ATO targets SMSF property schemes – again

Once again, the ATO has targeted SMSF property development schemes that divert profits of a property development project to a SMSF. This time, the focus is on using a special purpose vehicle (SPV), which the SMSF directly or indirectly owns.

It appears that some SMSF trustees may not have learned much over the last three years around this.

SMSFRB 2020/1

The ATO concerns were first evident in the release of SMSFRB 2020/1, which identified schemes and arrangements entered into by an SMSF, which can be with a related or unrelated party involved with purchasing and developing property to sell or lease.

The problem is the structure of those arrangements, which diverts income into super, creating potential breaches of the sole purpose test and other SIS issues.

SMSFRB 2020/1 specifically discussed related and unrelated party property development arrangements such as joint ventures (“JVs”), partnerships and ungeared related entities and the various aspects of the SIS rules that apply to them.

Interestingly, these issues also form the cornerstone of TA 2023/2, the ATO’s recent release on property development schemes, indicating that the ATO is much less tolerant of the new arrangements it is now seeing.

How does TA 2023/2 differ?

The focus is now on a “controlling mind”, which makes the decisions for one or more property development groups by selecting the project and establishing an SPV.

While there is no explicit definition of a controlling mind in the Alert or SIS, a controlling mind is typically the members of their respective SMSFs.

What are the SIS concerns?

The ATO has a long list of potential SIS concerns that include:

1. Does the investment meet the requirements to provide retirement benefits for members and beneficiaries under s62 SIS?
2. Are fund assets valued at market value (r8.02B SISR) and are SMSF assets kept separate from the trustee’s assets personally (r4.09A SISR)?
3. Is there an IHA issue, and does it exceed the 5 per cent limit (s71 SIS)?
4. Does the LRBA fail to meet the exemptions in s67A & B?
5. Does the arrangement result in a loan or financial assistance to a member or relative (s65 SIS)?
6. Does the arrangement include the fund acquiring assets from a related party (s66 SIS)?
7. Have payments been made under the arrangement where the member does not meet a condition of release in contravention of the payment standards (r6.21 SISR)?
8. Are all the terms and conditions of the arrangement on commercial terms, or do they benefit the other party (s109 SIS)?

Documentation is an essential source of evidence to prove that transactions have been conducted on commercial terms.

Ensure all records are kept and made available in case the ATO comes knocking, which could be as simple as a similar quote provided to an unrelated third party showing the rates charged for all services and works are on commercial terms.

Conclusion

The ATO is targeting SMSF property development schemes that provide new obligations and responsibilities for SMSF trustees.

As long as property remains a sought-after investment, SMSF professionals must keep ahead of the legislation to ensure that funds with property development investments continue operating compliantly.

On the other hand, it will be up to SMSF trustees to determine whether property development is a good idea or a compliance nightmare.

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