Further, the regulator recognised a number of arrangements in which the investment activity is undertaken utilising joint venture arrangements, partnerships or investments through an ungeared related unit trust or company.

The ATO said property development can be a legitimate investment for SMSFs and doesn’t have any concerns with SMSFs investing in property development where it complies with the Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry (Supervision) Regulations 1994 (SISR).

However, it said that such types of investments can cause concerns where they are used to inappropriately divert income into the superannuation environment, or if SMSF assets are used to fund property development ventures in a manner that is inappropriate for and sometimes detrimental to retirement purposes.

“There are no specific prohibitions preventing an SMSF investing directly or indirectly in property development. However, where an SMSF seeks to undertake investments of this nature, care needs to be taken to ensure that there are no breaches of the SISA and the SISR,” the ATO said.

“Property development ventures may also involve complex structures and the manner in which they are implemented can lead to inadvertent but serious contraventions of the regulatory rules.”

Regulatory concerns flagged by the ATO that can arise in some arrangements include:

• whether the arrangement amounts to the SMSF being maintained for a purpose outside those permitted by the sole purpose test (referred to as a collateral purpose)
• whether the SMSF continues to meet the relevant operating standards, including record-keeping requirements, ensuring assets are appropriately valued and recorded at market value, and keeping SMSF assets separate from members’ assets
• whether the arrangement includes the provisions of a loan or financial assistance (directly or indirectly) to a member or their relative
• whether the arrangement includes the SMSF acquiring assets from a related party
• if the arrangement features the SMSF borrowing money, whether that borrowing fails to meet the requirements to be exempted from the prohibition on borrowing for a limited recourse borrowing arrangement (LRBA)
• whether the SMSF has contravened the in-house assets rules by exceeding the level of in-house assets allowed
• whether payments out of the SMSF under the arrangement are in fact payments of benefits contravening the relevant payment standards (commonly known as illegal early release of superannuation)
• whether the SMSF’s investments are made and maintained on an arm’s-length basis, and if they are not, whether the terms and conditions of the transaction are not more favourable to the other party than would be expected in an arm’s-length dealing

The ATO also warned SMSFs also need to be conscious of:

• income tax matters such as the non-arm’s length income (NALI) provisions and the general anti-avoidance rules, particularly where the arrangement involves other related parties
• goods and services tax (GST) matters such as GST registration requirements, correct reporting and the application of the margin scheme

Where an SMSF, or entities that the SMSF invests in, conducts a property development, the ATO said care needs to be taken that the parties are dealing with each other at arm’s length, including (but not limited to):

• the purchase of land or other assets
• the value of services provided
• the terms (including the use of personal or related-party guarantees) of any borrowing arrangements of the SMSF or other entities involved in the development
• the return on investment and income or capital entitlements

“We will continue to monitor property development arrangements involving SMSFs, particularly those that include LRBAs and related-party transactions, to ensure that SMSFs are not contravening any of the provisions,” the ATO said.