does the Auditor consider this to be carrying on a business but certainly you are unable to buy, develop, construct and sell on an ongoing basis.

 

[Rob G.]

Interesting info Rob. Thank you for your post.

To clarify, if we engage an architect and builder (or a spec building firm) to build a (say) 4 BR house or a duplex.....is this contributing to activities?

We would not pay ourselves anything or reimburse ourselves anything as the SMSF would undertake the construction as a cash build.

We would not lay a brick. We would never live in it. It is to provide rental income for the future or (unlikely) to sell in future.

I'd be interested on your further take on things.

Sounds like an arm's length non-business activity on those facts.

However, note the definition of "gainfully employed" is broader for SIS compared with Taxation Law.

To be a business usually requires active involvement of a more commercial nature amongst other things.

SMSF Trustees are allowed to "reimburse" themselves for their actual expenses incurred in administering the trust, just not pay themselves fees for service or make profits.

Cheers,

Rob

 

[Rob G.]

Purchased a large block of vacant land in Rockampton which was subdivided into 14 lots subject to Dept of Nat Resources registering the separate titles.
Paid the equivalent of $9000 / lot and just settled on the last one all of which we sold at $39500 / lot.

My SMSF allows for such activity and in no way does the Auditor consider this to be carrying on a business but certainly you are unable to buy, develop, construct and sell on an ongoing basis.

Given the intention to subdivide for profit ...

Is your fund assessed for ordinary income due to profit motive ?

Or is it subject to CGT from a profit making scheme relating to land ?

Cheers,

Rob

 

[Qlds007]

Rob

If it is like the last one i did it will be consider as a Capital Gain which is even better being at a rate of 10% with +365 day concession.