News and insights

ATO Taxpayer Alert released on SMSF property development

Article published on: 26-06-2023

The ATO released Taxpayer Alert TA 2023/2 to provide awareness that they are currently reviewing arrangements where SMSFs acquire direct or indirect ownership in a special purpose vehicle (SPV) involved in property development.

The ATO is concerned that some of these arrangements may directly or indirectly divert income and capital gains on disposal to SMSFs, which are taxed at a lower rate, where these would otherwise be taxed to related parties at a higher rate.

The ATO is reviewing arrangements which have some or all of these features:The individuals controlling one or more property development groups (related entities) establish an SPV to carry out a particular project and they are members of their respective SMSFs.
Their SMSFs can acquire (or acquire interests in) the SPV directly or indirectly for either an arm's length or non-arm's length consideration.
The SPV contracts their related entities to do some or all of the property development project work. The fees charged by the related entities is less than what it would have cost if the arrangement was at arm's length so that the related entities profit is less than (including nil) if the arrangement was at arm's length.
The related entities, SPV or both, may borrow to facilitate the property development project. The terms of the loans are not at arm's length (eg a lower interest rate is charged or where the loan terms are at arm's length but are not being adhered to or fully enforced).
The SPV earns higher profits in respect of the property development project than would have been if the SPV, SMSFs or the related entities’ dealings with each other were at arm's length. The SMSF(s) receive dividends or distributions in respect of the SPV's profits including any tax offset refunds relating to any dividends they receive.

Non-arm’s length dealings by any parties in relation to the scheme may give rise to income and capital gains received by the SMSFs being treated as non-arm’s length income, which is taxed at the highest marginal rate.

Other penalties the ATO may apply include denying the tax benefit under Part IVA provisions, disqualifying a person from acting as an SMSF trustee or director of the SMSF corporate trustee, or issuing a notice that the SMSF is a non-complying super fund.

The ATO has also released a consultation paper on non-arm’s length income provisions announced in the 2023/24 Federal Budget.

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