“The most recent guidance that's been issued in relation to property is TA 2023/2 which talks about the risk of diverting profits in relation to property development when a special purpose vehicle is used,” Scott said.

“If you have an SMSF that is involved in property development and is doing it through an interposed entity then you need to take a look at this taxpayer alert to make sure that you don't fall foul of the rules otherwise there's potential implications such as part 4A rules applying to the income that is distributed to the SMSF.”

Scott said in TA 2023/2 the ATO is looking at whether the entity involved in the property development is used to divert income to the SMSF.

“The non-arm’s length arrangement between the SPV and the other entities could mean that the SMSF will ultimately benefit more than the other entities had they been dealing with each other on an arm’s length basis,” she said.

“The ATO said that the features of this arrangement will usually have the same ‘controlling mind’ of one or more property groups. This means the same person may be controlling it even though they might not have control from a SIS perspective - their ‘mind’ is overall controlling that project and trying to divert the income into the SMSF environment.”

Furthermore, Scott said, the SPV, which is the entity that's carrying out the property development, might have a contract with the related party and in those cases, you need to make sure that contracts are also on an arm's length basis.

“For example, if you have a property development and the builder isn't charging for their labour, then you are effectively diverting more income into the SMSF.” she said.

“You also need to look at whether the profit paid to the SMSF is in line with the income or capital that the SMSF put into that development. For example, if the SMSF had 50 per cent ownership interest in that SPV, then it should get 50 per cent of the profits, but if the profits were diverted 100 per cent into that SMSF from the SPV, then you have an issue.”

She said if a client does “fall foul” of these rules, the best thing to do is look at the taxpayer alert and if you are still concerned, consider applying to the ATO for a private ruling or obtaining specific advice.