With rapidly declining rental vacancies and lower numbers of properties for sale in Western Australia, property is once again becoming a topic of interest, and the ever-popular question is coming up once again:
Can I do a property development in my Self Managed Superannuation Fund (SMSF)?
The answer to this is not exactly straightforward, and there are a number of questions I always ask before proceeding.
What kind of development are you considering?
This question is important because there is a big difference in directly undertaking a three townhouse build compared to a 10 villa development with three other investors.
At its core, the SMSF needs to make sure its sole purpose is to provide retirement benefits to its members, so running a property development business can raise some flags around this.
How are you going to fund the development?
The SMSF needs to be careful that it has enough cash to pay for the whole development, without borrowing, or be aware of the risks of having to make contributions and manage contribution caps.
While SMSFs are able to borrow, they cannot borrow for development, or use existing cash to fund the development of land that has a borrowing over it.
Are there going to be other parties involved?
There are several structures that can be considered if the SMSF wants to explore a development involving others.
The first issue to consider though is whether any of the other parties involved would be considered ‘related’ to the SMSF members.
This can include family members, business partners, and entities controlled by either of these.
If the other parties mean it is a controlled entity of the SMSF, then there are very strict rules around what can and can’t be done – including no borrowing.
If, however, the other investors are genuinely unrelated and just want to invest in this transaction, borrowing may be permitted.
The most important thing to remember is that advice before entering into the transaction may save a fortune in costs to unwind a prohibited investment.
Who is going to be the builder?
Often, there is a desire to enter into this investment because a member or related party is a builder.
This is a minefield of potential SMSF breaches as it needs to consider paying (and proving!) market rates, and how materials are going to be acquired and paid for.
It can be done, but the structure is tricky, and there are documents that need to be drafted at the beginning of the development.
What is the end plan for the properties?
GST isn’t often something that is talked about in SMSFs, but GST on property developments can have different considerations, depending on whether the properties are going to be sold, or whether they will be rented.
While your intention may, and can change, being aware of the cash flow implications makes life much easier, and allows you to build an effective investment strategy upfront.
Like everything with SMSFs, the key to using them as an investment vehicle is good planning, proper advice, and having everything set up correctly from the outset. Property development in SMSFs is definitely not for everyone. Getting it right can make it a success, but getting it wrong (even slightly) can lead to disaster.
How can RSM help?
If you have any questions or require additional information regarding property development in your SMSF, please contact your local RSM SMSF adviser today.