A Self Managed Superannuation Fund (SMSF) must not acquire an asset from a trustee or other related party of the fund under s.66 of the SIS Act. This legislation has posed problems for trustees when a fund is constructing a building and a trustee buys goods, and then is reimbursed by the SMSF.
An SMSF Accounting Change Relating to Ownership Of Materials
However, appointing the trustee as an ‘agent’, and having a properly drafted ‘agency agreement’ with the trustee, could allow trustees to purchase building materials for their SMSF. It is the small shift in the underlying ownership of the materials that makes the transaction possible.
We became aware of this potential solution from the minutes of the recent National Tax Liaison Group Superannuation Technical Sub-group meeting. This is a forum for industry leaders to meet with the ATO. In their meeting held on the 8th of December 2011 a member asked whether the trustees of a SMSF breached section 66 of the SIS Act if the trustees appoint as their agent, a related party to purchase the goods and materials on behalf of the trustee and those goods and material are used in the construction of a building on land owned by the SMSF.
The ATO’s initial response was that no breach would normally occur. “Where a related party only acts as an agent arranging for the acquisition of building materials on behalf of the SMSF trustee from an unrelated vendor, and the related party at no times holds legal title to the building materials, the SMSF trustees have acquired the materials from that vendor, not the related party. Therefore, section 66 of SISA would not apply to the acquisitions.”
However, the ATO’s view was that if progressive lump sum payments were received, or a single lump sum at the end of the project, or if a mark-up or profit is added, or the builder claims GST credits, then this may demonstrate that an agency arrangement is not effective. Also, if the reimbursement is deferred for a period of time, the SMSF may be considered to have borrowed the funds from the related party.
Summary
Although this response is not binding on the ATO, it does give clear insight into current ATO thinking. If you would like to find out more information on how to build a property in your SMSF, talk with one of our Melbourne based Self Managed Super Fund accounting experts.
Travis Allen is a director of specialist superannuation and business advisory firm Hillyer Riches. Hillyer Riches holds SMSF and business planning strategy seminars. To receive notification of upcoming seminars call Donna on (03) 9571 5333 or visit www.hillyerriches.com.au to learn more about how we can help you.
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