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Building on land owned by an SMSF: the ATO's view

An SMSF funding (without borrowing) the construction of a building on land it owns may engage a related party to provide the building services. However, there are some issues about whether the builder can buy the goods and materials and use them in the construction process in the normal way. The issues relate to whether that would breach the restriction on acquiring assets from a related party.  There is a suggestion that may circumvent the prohibition. Kate Hocking

What is the issue?

If an SMSF owns land and engages a related party on commercial terms to construct a building using goods and materials supplied by the related party, then the SMSF may be in breach of the prohibition on acquiring certain assets from related parties of the SMSF.   The relevant law is in section 66(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA), which says (subject to certain exceptions) that a trustee or an investment manager of an SMSF must not intentionally acquire an asset from a related party of the SMSF.

The question in the building construction context is whether the goods and materials supplied by the related party to construct the premises, are to be treated:

  • as the acquisition of an asset from that related party? This would be a breach; or
  • as forming part of the performance of the service the related party has been engaged to carry out? This would not be a breach.

The ATO's view

The ATO takes a literal view of the law.  Its view is that if a related party of the SMSF is undertaking the construction of the building, then the SMSF must acquire the goods and materials directly from the supplier. [i]

ATO's Self Managed Superannuation Funds Ruling (SMSFR) 2010/1 [ii]

This issue has previously been discussed, in part, in SMSFR 2010/1.  Under that ruling, the value and function of the goods or materials was a relevant factor in determining whether they constituted part of the service provided by the related party.

Paragraph 19 of SMSFR 2010/1 states:

If goods or materials that are insignificant in value and function are provided to an SMSF as part of a service it is the Commissioner's view that it remains the performance of a service only. If, however, goods or materials are provided to the SMSF that are not insignificant in value and function there is an acquisition of assets (being the goods or materials).

The ATO's examples

The Commissioner's view is clarified further in examples 5 and 6 of SMSFR 2010/1. 

Example 5 lists scenarios where section 66(1) is not breached as the performance of the service for the SMSF along with the provision of goods are of insignificant value and function. The scenarios are:

  1. A member of an SMSF fixes taps in rental properties owned by the SMSF by replacing the tap washers.  As the tap washers are insignificant in value and function, the substance of the transaction is the performance of a service.
  2. A relative of a member of an SMSF is contracted to provide accountancy services to the SMSF.  As part of that service, a disk containing SMSF records is produced and provided to the SMSF.  As the disk is insignificant in value and function, the substance of the transaction is the performance of a service.

Example 6 lists scenarios where a breach of section 66(1) has occurred as there has been performance of a service for the SMSF along with the provision of assets that are not insignificant in value and function. The scenarios are:

  1. A member of an SMSF buys and installs ducted air-conditioning in a rental property owned by the SMSF. As the ducted air-conditioning components are not insignificant in value and function, the SMSF does acquire an asset.
  2. A member of an SMSF buys all necessary building materials and builds a house on land owned by the SMSF. The member does some of the building work and also pays contractors to do some of the building work.  As the building materials are not insignificant in value and function, the SMSF does acquire an asset.

How to avoid a breach when a builder is constructing a building for the SMSF

In the building scenario in example 6, the SMSF could avoid breaching the prohibition by:

  • acquiring the goods and materials directly from the supplier; and
  • engaging the related party only for the actual performance of the service to construct the building.

That sort of arrangement is uncommon.  Normally, the builder ?? in this case, the related party ?? is required to provide the necessary goods and materials to construct the building.   Good reasons for having this work done by the builder include:

  • it is more convenient;
  • the builder has more experience; and
  • the builder receives trade discounts.

What suggestions were made at the NTLG?

The NTLG made a useful suggestion in this area ?? see the minutes on 8 December 2010 [iii] (Minutes).  (By the way, the NTLG provides a forum for the Australian Taxation Office (ATO), Treasury and professional and industry associations to raise and discuss legal and administrative issues in relation to the tax and superannuation system.)

In the NTLG's discussions:

  • it was assumed that the construction of the property was on an arm's length basis (to satisfy section 109 of SISA); and
  • it was assumed that the acquisition of the performance of a service would not constitute a contravention of subsection 66(1).

The useful suggestion was that the ATO respond to whether it would be permissible for a contract to be drawn up between the builder and the trustee of the SMSF such that the related party builder acquires any materials as an agent of the SMSF trustee.

Stay tuned for the next NTLG minutes to see if the ATO has commented on this proposal. 

Essential superannuation resources

Stay on top of the never ending changes affecting superannuation with the following resources from Thomson Reuters: The Essential SMSF Guide and the Australian Superannuation Handbook. Available in book, ebook and online.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a wide range of SMSF topics here.

Related links

More Cleardocs information on SMSFs

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[i] See the superannuation NTLG minutes. The NTLG is the National Tax Liaison Group Superannuation Technical Sub-group available at

[ii] available at:

[iii] available at:


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Leigh Baring
Leigh Baring
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Qualifications: LLB (Hons), BEc (Hons), Monash University

Leigh is a Partner in Maddocks Tax and Structuring team. Leigh has extensive experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.

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