partner with smsf fund

Can I partner with my smsf fund to subdvide land ? (Assuming all cash no bank involved.)
Example
My smsf buys block of land $200k
I then provide personal funds of $200k to subdivide land into 4 lots.
The 4 lots then sold for $150k ea = $600k so $200k profit
As equal partners so $300k returned to fund and $300k returned to me ..

Is this possible ..!?
Thanks

 

It could be. You or a related entity could be a tenant in common owner with the SMSF trustee. You could even borrow your share, but couldn't mortgage the jointly owned property.

There are other ways to consider as well such as a unit trust

 

As described there is a concern. You are lending to a smsf if it owns all the land. Thats prohibited. And if it was 50% each then the fund share is still 50% of the land but it cant borrow. So a share of profit could be impacted. I would be avoiding the personal route and considering a fixed unit trust as it gives an absolute entitlement where to conduct this jointly may not. That trustee cant borrow from you BUT the trustee can issue $1 units to you as a way for the trust to raise funds for it to develop the land . This would mean you likely have a 50% interest. You could borrow your share but until a profit occurs you cant claim the interest since "vacant land"...You could claim the interest against the final profit.

But your numbers are all wrong and this isnt something well costed. GST applies to land sales. You also assume $0 costs to subdivide and sell. Some of those costs may include GST which can be claimed and some will not (council levies etc). The margin scheme may lessen the impact of GST if its permitted.

The developer toolkit attached helps explain the key concerts ahead of tax advice. The SMSF share of profit would be subject to low tax. That share of profit is preserved in the fund of course.

 

Thankyou for the above answers. Am looking at a property to subdivide buying jointly with mostly personal cash and some smsf cash (so no banks involved). Its a large property has a house on one section. Is there anyway I could live in the house in this scenario ..?

 

Certainly not. If the SMSF is involved I suspect a prohibited acquisition / loan etc. Get personal legal and tax advice. A smsf is prohibited from any form of investment which is used by or occupied / leased etc to an associate. No matter what. EXCEPT if its use is businerss real property which a house cannot be.

If the property was and remains 100% vacant then its possible but a fixed unit trust may be a prudent strategy to consider above Tenants in common. It also has some traps but it has a better basis for a fixed entitlement to the fund for its funds it contributes.

 

Thanks the scenario now is I have some vacant land which now has subdivision approval to split into 9 lots.
It is owned by a discretionary trust that is carrying on property development as a business.
Im sole trustee of this trust and sole trustee of the smsf. (There is a bank mortgage on the land but that could be cleared if needed to be).
Can my smsf lend funds towards development costs ? And receive a return (interest) on its loan.. Say a 12 month loan term ? Thanks !

 

no

 

So does the smsf need to buy the land from the trust then I use cash for the development costs?

 

There may be problems with the ability for the smsf to buy this land. Rule number of smsfs (and disc trusts) is never have a human trustee. And you have just found why. (I explain below)

Any loan must be discharged. A SMSF cant buy encumbered land and it also cant allow a charge. The greater problem howeer is meeting the business real property test in the trust immediately prior to the transfer. I would be suggesting specialist legal advice. Subdivision approval MAY be a indicator of a enterprise. How is the GST on the land sale being dealt with ? ...Many issues here.

Fred Smith as trustee for the trusts cant contract with Fred Smith as trustee for a smsf. You are the same person. Its like marrying yourself or lending money to yourself.

Land titles cant and wont process a transfer. Wonder how that could even be a "title transfer".

IMO DBA Lawyers are the gurus to advise.

Could well be a Part IVA scheme in the transaction too.

 

Thanks - sorry am sole trustee for the property trust but the smsf does have have a corporate trustee. (I am sole director of that company)
The BRP test shouldnt be a issue the property trust has done similar developments before is registered for gst and pays gst on all sales

 

Don't think you will satisfy the business real property test either. The property must be used wholly and exclusive in a business. In your case, the land is really trading stock so whilst it is held by the business, I'm not convinced that its used in the business.

Even in the case where the property was leased out, I think you would struggle to satisfy this.

Would likely have been possible from the start, although very complex, but I think impossible to get the SMSF involved at this stage.

 

Thats where to BRP rules in SMSFR 2009/1 may be problematic. If the trust is selling it as BRP (a key condition of the restriction in s66(1) of SISA), then the SMSF may be OK. However the problem may be that the land is being conveyed TO the fund for it to hold it as BRP. That doesnt meet s66(1). The trustee may satisfy that onus if it can demonstrate elements of enterprise concerning the use of the land and costs being incurred etc. However this issue can also be fatal to Part IVA.

The reason for the transfer ??? Thats the Part IVA problem. It may appear a transfer of trading stock between two entities and if the expectation is to treat the supply as a going concern this could be a tax concern. The danger to the issue is that if ALL the things are possessed by the trust why is the sale to the smsf being considered ? It may only be to reduce the impact of tax on profits. Ignoring the stamp duty issues which we must accept as a transfer cost incurred to merely save tax, That is then fatal to Part IVA. And with the same ultimate controlling minds and beneficial interests it may be a scheme. And then there is the non-arms length income issue in the fund. So the Commissioner can attack it in two, or both, ways:
1. Part IVA avoidance
2. Non-arms length income rule

 

Hi Paul thanks for your helpful inputs just to clarify your comment above "A SMSF cant buy encumbered land and it also cant allow a charge" Does this mean that if there is a mortgage over some land that under No circumstance (regardless of structures etc..) can a smsf provide funds to subdivide that land.

 

If an SMSF holds unencumbered land it could potentially use its own money to improve that land, including subdivision.

 

As Terry said + A SMSF cant "buy" encumbered land as it cannot give a charge over fund assets except when permitted and to further complicate the fund assets cant have or maintain a charge over them and must be unencumbered at all times. That said, its unorthodox to acquire title with a charge over title in arms length transactions. It would NOT be acceptable for a smsf to acquire title with a charge. The lender wouldnt likely approve a change of owner anyway and if it was a non-arms length issue thats also a problem for the purchase. Normally all encumbences on title are cleared by the former owner immediately prior to transfer. Also a SMSF cant acquire land from a related party associate (eg a trust or company or members etc) in most cases. Even if its at market value etc. Immediately prior to acquisition it is not likely to be business real property based on the former owner/s USE as they arent developing and subdividing...the smsf is planned to do that. Its a area where legal guidance on super law is likely ideal.

If a smsf buys land at arms length from unrelated parties etc using cash there is no explicit prohibition on it buying that land BUT it cant later use that property as loan security and cant borrow to build and develop. Even from a arms length person. This would be a "borrowing" by the fund and that is also prohibited. Even if that person was a kind benefactor and doesnt want to call it a loan the smsf laws would be breached by someone enhancing the land for zero cost.

 

A SMSF couldn't lend a related party either, which seems to be what Grant is suggesting from reading the last post he made again. Others cannot use the SMSF funds either.

It could potentially lend a non-related party though.