There is a common misconception that self-managed superannuation funds (SMSFs) cannot engage in property development. However there are no provisions in the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations), the Income Tax Assessment Act 1997 (Cth) (ITAA97) or the Income Tax Assessment Act 1936 (Cth) (ITAA36) that expressly prohibit SMSFs from engaging in property development.
While the SIS Act and SIS Regulations do not prohibit property development, there are certain obligations under the SIS Act and SIS Regulations that can be breached by the activities involved in property development. However, with the right advice and structure, the risks of breaching the SIS Act or SIS Regulations when developing a property can be eliminated. Some of the different ways in which SMSFs can engage in property development are:
Direct investment in property development
SMSFs can invest in property directly through the purchase of land and buildings or structures. The major advantage of direct investment is that those assets can be developed and the resulting income and capital growth will be taxed at low SMSF rates. A key restriction however is that SMSFs are not allowed to borrow for funding property developments through direct investment.
Indirect investment in property development through unit trusts
SMSFs can also invest in property indirectly through related and unrelated unit trusts. These different structures can enable a SMSF to engage in property development and property development activities without breaching the SIS Act or the SIS Regulations.
These structures are flexible and allow SMSFs to engage in property development jointly with other entities (including other SMSFs) and may also allow for the property development activities to be funded using borrowed funds. These structures can also provide asset protection for your SMSF.
What should you do if you locate a development site and want to use your SMSF in the project?
The structure most suitable for your SMSF will depend on a variety of factors. To discuss how your SMSF can engage in property development and the best way for it to do so please contact your local Hunt & Hunt property contact.