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:
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]
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 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:
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:
In the building scenario in example 6, the SMSF could avoid breaching the prohibition by:
That sort of arrangement is uncommon. Normally, the builder â?? in this case, the related party â?? is required to provide the necessary goods and materials to construct the building. Good reasons for having this work done by the builder include:
The NTLG made a useful suggestion in this area â?? 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:
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.
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.
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[i] See the superannuation NTLG minutes. The NTLG is the National Tax Liaison Group Superannuation Technical Sub-group available at http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00268544.htm&page=10&H10
Andrew is a lawyer in the Maddocks Tax & Revenue team.
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Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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