I have a client with an SMSF who is looking to do some capital works improvements to a property owned by their SMSF. The client wants to engage their son who is a builder to undertake the works. The son will undertake the works on normal commercial terms.
Is the SMSF able to engage the son (being a related party) to undertake these works?
There may be some scope for the SMSF to utilise the services of a related party to carry out these works. However, there are some issues to attend to.
As per SIS s66, the SMSF cannot acquire assets from a related party (there are some exceptions to this for listed shares, etc). The ATO takes the view that if the SMSF was to engage the related party builder and the builder supplies all the materials for the build then the SMSF is actually acquiring all the materials (wood, nails, etc) from the related party and hence breaching SIS s65.
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).
There may still be some scope for the related party builder to act an 'agent' for the SMSF when they acquire the materials required to carry out the work and then use the materials in the completion. This concept was covered in a recent NTLG meeting (December 2011).
The minutes from this meeting state:
Section 66 of SISA prohibits, with some exceptions, the acquisition of assets by the trustee of an SMSF from a related party of the SMSF. Consequently, if a related party builder acquires materials in their own right which are then supplied to the SMSF, this would result in a contravention of section 66.
Alternatively, where a related party only acts as an agent, arranging for the acquisition of building materials on behalf of the SMSF trustee from an unrelated vendor, and the related party at no times holds legal title to the building materials, the SMSF trustees have acquired the materials from that vendor, not the related party. Therefore, section 66 of SISA would not apply to the acquisitions.
Whether the particular arrangements under which building materials are supplied do amount to a direct acquisition by the SMSF trustee from the original suppliers, with the related party only acting as an agent, will be determined by the application of the normal laws of contract and agency to the facts of each case.
As stated in the industry suggested treatment, where there is a direct acquisition by the SMSF trustee from the original supplier it is the SMSF trustee who has the contractual obligation to pay the original supplier for those materials.
If the related party pays for building materials and invoices the SMSF either progressively (that is, at regular intervals) or at the end of the project, especially where a mark-up or profit is added, this might be indicative of the purchase of the materials by the related party in their own right and on-sale to the SMSF trustee rather than a purchase by the SMSF trustee through the related party as agent. If the related party builder claims GST input tax credits in respect of the acquisition of the building materials, this might also be indicative that the related party builder acquired the building materials as part of their business operations and then supplied these to the SMSF trustee.
In addition, if the agent has outlaid funds to acquire the materials on behalf of the SMSF, an arrangement to defer reimbursement of that amount may amount to a borrowing by the trustee in contravention of section 67 of the SISA. This is discussed in paragraphs 70 to 74 of SMSFR 2009/2: Self Managed Superannuation Funds: The meaning of 'borrow money' or 'maintain an existing borrowing of money' for the purposes of section 67 of the Superannuation Industry (Supervision) Act 1993.
The help desk is the ultimate back up support for busy practices. Knowledge Shop membership gives your team access to help desk support in tax, business services, superannuation, specialist areas and practice management. Take a tour of the Knowledge Shop service or call Julie on 1800 800