As financial markets continue to flounder, SMSF trustees are increasingly looking at different ways to build their retirement wealth.
A typical example might involve using super to buy vacant land with a view to developing it at some stage.
But what sort of development is – and just as importantly isn’t – allowed?
At the outset, it’s important to note that the super laws don’t demand that you follow State Government or local government planning laws. For example, if vacant land is zoned as residential, but you decide to put a nuclear enrichment plant on it – to take a slightly outrageous example! – then there is nothing in the super laws that will penalise you if you’ve executed the transactions correctly.
Obviously, anyone breaching planning laws opens themselves up to penalties and fines of various types, and therefore, such an action might be considered a breach of trust because you haven’t done all you can to run your super fund appropriately.
But in relation to the super laws, before we answer this question, we need to know what type of land you’ve bought and what you hope to use it for.
The vacant land might be farm or pastoral land that you intend to agist. If you want to rent this land to a third party, then typically there would be nothing stopping you doing this (assuming your local property and planning laws permit this). If you want to rent this land to a related party of your super fund, then you need to be 100% sure it is ‘business real property‘.
This is a term found in the super laws and essentially means premises or property that can be used wholly and exclusively in the running of a business.
A related party of the fund is another term found in the super laws and it means any member or their relative or any company or trust that the members or relatives control or who are deemed by the law to control.
Perhaps your super fund’s vacant land is zoned for business purposes, such as commercial, industrial or retail. In these cases, if you would like to use it to develop premises, then this can be done and it can be leased to a related party of your super fund because it will probably be considered ‘business real property’.
A key issue will be who the developer is. One task for the developer is to purchase all goods and materials for construction directly from the supplier. A super fund is unlikely to receive any trade discounts, so you might be tempted to use another entity to act as developer.
Perhaps your super fund might want to enter into a contract with a member of the fund in order for them to act as the developer, purchase all materials and engage contractors. Stop! This is a breach of the super laws because the super fund is acquiring assets from the member – namely, the building materials.
The super fund must buy the materials. However, a member can provide their services as a development manager or co-ordinator to oversee what’s done with those materials. This arrangement has to be clearly spelt out in writing. Importantly, the member can’t receive a fee from your super fund for their services.
Another key issue will be GST. Many super funds don’t bother registering for GST because it’s typically not compulsory and it provides a marginal financial benefit. Super funds and the GST are strange bedfellows and we don’t have space here to discuss all the related issues. However, in a property development situation it’s often a good idea (and given the cost of the goods purchased, often essential) to be registered for GST purposes.
Without going into too much detail, sometimes it’s essential to factor in GST adjustments, and these can have a significant financial impact.
You might be interested in developing vacant land for residential purposes. This is fine, as long as you and your relatives don’t use the house, flat or apartment – it must be leased to a non-related party.
Finally, just a brief word about super gearing cases. One of the most important rules about super gearing is that the asset held in these arrangements often can’t be replaced (red, New opportunities open for investing in property). In nearly all cases, development of vacant land would be considered to be replacing an asset – so basically, you can’t use your SMSF to borrow funds to build on vacant land – you must support the development with existing funds within your SMSF.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.