My brothers and I each have our own SMSF's. Combined we would have approx $1m between us.
We intend to purchase a property development site and use our SMSF money and also bank borrowings to purchase and fund the project. We would sell all the development at completion.
Our current thinking is to setup a unit trust for the SMSF money to be invested into. Not sure if this would be the same trust that purchases the property.
I am aware that there are hundreds of tricky rules around using SMSF. Is something like I described above possible. I am sure our current plan is too simplistic so I need to know how we can do it.
If anyone knows a kick-arse SMSF specialist who can help us get this sorted then please let me know.
Greg
Better be prepared for some legal advice before starting. You would be breaching a few rules possibly if you set it up like that.
You have to look at the sole purpose test – super is supposed to be solely for your retirement. Running a business of development may breach this rule.
You can also only borrow to buy a single acquireable asset. So if your fund purchased the land it could not subsequently be mortgaged or used as security.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry, The SMSF will not be purchasing the property so I don't think it will be accused of being in business. Rather the SMSF will be investing money into a unit trust which is where the property will be purchased.
I am concerned about getting this correct – so if you can suggest any names of people who specialise in structuring investments to be SIS compliant I'd be grateful.
Greg
Yes, if done that way the business aspect may be ok. If you are in Sydney I may be able to advise.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
http://www.cavendishsuper.com.au/documents/Technical%20Bulletin/CavendishTechnicalUpdateSep05.pdf
This makes for some good reading
I think the bank borrowings would be the hardest part. Borrowing ie for construction.
I thought it had to be a independent 3rd party.
Ie your brother could contribute funds to by the land component of a development, whilst you use your income from your job/business to finance the construction and enter into a JV with your brothers unit trust (the smsf owning the units)
Thanks wilko1 – a very interesting read. Concerns me a bit that the document was published in 2005, so much may have changed since then. SMSF rules seem to change every week.
Hi Greg,
There is actually a simple way of doing it, which developers have been using for many years. The following article gives an outline of how one particular company is doing it:
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Borrowing in the Unit Trust may be an issue, as it could mean the SMSF investment may breach s71.
Best to see an expert and get this all sorted out before starting. SMSF's ownership of units in a related unit trust were tightened a couple of years ago.
Freelife – Thanks for the article. We do have something similar in mind for future developments once we are more established.
However, the current goal is to figure out how we can do it considering we are all family members. I assume that adds a level of complexity under the 'related parties' type rules. Can you point me in the direction of any SMSF experts where we can get this advice?
Greg
Dan42, appreciate the tip. I am very wary of getting tangled up with the ATO for breaching a rule. Can you suggest any SMSF experts who could help us out?
Greg
The major compliance issues to consider are:
1. The investment strategy of the SMSF
2. Restriction on asset acquisition from related parties
– is the property inside or outside super already?
– is the property owned by a related party?
3. investments must be at arms length
4. In-house assets restrictions
5. Borrowing limitation of SMSF entities
4. Is the sole purpose test satisfied? (i.e not considered as carrying on a business within the SMSF)
As you can see there are quite a few hoops to jump through. If you can tick all those boxes then you may be able to do a property development with your SMSF
Thanks – great list to use a starting place.
I think my initial post was not very clear. The SMSF will not be buying the property so your point 4 (the second one) should not be applicable.
To clarify – the plan is that the SMSF invests money into a property development that we purchase in a different strucure.
I think the issue is more your point 3. Invesments at arms length. This is the area I am unclear on as the plan would be that my SMSF would be investing in a unit trust (that will purchase the property development site). Myself and my brothers wold also be investing in this unit trust with our personal cash and getting bank debt as well.
I think that is what I need to get advice about. Ideas?
Greg
You guys must be genetically predisposed to big cojones.
Every large property developer out there is cutting to the bone trying survive and then there's a few over the last few months who've simply gone to the wall. More to follow by the looks of things. They're discounting like crazy trying reduce inventory levels and keep at least some work flow going. The outlook is for a deteriorating market over 2013 with no real bounce in the foreseeable future. Doesn't mean things won't change but risking my hard earned when the pro's are scaling back suggests things are going to be high risk at best.
One way you might want to consider to reduce/eliminate most of the risk is to look at Dereks model. If I was going to tackle development again his model would rank as one of the best I've seen in terms of risk mitigation.
Quote:DerekNEW Latest Perth JV Project – est $100K profits – http://tiny.cc/hesosw
[email protected] | http://www.eosproperty.com.au | 1300 558 114
You would be able to put your own cash and smsf cash into a unit trust as that would be a ungeared unit trust. You would not be able to put money into a unit trust and then further gear it via borrowings to be a geared unit trust as that breaks the smsf rules. You could only invest your smsf funds into a geared development if you use an independent 3rd party. You would need to get a builder or developer on board.
Get some advice from Richard Taylor (qlds007) as he has done similar in his smsf.
Thanks Freckle – I had a look at that website.
How do you see he mitigates the risk? I assume you mean the risk is reduced for himself as the developer?
Greg
Freckle – I agree the building industry is in trouble (especially in Vic). It is not just developers but builders as well going under.
On the positive it means there will be less competition for good sites. I think a lot of the developers are in trouble as the banks have changed their appetite for risk. Having a business plan which assumes you will always get finance is not always going to work.
They do all the legal and technical work. Engage a construction Co to execute the development but risk is mitigated because units are presold to investor buyers who provide the seed capital. The buyers get a slice of the action for putting up capital and assuming the risk. Win-Win for everyone.
Technically one could argue all parties are partners in the development. A good low risk model in this current economic climate. I would also think a much better model for employing/investing super funds.
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