development within a SMSF

We're looking at building a property within our SMSF . Our understanding is that we can't get a construction loan within the fund , but we can probably pay cash for the process . That would involve selling a property the fund owns outright which we would prefer to keep .

I know at one stage super funds could only do superficial reno's rather than developments , but my recollection was that had changed .

So questions . Can a SMSF do a development ?
If so , is there a way a super fund borrow to do that ?

Cliff

 

Yes and Yes - indirectly, but need to involve others

 

A SMSF cannot borrow money other than a fully compliant limited recourse borrowing facility which wont comply if the property is developed.

However there are other options including a widely held trust or bringing in new members etc

I would be very wary of a SMSF undertaking a property development for resale in its own name. Non-arms length income issues and more could raise serious concerns. Many auditors will automatically qualify the audit report for a investment strategy that doesnt consider all the required elements. A superannuation entity (even a SMSF) must always remember the trustee fiduciary duties sit above that of the interests of a member. Using super to speculate and take a punt may not be an investment. A detailed plan should be a first step.

 

I noticed that a DA was posted nearby us as for what is currently a shop with shoptop housing:

X&Y Smythe Superfund etc
Notice of proposal - Conversion to Boarding house with 6 bedrooms, refurbishment of retail space etc.

I would have thought that the material change in use would have breached the act as well (regardless of highest and best use of the property) even if they don't need to borrow.

 

Terry / Paul

Thanks for the replies.

Havent heard of a "widely held trust "

Two members , me and wife . No interest in bringing in other members.

This would be an arms length investment , not involving any related parties / properties or potential conflicts of interest .

Aim wouldn't be to build for resale , but to build to rent / long term hold with high return .

Cliff

 

SMSFs shouldnt operate a business or have non arms length dealings. A plan to hold helps. That said you would need to commit to this for 5+ years at minimum. The borrowing issue will likely be insurmountable.

This is a exaggerated example but may highlight some concerns
Super Scheme Smart: Individuals information pack

I would seek advice - DBA Lawyers is a law firm I would consider

 

If we can't borrow , we'd do it with out borrowing . Attractive Long term return .

Cliff

 

By 'we' I hope you mean 'the trustee of the SMSF'!

 

Yes you can develop within an smsf, this is an important and popular strategy of smsfs.

As a builder/ developer we have done it personally so the content in the attached is real experience and important as the use of a related party such as a family member as builder you need to follow stringent rules to ensure you donot breach the strict requirements of super law and don't forget the use of an agency agreement.

Here is the article we wrote back then in 2016 Tips and Traps of SMSF Property Development - Redwood Advisory SMSF

If you want to buy the end stock this is possible also and the available lenders for smsf are aware of our strategy as we have been using it for many years - there is a separate knowledge source / strategy on this topic also.

Happy investing and remember seek advice before implementing this strategy

Cheers Ivan

 

Hi Team - WARNING - LONG POST

Hopefully, I'm not going out of topic here and Cliff doesn't mind if I use his post to introduce few querries about investing using SMSF.

Few thoughts came to my mind and I would like to receive your comments on them.
We are thinking about having few couples (2 to 4) accessing the money in the superfunds and house equities to do small property developments (ie. Buy/reno/sell – 3months or buy/develop/sell – 12 months).

The initial hypothetical scenario is to have the SMSFs and Property Equities joined to a Unit Trust and the deals to be done through it (is it the S13.22C unit trust arrangement? not very sure how it works).

I uploaded a print screen to show how I have this arrangement in my mind, but we are open to suggestions.

We are trying not to borrow, so our property options are not as limited.

Questions:

1 - Is this setup reasonable? Would you suggest something else that would make the arrangement more tax-efficient and easier to manage or give us more flexibility in terms of property acquisition and release to the market?

2 - Setup Unit Trust (U/T). Do we need a company as a trustee for U/T? For protection purposes? We all got family homes, so few of us will be concerned about it.

3 - Would the investment property be held under the Unity Trust? Is it correct?

4 - Who will be lodging/claiming tax? Unit Trust, P/L trustee, SMSF or property owner releasing the equity - Sorry about the confusion, sometimes it sounds like it will be double taxed.

We are open to further suggestions or comments you may have.

Thanks for your help. Rod

 

1. its possible with careful planning
2. yes
3. trustee of the unit trust would own the property
4. trust will earn the income and this would be distributed to unit holders who would pay tax on it.

Make sure you get advice from a SMSF lawyer. Don't rely on a super 'advisor'. Many non-lawyer lawyer advisors think they can give legal advice on anything super related but they can't. This is not something I would be comfortable advising on because of the risk but there are many lawyers out there who can.

 

Just had our good mate vincent licciardi over at hwl provide legal advice on an smsf setup with a property development and an unrelated unit trust for clients

 

The apparent blending of three devs in one unit trust may be a concern - Under tax law not super law. Although super compliance must be confirmed. A CGT event still occurs with a isolated profit making venture and the unrealised value of Dev 2 and 3 may be impacted if Dev 1 is sold in the interim and units redeemed...to repatriate a share of profit. You could end up with a double tax issue. (ie a CGT gain on trust units AND on realised profits)

I would be seeking smsf legal advice on structure and process. The unit trust is required to provide each unitholder with a fixed absolute entitlement to income and capital. In some devs this can vary with each dev site too and that may need some advice and structure tweaks.

ABN / GST registration etc for the unit trust.

 

Best of both worlds is to get an accountant who is across development to work with a lawyer across development and SMSF law

 

I missed that there will be 3 developments. Best to not hold more than 1 property per unit trust I think

 

Thank you all for your comments specially @Terryw & Paul@PFI.
I had the opportunity of discussing the structure with some developers and it seems to be a general practice to terminate the U/T after the development is sold. It seems to prevent the tax issues with any potential future developments besides the apparently legal benefits as well.
Further to SMSF and developments, it seems like everyone has a different opinion, which is fair, some of the recommendations were to develop with other SMSFs only, others to use house equity and SMSF and others just house equity and refinance not touching superannuation.
I will meet a group of people who has been doing several house flips in the last 2 years, I hope they can share some of the good and bad experiences. Thanks Rod

 

There is no one answe to structuring. Many ways to do things and no one correct answer