SMSFs and related party builders
In situations where a SMSF enters into a contract with a related party, care needs to be taken to avoid potential breaches of the law. Peter Burgess explains.
In February 2010, the Australian Taxation Office (ATO) released ruling SMSFR 2010/1 which explains when an asset is intentionally acquired by a trustee of a from a related party of the SMSF for the purposes of subsection 66(1) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).
This ruling referred to situations where an SMSF enters into a contract with a related party entitling the SMSF to the performance of a service by the related party.
The ruling explained that in situations where the goods or materials that are insignificant in value and function are provided to an SMSF as part of a service it would be the commissioner's view that it remains the performance of a service only.
However, if goods or materials are provided to the SMSF that are not insignificant in value and function, it would be the Commissioner's view that there has been an acquisition of [[a related party assets]] (being the goods or materials).
The Commissioner's view is further explained in example five and six of SMSFR 2010/1.
Example six refers to a member of an SMSF who buys all the necessary building materials and builds a house on land owned by the SMSF. The member does some of the building work and also pays contractors.
As a service is performed for the SMSF, and assets have been acquired from the member - which are not insignificant in value or function - the Commissioner concluded that there has been a breach of subsection 66(1) of the SIS Act.
At a recent meeting of the National Tax Liaison Group Superannuation Technical Sub-group, the ATO was asked a question about the appointment of agents and whether the trustees of an SMSF would breach section 66 of the SIS Act if the trustees appoint as their agent the related party builder to purchase the goods and materials on their behalf.
Specifically, the ATO was asked whether the trustees of an SMSF would breach section 66 of the SIS Act if the trustees appoint as their agent a related party to purchase the goods and materials on their behalf, and those goods and materials are used in the construction of a building on land owned by the SMSF.
ATO's response
In the ATO's view, where a related party only acts as an agent, arranging for the acquisition of building materials on behalf of the SMSF trustee from an unrelated vendor, and the related party at no times holds legal title to the building materials, the SMSF trustees have acquired the materials from that vendor - not the related party.
Therefore, section 66 of the SIS Act would not apply to the acquisitions.
However, where the related party pays for the building materials and invoices the SMSF either progressively or at the end of the project (especially where a mark-up is added), this might be indicative of the purchase of the materials by the related party in their own right and on-sale to the SMSF trustee rather than a purchase by the SMSF trustee through the related party as agent.
Implications for practitioners and SMSF trustees
In situations where the SMSF enters into a contract with a related party entitling the SMSF to the performance of a service by the related party, and the goods and materials provided by the related party as part of the service are not insignificant in value or function, care needs to be taken to avoid potential breaches of section 66 of the SIS Act.
In these circumstances, consideration should be given to appointing the related party as an agent of the trustee.
The related party could then purchase the goods and materials needed to perform service on behalf of the trustee without the related party holding legal rights to the goods and materials.
The appointment of an agent in this scenario would typically involve the SMSF trustee assigning the related party as their agent under a deed of agency agreement, or by a variation to the building contract.
The deed of agency agreement would confer upon the agent the terms of the agency and would authorise the related party to acquire the goods and materials as an agent on behalf of the trustees.
Alternatively, the agency appointment, and the authority to act conferred upon the agent, could be expressed or implied in the building contract.
Peter Burgess is national technical director of the Self-Managed Super Fund Professionals' Association.
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