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Joint Venture with SMSF

Discussion in 'Superannuation, SMSF & Personal Insurance' started by Superman, 7th Nov, 2007.

  1. Superman

    Superman Well-Known Member

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    Just wondering if anyone has any experience with operating a joint venture between an SMSF and another party (individual, trust, company etc)?

    I know that the joint venture agreement (JVA) is paramount - very important from a SIS compliance point of view, and also that a 'shared outcome' i.e. an interest in a finished product, rather than joint income like a partnership.

    This is another possible avenue for someone looking to leverage and/or get some direct property action in their SMSF.
     
  2. MattR

    MattR Well-Known Member

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    I thought that the ATO had put the Khyber on this ie a SMSF entering into a joint venture with say a member of the fund.
     
  3. Superman

    Superman Well-Known Member

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    The ATO doesn't like JVs as too many things can go wrong. Potential hazards include breaching the sole purpose test, charges over fund assets and also carrying on a business.

    Based on my knowledge, JVs can be done within SIS legislation - and can be quite useful - especially for a small scale property development where the objective is to end up with the SMSF owning a % of a finished property that is rented.

    Not for the faint hearted though!
     
  4. Superman

    Superman Well-Known Member

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    To answer my own question, I have found the following from the ICAA:

    Can an individual or company purchase a piece of land and then enter into a joint venture with the superannuation fund to develop the land?

    Yes, a superannuation fund can enter into joint venture with an individual to develop a property care needs to be taken to document the joint venture appropriately. This would include recording the value of each of the inputs and allocating a share of the completed asset to the fund in accordance with the assets provided by the fund.

    The Superannuation Industry (Supervision) Act allows all types of investments and then precludes activities which the legislators feel are not for superannuation purposes. As joint ventures are not specifically prohibited some trustees have entered into these arrangements.

    When entering into a new investment such as a joint venture, trustees first need to consider the appropriateness of a superannuation fund investing in this way.

    SIS Act issues to be considered include:

    S62 the sole purpose test (see also the decision in Scott v The Commissioner of Taxation No 2 (1966) 40 ALJR 265)

    Consideration should be given to who the other parties to the arrangement are and whether there is a retirement income purpose to the investment, refer APRA Superannuation Circular III.A.4.

    S52(2)(d) does the investment comply with the investment strategy.

    S69 – 85 does the investment breach the in-house asset test.

    When investing in property projects some superannuation fund investors may believe that they are doing so as a part of a joint venture arrangement and in doing so have therefore complied with the in-house assets test. The reality may be that they are more than likely investing in a partnership.

    There is no superannuation specific guidance on the establishment of joint ventures. For taxation purposes a source of information can be found in tax rulings. In particular GSTR 2004 /2 considers what is a joint venture for GST purposes.

    A joint venture is formed for the purpose of undertaking a specific commercial venture i.e. developing a property.

    There is a sharing of product or output not sale proceeds ie each party receives a share of the developed property.

    There is a contractual agreement between the joint venturers and any manager overseeing the venture.

    There is joint control over the operation.

    The costs of the project are shared

    Where the parties are carrying on a business and are in receipt of ordinary income jointly this may be a partnership. A partnership arrangement may result in a SIS breach of S71(1)(i). By contrast, the legislation does not preclude a joint investment between the fund and employers via a company or trust
    where the property is owned between the parties as tenants in common.

    While the trustees may believe their arrangement overcomes the in-house assets test it is important to remember that the regulator can effectively deem (see SIS Act section 70A) an arrangement to be in breach of the in-house assets test. However even if the in-house asset test rule can be met, the whole business arrangement may nevertheless breach the sole purpose test if a retirement income basis for the venture cannot be demonstrated.

    For further information on joint ventures refer to GSTR 2004/2 at: http://law.ato.gov.au

    Will this change where the land is subject to a mortgage?

    Yes, as you are unable to separate any building from the land itself the improved asset is subject to a mortgage and the fund has invested in a geared asset. This is in breach of SIS section 67.
     
  5. Rob G.

    Rob G. Well-Known Member

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    The emphasis is on the Trustee remaining an 'investor'.

    By being too actively involved, the Commissioner may regard you as carrying on a business of developing.

    For a SMSF, the ATO is judge & executioner.

    Add two zeros to the auditor fees.

    Cheers,

    Rob
     
  6. Superman

    Superman Well-Known Member

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    Yes Rob it is definitely a fine line. If you are churning out a new property via a JV every year, you would be in business, whereas if you simply 'invest' via a JV and hold onto your share of the finished property for rental income and capital growth I think you would be OK.

    Regarding the audit - in my case I can simply buy the auditor another carton of beer - he is a close friend! Yes - he does still maintain his independence and objectivity. I think....

    Thanks for your feedback.