People in building and construction businesses should not supply the materials used to renovated properties owned by their self managed superannuation funds (SMSF) because you would be breaking the law.
Let’s take a scenario where four people – a mum, dad and two sons – establish an SMSF. The family operates a building and construction business that makes and supplies building materials such as doors, windows and floor boards. They own the premises where their business is conducted.
They sold the premises to their SMSF at market price and leased it back to operate their business.
This is perfectly OK because the property satisfies the definition of a “business rental property” and leasing a business real property is one of the exceptions under the in-house assets rule under the superannuation law.
At a later date, because their business expanded, they decided they needed more production space. Because they are in the building and construction business, they decide to do the renovation themselves and supply the necessary materials.
To ensure everything is above board, their SMSF paid the four members the commercial rate for their time doing the renovation as well as paying for all the materials.
The members thought this would be OK as all the transactions were conducted at commercial rates and the SMSF has not been taken advantage of. If fact, they thought the SMSF had benefited from the professional and reliable renovation done by them.
Under the superannuation law, trustees cannot pay themselves a fee for acting as a trustee of an SMSF, but trustees can pay themselves a fee for providing any other professional services to their SMSF, as long as that fee is at commercial rates.
The type of services a trustee can provide to the SMSF include:
• Preparing accounting work for the SMSF, as the accountant for the SMSF;
• Maintenance work on the SMSF’s property, as a professional handyman for the SMSF; and
• Acting as a managing agent for the SMSF’s properties, if you are a professional property manager.
So there is no problem in the SMSF paying the members to perform construction work on the premises belonging to the SMSF at commercial rates.
However, the members cannot supply the building materials themselves as the transaction would be considered an acquisition. It does not matter that the building materials were acquired by the SMSF from the related party at commercial rates. This is where the trustees have contravened the law.
The Australian Taxation Office has issued a Self-Managed Superannuation Fund Ruling 2010-11 that covers this point.
At paragraph 19 of this ruling it states “if goods or materials are provided to the SMSF that are not insignificant in value and function there is an acquisition of assets (being goods or materials)”.
At example five of the ruling, it gives a situation where a member of an SMSF fixed taps in rental properties owned by the SMSF by replacing the tap washers. Because the tap washers were insignificant in value and function, the substance of the transaction is the performance of a service.
Then, at example six of the ruling, it outlines a situation where a member of an SMSF buys all necessary building materials and builds a house on land owned by the SMSF. In this situation, it is considered that building materials are not insignificant in value and function and therefore the transaction amounts o an acquisition of assets.
While providing certain services to the SMSF is fine, trustees cannot supply significant materials to the SMSF. The law states that this is considered an acquisition regardless of whether commercial rates were applied.