SMSF developing an owned Property – certainty needed

Hi All,

We are very close to purchasing 2 properties through our SMSF and need help from anyone experienced in this area.

One has a house (and thus an immediate revenue stream although initially negatively-geared) and the other (adjoining) block is vacant land.

There is opportunity for significant capital growth by ultimately developing the properties as the land area is significant and all zoned standard residential.

1. We know we cannot use borrowed money to develop the properties.

2. We know we cannot develop the properties while there is any borrowing on them (ie until they are fully owned by the SMSF).

3. We have received conflicting advice as to whether we can develop the properties when the SMSF fully owns them. AMP Super (informally) says Yes, my Accountant says No (it would be SMSF “carrying on a business”) , another SMSF specialist says “Yes, just have to be careful about structure and any building contracts – no liens or mortgages allowed etc”.

Based on everything I have read (including ATO rulings, SIS Act etc) I am rather inclined to go with the “Yes, just tread extremely carefully” position. [BUT IF ANYONE CAN SAY DEFINITIVELY OTHERWISE, PLEASE DO SO !]

4. If we assume that we CAN develop the properties once fully owned, the financial/legal challenges are around the funds needed to perform the subdivision (council contributions, other costs etc) which are nearly 400K.

We won’t have 400K of spare cash in our Super fund after the purchases, so here are our options (at this stage – anyone else with other suggestions very welcome !!)

a) Get money from elsewhere (eg LOC over existing properties) and use 3-year bring-fwd rule to get the 400K into the SMSF after July 1. Downside – the money is then stuck in Super Fund but the interest being paid on the Equity loan on the house is outside SMSF – and you can’t use SMSF funds for personal benefit so no pay back/repayment possible. :-(

(plus the interest paid on the money will not be deductible to the SMSF as it will not be its expense – it will be our expense. It would not be deductible against the original property purchase price, or against improvements, or ongoingly.)

b) Find investor with 400K of Super to join our SMSF (temporarily) and fund the subdivision. Downside : they will be entitled to between 33% and 50% of the development profits as a member of the SMSF – seems a lot for lending us their money for 12 months.

c) We do the whole project outside SMSF. Downsides : the government will get an extra $200,000 in CGT –
money that would frankly have helped us significantly in retirement, and we can’t use the SMSF money towards the project.

Seems like a rock and a hard place at the moment…

So any advice/suggestions (or interest as a potential JV partner!) greatly appreciated.

Thanks.
Warren Kinny