A Matter of Trust
Taxation in Australia
In the first part of this article, I examined whether a self-managed superannuation fund (SMSF)1 can carry on property development activities and a property development business, and what superannuation and tax laws must be considered when an SMSF carries on property development activities. In the second part of this article, I examine various structures under which an SMSF can undertake property development, or invest in an entity which undertakes property development activities. Legislative references are to the Superannuation Industry (Supervision) Act 1993 (SISA) or the Superannuation Industry (Supervision) Regulations 1994 (SISR).
SMSFs Property development activities can be undertaken directly by the SMSF trustee provided the SISA and the SISR are not breached (see Diagram 1). Advantages of using this structure include:
- there is no need for other entities to be involved, and therefore costs and administration can be reduced;
- the SMSF’s cash can be used directly in the development;
- existing SMSF assets can be developed (although not with borrowing);
- income and capital are taxed at SMSF rates; and
- the SMSF can undertake a property development business. Disadvantages of using this structure include:
- SISA and SISR restrictions can make property development activities difficult;
- there is no asset protection — SMSF assets are subject to claims from the development activities;
- it is difficult to use borrowings when making improvements to properties;
- SMSFs cannot use borrowings to improve existing assets;
- it is difficult to bring other parties into the development (for example, it is generally preferable not to bring in third parties as members of the SMSF); and
- the difficulties of using related party developers/builders.
Download the full paper to continue reading: SMSFs, trusts and property development: part 2