Purchasing land through a SMSF

[The Trump]

Hi,

I was hoping that someone could provide me with some advice in terms of purchasing a block of land through a SMSF.

I am looking at purchasing a block of land outright utilising funds from the SMSF. (ie. no loan).

If I was to build a house on the block utilising a independent builder. Would the money needed to fund the build be required to come from the SMSF.

Or would be it be required to funded from my own monies. (ie. outside the SMSF)

Thanks

 

[Redwood]

Hi,

I was hoping that someone could provide me with some advice in terms of purchasing a block of land through a SMSF.

I am looking at purchasing a block of land outright utilising funds from the SMSF. (ie. no loan).

If I was to build a house on the block utilising a independent builder. Would the money needed to fund the build be required to come from the SMSF.

Or would be it be required to funded from my own monies. (ie. outside the SMSF)

Thanks

G'day Trump,

Let me start with saying the Trust Deed and Investment Strategy will govern what your SMSF can and can't do. The sole purpose of your fund must be for retirement benefit. Bet you have heard that before, but really important.

You can purchase land in an smsf and you can build on it. This can be done from your cash reserves of the fund - and not your personal monies. All should be funded from your smsf.

You can buy H&L on a one part contract also under a LRBA.

There are a number of rules to be considered in entering a LRBA and building on vacant land - seek advice.

Hope that helps.

Cheers, Ivan

 

[The Trump]

Thank you very much for the reply most appreciated.

 

[Paul@PFI]

G'day Trump,

Let me start with saying the Trust Deed and Investment Strategy will govern what your SMSF can and can't do. The sole purpose of your fund must be for retirement benefit. Bet you have heard that before, but really important.

You can purchase land in an smsf and you can build on it. This can be done from your cash reserves of the fund - and not your personal monies. All should be funded from your smsf.

You can buy H&L on a one part contract also under a LRBA.

There are a number of rules to be considered in entering a LRBA and building on vacant land - seek advice.

Hope that helps.

Cheers, Ivan

I haven't ever found a trust deed that prohibits acquisition of land and would welcome a post for one if you ever see one. Even the ATO and most law reform representative bodies, Treasury and others recognise that a trust (incl a SMSF) may have provisions deemed or even containing broad discretionary objects to act. (eg "The Trustee may do all things subject to SIS, Tax Law etc style clauses)

Agree the investment strategy is probably most important. What is the strategy for vacant land... develop it ? If the aim to build a rent a producing investment that will also appreciate in the long term then likely no issues. If its a build and sell strategy the IS needs to consider GST and other issues too. The GST issues may be a concern since a SMSF is always an enterprise.

The SMSF cannot borrow to buy land and then build. It also might have difficulty if it buys land then builds using borrowings. The build must also not be undertaken by a member, relative / associate.

Lots of rules in this area, Donald. Yes you can add extra personal $$ but it is subject to limits and would be preserved etc. May be some tax strategies if you are older.

 

[Property Hoarde]

yep the fund can purchase the land and then build on it, if it has the cash.

Personal money not to be used, unless it goes into the fund as a contribution and meets the contributions caps.

 

[Property Hoarde]

The build must also not be undertaken by a member, relative / associate.

.

I disagree with this, it is easier to say this so the client does not stuff it up but I can not see why they could not as long as it is on an arm's length bases and if the trustee/director of trustee is doing the work they meet the conditions in Section 17B of SIS.

http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s17b.html

 

[Paul@PFI]

How does remuneration come into it? That occurs if the trustee pays the Directors. Its prohibited yep but s17A doesn't mean the fund ceases to be a SMSF. It means the fund is non-complying. But doesn't apply to a supply of services or materials ie an asset. eg labour and materials etc to supply a deck. The SMSF can buy timber but it takes labour to build the deck. Member inputs are the concerns as well as the member facilitating the acquisition using personal funds etc.

s66 of SISA is fairly clear. s66 deals with prohibited acquisitions of assets. Note it says prohibited. If a member repairs a tap its not an acquisition of an asset. If the fund buys a tap and a member fits it then there may be a concern. If a member builds an extension or performs work which is not on arms length terms then its a fail. Doesn't matter if its $10 or $100,000. There is no threshold test. Or ability to forgive and forget.

The ATO addresses some forms of contributions in TR 2010/1 which has application to acquisitions too. eg : A tax agent providing services to his own fund. However unless excepted then such a supply may be an acquisition in specie requiring an asset to be acquired on one side and a contribution on the other. Thus a concern.

My recommended approach is that a SMSF should not acquire an asset from a member relative or associate without professional advice.

 

[Property Hoarde]

Paul, you are going off onto to tangent.

You said the trustee/director could not build the house which is not 100% correct. This what I was pointing out.

If the trustee/director is a builder which owns and runs a building business and they treat the fund as just another client, they can build the house. This is as per Section 17B of SIS. That is why I mentioned it.

As the builder is doing the super fund job as just another client, they are being paid on an arm's length basis and therefore there is no issue with contributions. If not at arm's length then the discussion on contributions come in.

Also if the trustees breaches 17A they are still a complying SMSF. They only become non complying when the ATO makes them non complying. I know most Accountants do not understand that. A lot believe if I qualify the audit report, it makes the fund non complying, it does not I do not have that power.

 

[Redwood]

The build must also not be undertaken by a member, relative / associate.

Hi there,

There an a strategy for this so yes you can.

Cheers, Ivan

 

[Paul@PFI]

Paul, you are going off onto to tangent.

You said the trustee/director could not build the house which is not 100% correct. This what I was pointing out.

If the trustee/director is a builder which owns and runs a building business and they treat the fund as just another client, they can build the house. This is as per Section 17B of SIS. That is why I mentioned it.

As the builder is doing the super fund job as just another client, they are being paid on an arm's length basis and therefore there is no issue with contributions. If not at arm's length then the discussion on contributions come in.

Also if the trustees breaches 17A they are still a complying SMSF. They only become non complying when the ATO makes them non complying. I know most Accountants do not understand that. A lot believe if I qualify the audit report, it makes the fund non complying, it does not I do not have that power.

I deal in accuracy. I have PI and don't like claims. I have to ensure posts are clear and don't contain undisclosed ifs. Most trustees CANNOT build a property themselves or do a reno etc. Just as redwood says some can...They can. Some IF its done right. That doesnt mean "YES YOU CAN"" is acceptable as a post. Even a arms length price may be prohibited. s66 isn't forgiven just because the members Father is a builder.

17B is irrelevant. s17B addresses trustee remuneration. That's being paid as a trustee for trustee work NOT for acquiring an asset. 17B basically prohibits the fund form paying fees to Trustees or Trustee Dirs for admin of the SMSF etc Covers things like phone calls, travel, office costs, labour etc. If the member is a builder they cant just use market value and build a home the fund acquires. That would be reckless to suggest. 17B doesnt address prohibited or restricted assets such a s66 prohibited acquisition, inhouse, Reg 17.22C trusts etc.

There are ways and strategies - But I wont say "everyone can do X" as not everyone can and if its not 100% correct its a fail. That where using pro's like redwood etc is smart. We all guide strategy and specifics so it is compliant. One thing wrong and its a problem.

My advice would be that if the build is subject to a tender process comprising other bidders equally given information and the related party associate is not the lowest then it may be permitted. Certainly demonstrates arms length. I have seen shams where the related party has tried to pass a low cost build or has amended specs to high end for no value or not built to specs at all. These are a s66 problem too. If its so arms length then use an arms length builder.

I'm quite aware of what non-compliance means. That the end result of serious non-compliance. Plenty of other penalties can be applied before that one. If an auditor reported a s66 acquisition relating to a building that's probably going to be classified above a minor incident.

 

[Property Hoarde]

I do not understand your post Paul. It might just be that it is Friday afternoon.

17B covers work done by trustee which are not in their capacity as trustee of the fund.

the most common expense(work) which falls under 17B is accounting fees. The owner of an accounting practice uses his staff to prepare his SMSF fund. the accountant can charge his fund for the accounting work done by his firm at normal rates.

It has nothing to do with Stamps or actual costs incurred for the fund by trustees as trustee of the fund. If a trustee uses a 70 cent stamp to post say the fund documents to you. I am more than happy that the fund reimburses the trustee for that 70cent expense. If the trustee goes and charges the fund $1 for that stamp and therefore received remuneration of 30 cents then there is an issue. Not with 17B but 17A.

Is 17.22C a new type of trust I have never heard of? I think you mean 13.22C

I never said all trustees could build a house. You would hope that if you not a builder you would not even try.

 

[coastymike]

There could very well be a problem under s 17b. It refers to the trustee and the director of the trustee company. Now if the trustee is a company with the members as directors then you may have a problem if bill (one of the directors) provides his building services to the smsf through his other company which has the license. S17b talks about the trustee or the director of the trustee company doing the work. So the company or the director would need to do the building services and unless that company or director had a building license which is required under s17b then it would breach 17b. If bill is a sole trader doesnt seem to be a breach of s17b. But I dont believe it extends to other companies of which he is a director. It talks about trustee of the smsf and director of the corporate trustee. Read s17b VERY carefully.

It also says they can only supply services. Doesnt say you can supply materials so if the director supplied materials along with the labour you will still have a breach.