“Obviously, there are some related-party dealings which you can resolve quite easily like related-party leases but then there are big problem areas such as property development,” said Mr Levy.

“The trustees may have tried to dot all the i’s and cross the t’s, but if, for example, a bunch of super funds have invested in a unit trust and they’ve got a related-party builder involved in the process, the number of related-party transactions as part of that is huge. All it takes is one significant one and they can be in a world of hurt.

“We’ve had to deal with a couple of these over the past six months, and it’s terrifying.”

Mr Levy said that in some cases where SMSF clients have been warned about the rules that apply and the potential downside of falling foul of those rules, they have reconsidered getting related-party builders. 

“The other thing to be aware of with related-party dealings is that the amount of additional evidence that you need to ensure that you’ve actually met the rules is massive,” he cautioned. 

“Where there’s a construction contract in place, you need to have evidence that the cost plus margin that you’ve used is commercial. You need to prove that the way the staged payments matches what happens in the real world. You’ve got to do all these things that you don’t need to do with a third-party builder.

“I think going forward, there’s going to be a lot of instances where people trip up on it and suffer quite heavily for it.”

DBA Lawyers special counsel Bryce Figot has also previously cautioned SMSFs on some of the red flags in the property development area following the release of the ATO’s SMSF Regulator’s Bulletin (SMSFRB) 2020/1.

SMSFRB 2020/1 outlined some of the situations that concern the ATO, including where an SMSF borrows money from a related party to buy units in a related unit trust and that unit trust undertakes a property development.

The ATO doesn’t explicitly state that it can’t be done, said Mr Figot, but the Regulator’s Bulletin suggests that it can’t be done due to the challenge in obtaining evidence from an arm’s length lender.

“You’re not within the safe harbour [terms] of PCG 2016/5, and therefore, in order to be able to do it, you would have to show that an arm’s length lender would have lent in those circumstances,” he explained.

“They don’t make the final leap, but the conclusion that they push you toward is that you’re not in the safe harbour and you’re not going to be able to show that the terms are consistent with an arm’s length dealing in the exact same arrangement.”