Australians love property and the lure of a 15% preferential tax rate on income during the accumulation phase, and potentially no tax during retirement, is a strong incentive for many SMSF trustees to dream of large returns from property development. We look at the pros, cons, and problems that often occur.

An SMSF can invest in property development if trustees ensure the investment complies with the rules. A key is the sole purpose test. Trustees need to ensure the fund is maintained to provide benefits for retirement, ill health or death.

There are multiple ways an SMSF can invest in property development if the investment strategy of the fund allows:

Directly developing property
An ungeared unit trust or company (the parties can be related)
Investment in an unrelated entity
A joint venture

Directly developing property from fund assets

An SMSF can purchase land from an unrelated party and develop the property in its own right. Common issues include: acquiring land from a related party (not permitted), borrowing to develop (not permitted), and GST implications.

Related ungeared trust or company

An ungeared company or trust is often used (under SIS Regulation, section 13.22C) when related parties want to invest in a property development together. The SMSF can invest in a company or trust that is undertaking a property development as long as the company or trust does not borrow money, does not conduct a business, and conducts any dealings at arm's length.

Joint venture arrangements

An SMSF can potentially invest in a joint venture (JV) property development, but the criteria are necessarily strict. It's essential to get advice well in advance — tax, legal and financial — before pursuing a JV.

Download full Client Newsletter February 2024