The ATO’s attacks on SMSFs conducting property development continues! The ATO has released Taxpayer Alert TA 2023/2 (the Alert) confirming that the ATO will review arrangements where related entities of a SMSF are conducting a property development (or including where property development is undertaken on SMSF owned assets) and where a special purpose vehicle (SPV) is used. The SPV being a company or trust which will be a related party to the SMSF through which generally a member of the SMSF may provide property development services to the SMSF for a commercial arm’s length fee and acquire and manage building materials used for the development.
Here, the ATO has indicated concern that the SPV’s fees charged to the SMSF may be lower than commercial market rate property development fees from which the SMSF would indirectly benefit, compared to if an unrelated builder were to be engaged to conduct the property development, and that the SPV may enter into contracts with other related entities controlled by the member to facilitate or fund the development, all of which may indirectly benefit the SMSF and potentially breach non-arm’s length income prohibitions.
The in-principle breach here, as indicated in the Alert, is the potential shifting of what would otherwise be profits of the related entities to the concessionally taxed environment of the SMSF, whether directly or indirectly. The ATO suggested in the Alert to refer to the ATO’s SMSF Regulator’s Bulletin SMSFRB 2020/1.
The ATO provides an example in the Alert which illustrates its concerns that one, or two, or a few non-arm’s length dealings within a multi-layered property development structure “scheme” involving interposed entities and SPVs can be interpreted by the ATO such that, if all steps in the scheme are not carefully examined to ensure that each step is conducted at commercial arm’s length terms, and documented as such, this can lead to a finding of non-arm’s length income having originated within the property development scheme to reach, and penalise, the SMSF.
In particular, the ATO states at paragraph 18 of the Alert:
“A view has been expressed that as long as the SMSF is not directly involved in any non-arm's length dealing, the NALI provisions cannot apply. These views are not correct and have been addressed judicially. Non-arm's length dealings by any party in respect of any step in relation to the scheme, can give rise to NALI as defined in section 295-550 of the ITAA 1997.”
The Alert reiterates that, while SMSFs can conduct property development, they need to do so very carefully, ensure they have proper legal documentation (and advice) and obtain and retain benchmarking evidence to support any related party dealings.
To discuss this further or for more information please contact:
Phil Broderick
Principal
Sladen Legal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Terence Wong
Senior Associate
Sladen Legal
T +61 3 9611 0112 l M +61 0458 846 022
E twong@sladen.com.au