Is it time you considered the structure of your business?

The ATO’s Small Business Restructure Rollover gives you flexibility, as an owner of a small business entity, to restructure your businesses and the way your business assets are held while disregarding tax gains and losses that would otherwise arise.

There is a range of small business rollovers already available where you – as an individual, trustee or partner – transfer assets to, or creates assets in, a company while incorporating your business. These rollovers include:

  • The transfer of assets or a business from an individual, trustee or partner to a wholly owned company (Division 122 rollovers).
  • The transfer of assets or a business from a trust to a company (Subdivision 124‐N rollover).
  • Where an interest holder exchanges shares in a company or units in a unit trust for shares in another company as part of a restructure (Division 615).

These rollovers deal with the transfer of assets to a company or deal with shares or interests in companies. However, they are limited as they only apply in the following cases:

  • When assets are transferred into companies (not where assets are transferred out of companies or between entities that are not companies).
  • When shares or interests in companies and trusts are exchanged for shares in companies.

The Small Business Restructure Rollover, on the other hand, is not restricted to the transfer of assets to companies. While this rollover can also be used where business assets are transferred to a company, it also allows for the transfer of assets from:

  1. Individual(s) to trusts or companies
  2. Partnership assets by partners to trusts or companies
  3. Company assets to trusts
  4. Company assets to individuals and partnerships
  5. Trust assets to beneficiaries of trusts
  6. Transfer of assets from one trust to another.

Is it time you considered whether your current business structure is right for you?

It may have been up until this point, however, circumstances do change.

For a complimentary 30 mins discussion, you will be better informed to make the decision.

When should you consider cancelling your GST registration?

Just as not being registered for GST (or required to be registered) can be an effective defence against an accusation that you have made a taxable income, legitimately cancelling your registration before the income is made can prevent the income from being taxable.

The cancellation process involves applying for the cancellation with the ATO. You are required to have done one of two things before you apply to cancel your GST registration:

  1. Ceased trading or now trading under the GST turnover threshold.
  2. Sold the business to another party.

If you leave the GST system, you are required to make an increasing adjustment in your final return.

If you apply for cancellation more than twelve months after becoming registered and the ATO is satisfied that you are not required to be registered, the ATO must cancel your registration.

Note that you are not required to have ceased operations. However, the ATO must be satisfied that your annual turnover is below the current and projected registration thresholds. Hence, you can cancel even if you are continuing to carry on an enterprise – as long as your turnover does not require you to be registered.

If you have ceased operations, the ATO can cancel your registration upon becoming satisfied that you are not carrying on an enterprise and that registration is not likely to be required for at least twelve months.

The ATO may also cancel your registration if you have been registered for less than twelve months and they are satisfied that you are not required to be registered.

This is important because there will be times when your best outcome is to purchase or sell property as a non-taxable source of revenue. One scenario would be if your current and projected GST turnover is below the threshold and you wish to sell a capital asset without paying GST.

In making this decision you will need to consider whether your current and projected GST turnover are below the threshold and the size of any increasing adjustment that may be required to make upon cancellation.

When the ATO cancels a GST registration, it will notify you of the date of effect of the cancellation and alert you to the possibility of an increasing adjustment.

Careful consideration should be given to your GST registration and whether cancelling that registration will be to your benefit.

If you need some help with it, do not hesitate to contact us.

Can you avoid the GST pitfalls?

Many of the pitfalls that you could be faced with as the property developer can be avoided by asking some key what, who, how and why questions in the early stages.

Many of these pitfalls begin with the acquisition and in particular the contract of purchase. Things like:

  • Is the property actually subject to GST?
  • Is the vendor registered for GST? Should they be?
  • Is the margin scheme applicable?
  • Is it a sale of a going concern? Is that stated in the contract?

Not knowing the answers to these questions could have you claiming GST when you are not permitted and then having to repay that GST, possibly with interest and penalties. Alternatively, you may not have claimed the GST when in fact you possibly could.

What?

What is it that you are purchasing to develop? Is it vacant land, farm land, residential property, operating or non-operating commercial residential premises, leased or vacant commercial premises, or a mixed site (for instance, a downstairs shop and an upstairs residential apartment)?

You need to confirm that the vendor has adopted the correct and optimum GST treatment in the contract of sale. The simple approach of accepting that GST is to be added or included in the contract price (and can be recovered by the developer as an input tax credit) should be questioned and only accepted if no other GST treatments are available.

In a 2013 Supreme Court of Victoria case, two parties were in dispute over whether a property’s contract price (around $900,000) included ten per cent GST.

The property was an existing residence and the sale that was not subject to GST, but the purchaser argued that the contract was GST-inclusive, and therefore the total price of the property should be reduced to $818,181. The vendor, on the other hand, argued that the contract was GST-exclusive, so the sale price should hold at $990,000.

The court found that the purchaser was required to complete the contract. With a better understanding of the GST issues the dispute could have been fully and simply resolved during the contract negotiations.

Who?

Who is the supplier of the development site? Is the vendor named in the contract of sale acting as a trustee of a trust, as a nominee or agent, or as a bare trustee?

If the contract provides for the sale to be plus GST, or a GST-free supply of a going concern, you should confirm that the supplier is in fact registered for GST.

Some unregistered vendors of commercial property are unaware of the exclusion for the sale of capital assets and register for GST so that they can charge, collect and remit the GST. This is incorrect on so many levels, as it adds to your duty liability and financial pressure, it sets you up for an early review by the ATO and it renders you ineligible to use the margin scheme upon resale.

A 2010 case in the Supreme Court of New South Wales heard two parties dispute the contract price of a residential apartment above a fruit shop that had been sold at auction. The vendor insisted that it was plus GST and the purchaser insisted that it was GST inclusive.

The vendor proved to the satisfaction of the judge that the auction had been conducted on the basis that a further ten per cent would be added for GST.

When a ruling was sought from the ATO as to the amount of GST required to be paid (the fruit shop being commercial premises and the apartment being residential), the Commissioner ruled that the sale was not a taxable supply to any extent because the vendor was neither GST-registered nor required to be.

The second ‘who’ to consider is who is the developer entity?

Where a property is being acquired and there is flexibility for deciding which entity is going to make the acquisition, you should give careful consideration to the entity that is going to undertake the development. Individuals and partnerships of individuals carry inherent risks as do partnerships of companies or trusts.

The decision should be made carefully and with regard to issues of asset protection, income tax and GST.

How?

How is GST accounted for in the contract of sale? Is it expressly stated? Is there a clause defining the exact treatment of GST? Has this been correctly stated?

The GST clause in a typical contract of sale for real estate will offer several GST outcomes to choose from, including plus GST, inclusive of GST, margin scheme, supply of a going concern and farm land.

Rented residential premises should never be acquired as a going concern as this may render you liable to a non-creditable increasing adjustment, applicable where going concerns are acquired with a view to making input taxed supplies.

The failure to adopt the most appropriate GST treatment in the contract may also deny you access to the margin scheme upon resale and embroil you in a costly, time consuming and avoidable contractual dispute.

In 2013 the Supreme Court of Victoria handed down its decision in a case where the parties were in dispute as to whether the contract price was inclusive of or plus GST. (The case had been back and forth to that court since 2008!)

The purchaser made an offer of $2,250,000 for the property, which the vendor accepted. However, the contract of sale contained a GST clause and a dispute later arose between the parties as to whether the GST clause required the purchaser to pay an additional $225,000 to the vendor on account of GST.

The judge decided that the GST clause was obscure and meaningless and did not clearly state whether the parties intended the price to be inclusive or exclusive of GST. The court declared the clause was void for uncertainty and severable from the contract.

Why?

Why are you acquiring the property? If the development involves the construction of residential premises, are they for sale or for rent? These questions are directly relevant to your decision to register for GST and to your entitlement to recover in full, partially or not at all, the cost of any GST imposed on the construction inputs.

Sometimes you will be undecided about your plans to sell or rent. This complicates the decision-making about registration and the claiming of input tax credits. These issues should be identified and confronted by you sooner rather than later. To do otherwise is to risk a GST compliance nightmare.

In Appendix A, I discussed the implications of a change of purpose for your development. This is particularly important when it comes to GST.

You need to have a clear intention as that will determine whether or not you are required to register for GST and/or can claim GST on acquisitions and whether there will be GST on sales. However, intentions can change.

You may have intended to develop your land with three townhouses and sell all three. In so doing, you claim back GST on those acquisitions, say $120,000. At the completion of the development, the market conditions are such that you believe you would be best to hold and rent with a view to selling some time in the future. At that point, the $100,000 of GST you have already claimed back from the ATO will need to be repaid. This will likely have significant cash flow implications, as you would have likely used those funds to assist with the costs of development and, as such, do not have access to the funds anymore. In addition, you have likely borrowed for the development and, depending on how that debt was structured, the banks may also be seeking repayment in some form.

I think you can now clearly see the importance of intention and, where possible, planning accordingly.

You must document your intentions at the time of acquisition and monitor changes of use (if any) for the change of use adjustments described above.

Documentation

So many legal cases are decided against taxpayers because they are unable to prove that the taxation decision should have been made differently. Unfortunately, the onus is on you.

Evidence in the form of emails, text messages, letters and file notes is vital to support your claims of intended use in any dispute with the ATO. The support of third parties, such as agents and financiers, is also extremely useful.

Are you confused?

It can seem simple on the surface, but it is definitely not.

Speak with your trusted adviser and make sure you do not make the wrong decision with GST. It could cost you plenty.

How does a “Going Concern” affect GST?

A sale of business where all that is necessary to operate the business is transferred to the purchaser is known as the supply of a ‘going concern’. In simple terms, the business has the ability to continue to function, as was the case immediately prior to sale.

The revenue generated is GST-free if it is in exchange for money (or some other benefit), if the recipient is registered for GST (or required to be), and if the parties have agreed in writing that the business will continue to operate effectively.

There are two farm land concessions. The more common concession arises where:

  1. There is a sale of land on which a farming business has been carried on for five years or more preceding the sale.
  2. The purchaser intends that a farming business continues to be carried out on the

There is no defined time limit when it comes to the second criteria. However, there would be an adjustment if you tried to exit the GST system with the land or use it to make input taxed supplies.

A less commonly used concession is available where:

  1. Potential residential land is subdivided from land on which a farming business has been carried on for at least five years.
  2. The sale is made to an associate of the seller without consideration or for consideration below the GST-inclusive market value of the supply.

This concession allows potential residential land (land that it is permissible to use for residential purposes, but that does not contain any residential buildings) to be sold to a family member for development or for resale to a developer.

What does this all mean in real life situations?

If you intend to undertake a development in a business-like manner that constitutes an enterprise, you should consider becoming registered for GST as soon as the enterprise commences.

Consider the following example from the ATO of what it would consider activities organised in a business-like manner.

‘Tony is a carpenter. After reading the Investors Club News, he decides to purchase a property. He thoroughly researches the real estate market, attends investment seminars and records the information he has found.

The property Tony purchases is in a good location but he pays a reduced price because it needs extensive renovation. Using his knowledge and contacts within the building industry, Tony quickly completes the renovations.

He then sells the property and makes a generous profit.

Using the proceeds from the sale of the first property, Tony purchases two more houses that require renovation.

Tony sets up an office in one of the rooms in his house. He has a computer and access to the internet so he can monitor the property market. Tony’s objective is to identify properties that will increase in value over a short time once he has improved them. He leaves his job so he can spend more time on his research and renovations.

Tony’s activities show all the factors that would be expected from a person carrying on a business. His property renovating operation demonstrates a profit-making intention; there is repetition and regularity to his activities. Tony’s activities are organised in a business-like manner.

Therefore, Tony is regarded as being in the business of property renovation.

Identifying the commencement of your enterprise (in contrast to preparing to commence your enterprise) is a difficult task. The commencement of your enterprise usually coincides with the first significant expense incurred once your decision to proceed with a specific development has been made.

You are not required to be registered until sales are excess of the GST turnover threshold are made or are likely to be made. However, delaying registration in these circumstances is only going to inconvenience you and potentially enhance cash flow pressures. If you are likely to exceed the GST turnover threshold, you would be best advised to register from the beginning so you can claim any GST on your expenses, otherwise you could be faced with the scenario that the ATO would require you to be registered and therefore you would be out-of-pocket with GST payable on your sales, having not planned and managed your cash flow accordingly.

On the other hand, if you are undertaking a residential development and intend to hold the developed residential properties for rent, you should not apply to become registered. If you are already registered, you should consider applying for a cancellation or using a different entity to hold these properties.

With most property developments, the acquisitions and input tax credits typically precede the payment of GST arising from the sales. This timing difference usually sparks an interest and hence response from the ATO. You are advised to ensure that your input tax credit claims are creditable acquisitions and supported by tax invoices before making the credit claims.

If you fully understand the GST law or have someone working with you that does, you could save yourself thousands of dollars. This is where you would likely need your trusted tax adviser very close by your side.

The GST Margin Scheme – What is it?

The margin scheme is a way of working out the GST you must pay when selling a property that is a part of your business.

Where the margin scheme does not apply (in most cases), you would calculate the GST as one-eleventh of the sale price. Where the margin scheme does apply, you calculate the GST as one-eleventh of the ‘margin’.

The margin is the difference between the sale price and the purchase price of the property. For property purchased prior to 1 July 2000, you have the choice to use the original purchase price or an approved valuation as of 1 July 2000.

It is important to note that the margin is not the profit you make on the property sale, as it does not take into account costs to develop the property or costs to subdivide the land.

If the property is sold as part of the business and is registered for GST, you may be able to use the margin scheme to work out how much GST you must pay.  For example, if you purchased your property for $500,000 and sold it for $830,000 and the margin scheme applied, the total GST would be $30,000 (one-eleventh of the margin of $330,000), rather than $75,454 (which would be based on the sale price without the margin, or one-eleventh of $830,000).

Whether you can use the margin scheme depends on how and when you first purchased your property. You can use the margin scheme if you purchased the property before 1 July 2000 or if it is purchased after 1 July 2000 from someone who:

  • Was not registered or required to be registered for GST
  • Who sold you an existing residential premises
  • Who sold the property to you as part of a GST-free going concern
  • Who sold you the property using the margin scheme.

You cannot use the margin scheme if, when you first purchased the property, the sale was fully taxable and the margin scheme was not used. In this case, the amount of GST included in the price you paid is one-eleventh of the full purchase price.

The rules regarding the application of the margin scheme to a sale by you, as the developer, are very useful to understand. They provide mainly for situations in which your acquisition of the property to be developed makes the subsequent sale ineligible for the margin scheme.

The most common of these situations is where the entire interest in the property is acquired as fully taxable income on which GST is calculated without using the margin scheme (as detailed earlier).

Another common situation is where the entire interest in the property was acquired as a going concern from a vendor who had acquired the property as a fully taxable supply on which GST was calculated without using the margin scheme.

Where you acquire a property as a going concern from a vendor who was entitled to use the margin scheme (but didn’t), you calculate the margin by deducting the vendor’s purchase price (or the market value when the vendor purchased the property) from the sale price. For example, you purchased a property from a vendor as a going concern for $500,000. The vendor originally purchased the property for $400,000. You sell the property three years later for $600,000. You are able to calculate the margin on the vendor’s original purchase price of $400,000. Therefore, your margin would be $200,000 and you would pay GST of one-eleventh of $200,000, being $18,182. If you do not apply the margin scheme, you would pay GST on the $600,000 sale price, being $54,545.

The best outcome for you is to purchase a property that is either an existing residence (on which no GST is payable) or a non-taxable supply (such as a commercial property sold by a vendor who is neither registered nor required to be). You then deduct the entire purchase price when calculating the taxable margin.

As a property developer, acquiring property as a going concern or as farm land is more attractive than acquiring it as a fully taxable supply, on which GST is worked out without applying the margin scheme. As long as you are eligible to use the margin scheme, you will save GST payable on the sale of the developed properties – generally one-eleventh of the acquisition value that can be used to calculate the taxable margin.

If you need some advice around the margin scheme and any property you are wanting to acquire or recently have, please get in touch. We are here to help.

How do business losses affect GST?

The ATO identifies a profit motive as one of the key indicators of an intention to carry on an enterprise. For this reason, the ATO places heavy emphasis on the achievement of profits.

A business that consistently operates at a loss and does not have a reasonable prospect of achieving profits in the short term is at risk of having its GST registration cancelled and its GST credit claims recovered.

If you’re in this position as a developer, you may be required to defend yourself by objecting to the assessments issued and cancellation action taken by the ATO.

This would not be overly difficult where you have planned a development, as your project will likely be costed and the relevant research undertaken to determine that a potential profit is likely at completion and sale of the developed property. It is unlikely that you would proceed with any significant development without expert opinion regarding the build and the potential sales values. You would engage builders and real estate agents and any other relevant external party to quantify and qualify your development. The level of investment would warrant such activity.

Where the development is significant in size and therefore time, it may run over a number of financial years. If this is the case, the business may be reporting a loss based on the fixed overheads of running the business, not the variable costs directly related to the development. The reason for this is that the variable costs directly related to the development would be treated as trading stock and/or work-in-progress and therefore not have an impact on your profit or loss.

Trading stock is added back at the end of the financial year if that land is not sold, therefore being profit neutral. Similarly, any development costs relating to an incomplete project will also be added back and therefore not impact on the profit or loss of the business, as the project is not yet complete and therefore not sold. At sale, all work-in-progress is taken up against the sale, as is the trading stock – that is, the cost of the original land.

The ATO and the courts will seek to determine the prospective profitability and/or the strong likelihood of it in any development as a positive indicator of the most important criteria for whether someone is carrying on a business (and by extension an enterprise), namely, the intention to make a profit.

It can be tricky, but always best to be informed irrespective of how the cards may fall.

If you would like to discuss this aspect of your development with us, do not hesitate to get in touch.

What happens with GST if you change the use of your development?

What happens if you are a GST-registered property developer who builds apartments exclusively for sale, and later decides to rent them?

The typical situation is that you would start out by correctly claiming input tax credits on all acquisitions relating to the development, including architect’s fees, legal fees and construction charges. However, when sales are slow or financial pressures arise, you then rent the apartments for income while still trying to actively sell them.

This is a change of use from a fully creditable purpose to a partly creditable application and will lead to a requirement to repay some of the GST credits claimed on the inputs into the development. The adjustment will be an increasing adjustment, meaning you will pay back the GST credits you previously claimed.

Contrary to popular belief, the increasing adjustment need not be made in the next activity statement due after an apartment is first leased. Nor is the GST repaid in a lump sum. The adjustment is made progressively at the end of an adjustment period.

An adjustment period for an acquisition is a tax period that starts at least twelve months after the end of the tax period during which you started renting out the properties, and ends on 30 June in any year. In other words, you have some time to repay the GST or indeed sell the apartments.

For example, if you report on a monthly basis, rental income earned in April 2013 would not have its first adjustment period until 30 June 2014. If you report quarterly and receive rental income in April 2013, the first adjustment period for the acquisition would be June 2015. The reason for this is that the quarterly reporter’s tax period ends on 30 June 2013 and the adjustment period must end on a 30 June that is at least twelve months after 30 June 2013. It can be seen, that 30 June 2014 does not fit this description as it falls within 12 months, not after 12 months.

The key point here is that you may sometimes be faced with the possibility of not being able to do what you originally set out to, such as, sell the apartment you just built. Not all is lost, as you will likely be able to rent until you find the right buyer/s.

What is important, is to understand how the GST is treated when there is a change to your circumstances.

If you need some clarification on this GST issue or any other, please do not hesitate to get in touch.

Do you need to register for GST?

If you are carrying on an enterprise you are entitled to register for GST.

When your GST turnover exceeds the turnover threshold, you must register for GST.

An ‘enterprise’ includes activities done as part of an ongoing business and one-off activities that share the characteristics of a business dealing (such as running a one-off event for which you sell tickets). You can see from that definition, that the enterprise (or business) does not need to have a great level of sophistication or longevity. It simply needs to have a commercial or business characteristic of providing a product or service for a monetary or like reward.

However, an enterprise does not include activities done as a private recreational pursuit or hobby, or activities you might do without a reasonable expectation of profit or gain.

This means that private dealings among family members without an expectation of profit and dealings by hobbyists are likely to fall outside the scope of GST law.

When it comes to GST turnover, this is determined by calculating the total value of your sales excluding GST, input-taxed sales (sales where GST does not apply) and sales not connected to Australia.

There are two registration thresholds – the current turnover threshold and the projected turnover threshold. The current turnover threshold counts your GST turnover in the current month and the previous eleven months. The projected turnover threshold counts the turnover in the current month and the turnover likely to be achieved in the next eleven months. The threshold amount for both thresholds is $75,000 per annum.

It’s also important to keep in mind two additional categories of supply that are not counted.

The first category is any income made, or likely to be made, by way of the transfer of ownership of a capital asset. Capital assets are structural assets – such as factories, shops or offices – through which a business is run. If you are registered for GST, you are liable for GST if you sell a capital asset in the course of your enterprise.

Capital assets are to be distinguished from revenue assets, such as trading stock. However, the character of an asset can change from capital to revenue and vice versa depending on how it is used. For property developers, properties built for sale and the land on which they are to be built are generally treated as revenue assets and rental properties, and the land on which they are to be built are generally treated as capital assets.

The second category is any income made, or that is likely to be made, as a consequence of ceasing to carry on an enterprise or substantially reducing the size or scale of an enterprise. For instance, if you purchase vacant land as a potential development site and decide not to proceed with any development activities, you would not be required to include the proceeds of the disposal of the land in your projected turnover.

So, the short answer to whether or not you need to register for GST is to look at your development activities and your GST turnover. If you are running an enterprise and your turnover it is over $75,000 per annum, you do need to register, whereas if it’s under the threshold and/or you are not running an enterprise, you don’t.

If you would like some assistance in better understanding your GST obligations, don’t hesitate to drop us a line.

Property development and GST

There are many Goods and Services Tax (GST) implications for property development businesses and, without a good working knowledge of these implications, you may find yourself in a tricky situation.

Under the GST Act, an entity is liable to pay GST on ‘taxable supplies’ that it makes, and it is entitled to input tax credits for its ‘creditable acquisitions’. In other words, you are entitled to pay GST on your income/revenue and you are also entitled to a refund of GST on your acquisitions/purchases.

For each tax period (normally three months or a quarter), the amount of GST you must pay for the revenue your business has generated is offset against the credits you are entitled to receive based on the business purchases you have made. The net amount is the amount that you must pay to the ATO (or which the ATO must pay to you) for that period.

In some cases, adjustments may be required from prior periods.

Simple enough?

Not quite.

GST only applies to certain types of revenue and certain types of purchases, rather than all of them. You need to know which is which in order to ensure that you clearly understand your GST liability.

Input taxed supplies are one exception, with the most common example being the lease of a residential property. In this case, no GST is payable on rental income earned. Similarly, no credits are available for any purchases that are related to earning that income (such as renovations).

Additionally, some purchases can be wholly creditable (meaning you can claim all of the GST charged), partly creditable (you can claim part of the GST charged) or not creditable (you cannot claim the GST). This depends on whether the entity has a ‘creditable purpose’, meaning whether, and to what extent, the purchase was made in order for you to run your business.

As you can see, there are many considerations when it comes to GST.

Other issues that you need to understand are:

  • Do you need to register for GST and if so, when?
  • How do business losses affect GST?
  • What concessions are there for GST?
  • Can you avoid the GST pitfalls?
  • When should you consider cancelling your GST?

Our following series of articles will answer all those questions for you.

As a property developer, it’s essential to be aware of the complexities of dealing in real property and the GST implications of this. In simple terms, you are required to pay GST on your income/revenue once your GST turnover crosses the $75,000 threshold. You are also entitled to a refund on the GST you have paid for relevant purchases.

Keep in mind that the reality is more complex than that, particularly when it comes to changing your development intentions, making the most of concessions and avoiding the pitfalls, so this is an area where professional advice is essential.

Structuring your property development within your SMSF

Assuming that all the regulatory requirements can be satisfied, it may be possible for your SMSF to be undertaking activities in a number of ways, including:

  • As sole owner of the project, using SMSF funds
  • By a limited recourse borrowing arrangement
  • JV or as tenants in common
  • By investing via unit trusts.

All of these options have their own pros and cons, and your particular circumstances and financial goals will need to be carefully considered when deciding which is right for you.

Sole owner

Simply put, this is where you use the cash funds within your SMSF to acquire and/or develop land. This option may be suitable where you have the required funds to complete the acquisition and/or development without the need to borrow.

It has the benefit of resulting in 100 per cent ownership of the developed property in the name of your SMSF. However, the constraints are that you may not be able to acquire and/or develop the size of project that will derive the greatest benefit.

Starting small and diversifying within your SMSF portfolio is a positive strategy.

Limited Recourse Borrowing Arrangement (LRBA)

Under an LRBA, your SMSF will have the potential to acquire land/property that might otherwise be out of your reach with the ability to borrow.

The restriction is that you will not be permitted to develop that land/property until such time as there is no borrowing attached to the asset. Therefore, this strategy is a longer-term option.

Keep in mind that, because your superannuation is meant for retirement, a long-term option can be a very successful strategy.

JV or tenants in common

In a JV arrangement, your SMSF will partner with other/s to acquire and/or develop property. Like the LRBA option, this will potentially provide the ability to access larger scale development opportunities with a capital injection from your JV partners.

Ensuring that all activities are conducted at an arm’s length it could provide a successful result, particularly with the right JV partners involved in the development.

Dealing with a JV partner may present some issues, not unlike dealing with any business partner, and as such greater importance in this structure is placed on developing a clear plan and strategy for the development from the outset.

Unit trusts

Unit trusts, be they related or un-related trusts, are another option for investing your SMSF funds.

Related unit trusts

A related party is either a close family member, a partner in a partnership, and a company or a trust that is controlled or significantly influenced by a member of the SMSF.

A related unit trust is a trust where an SMSF member and/or his or her associates either hold more than 50 per cent equity, exercises significant influence in relation to the trust, or can appoint or remove the trustee.

In summary, a related trust is where there are related parties involved.

Legislation allows your SMSF to invest in a related unit trust provided that, at the time the interest is acquired, the unit trust does not have any:

  • Interests in other entities
  • Outstanding borrowings
  • Charges over its assets
  • Loans to other entities
  • Leases with SMSF related parties (except in relation to properties used solely within a business)
  • Assets acquired from related parties (unless they are business properties or the assets were acquired by the unit trust more than three years before the SMSF acquired the interest in the trust).

The investment cannot amount to more than five per cent of your SMSF’s total assets. For example, if the SMSF has a total asset value of $1,000,000, they cannot invest more than $50,000 in a related trust.

Given the five per cent rule and the inability of the related unit trust to borrow, charge its assets or carry on a business, the SMSF may be limited in the context of property development activities. These restrictions do not apply to SMSF investments in unrelated entities.

Unrelated unit trust

An unrelated trust is one where there is no connection between the members of the SMSF and the trustees of the unit trust.

Investment in this type of entity is popular from a property development point of view when you want to share in the potential significant gains of property development without having to be involved with the development itself.

It has the added benefit of providing you access to much larger developments with greater returns than you would potentially be able to, given your balance within your own SMSF.

Subject to satisfying all the superannuation industry supervision (SIS) regulations and having a prudent investment strategy, your SMSF can invest in unrelated entities, including those that hold property, borrow money and carry out property development activities.

The threshold requirement is that the unit trust is unrelated to the SMSF for SIS purposes.  This means that a member of the SMF cannot control the trust either by entitlement to 50 per cent or more of the income or capital of the trust, or have the power to appoint or remove the trustee.

An unrelated trust structure could possibly involve two unrelated SMSFs each with 50 per cent of the units, 50 per cent of the shares and 50 per cent of director voting power in the trustee company.

Assuming that the ATO (or a court) can be satisfied that you have an unrelated trust (and there are no other areas of SIS risk), and investing in the trust is prudent and fits within the SMSF investment strategy, then this is a way for the SMSF to have involvement in property development.

The commercial and legal aspects of an investment of this type also need to be carefully considered, including:

  • The SMSF deed must permit the investment.
  • Fifty per cent control is not effective commercial control.
  • Unrelated investors may have different views about how things should work, and the terms of the arrangement should be carefully worked through and fully documented.
  • Lenders may need to be convinced that the structure doesn’t offend SIS rules.

There are no specific restrictions on the activities an unrelated trust can undertake, and there can be borrowings in an unrelated trust that undertakes property development activities.

Importantly, a unit trust in which one or more superannuation funds hold entitlements to more than twenty per cent of income and capital and which carries on a business (other than investment) is treated as a Public Trading Trust and taxed as a company, so that distributions are taxed as franked dividends.

Finally, if the ATO considers that income derived from unit trust holdings is not arm’s length, the income in question can be taxed at the top marginal tax rate. This could occur where units are issued below market value, or other income is injected into the unit trust, and ends up in the hands of the SMSF unit holder.

You can see by the above options that you need to carefully consider all of them and which would best suit your particular circumstances and longer term goals.

We would be happy to discuss these options with you to ensure you’re on the right track. Give us a call or send through an email and we’ll organise to meet and chat about your goals.