The Australian Taxation Office’s (ATO’s) view on property development in self-managed super funds (SMSF) is not straightforward, and financial advisers need to ensure that SMSF members use funds as a retirement vehicle rather than to conduct business, said Peter Hogan, MLC Technical.
Speaking at Money Management’s SMSF Essentials 2012, Hogan said the ATO’s view on SMSF investments including listed securities and managed funds is clear-cut, but legislation regarding property development and business activity depends on circumstances and varying criteria.
"One of the things that is clear is just because the trustee of your fund or your client carries on some activities which have a businesslike feel to them, doesn’t mean they’re going to fail the sole purpose test on carrying on a business," Hogan said.
He said criteria include the scale of the activity, the profit motive and the financial impact on the fund, as well as considerations about whether the property is developed for rental or sale.
A simple view of the issue pits members who develop property for rental as passive investors, while those who develop for sale breach the sole purpose test, he said.
"This is one area where your clients can fall over the line if they’re not careful in terms of how they address this," Hogan said.
"There are people talking to your SMSF clients all the time about using their superfund money to be a passive investor in property development, and they’re corking up structures and cooking up arrangements in order to encourage them to do that," he said.
But financial advisers need to navigate the ‘grey’ to ensure their clients’ SMSFs don’t breach ATO regulations, Hogan said.
"On balance, the ATO’s view is carrying on a business, and those businesslike activities are inconsistent with the sole purpose test, so if you go down that path too enthusiastically, the ATO says you can do it, but you won’t be a self-managed super fund anymore and you lose your tax concessions," he said.
