Newsletter No. 2, February 2013

Acquisition of Building Materials from a Related Party

This month’s newsletter has been dedicated to an area of the superannuation law regarding acquisition of assets from a related party and how building materials supplied to a Self Managed Superannuation Fund (SMSF) by a related party would contravene this law.

Let’s take a scenario where four people (a mum, dad and two sons) established a SMSF together.  The family operates a building and construction business where they make and supply building materials such as doors, windows and floor boards. They owned 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 okay as the factory satisfies the definition of a “business real property” (refer to Chapters 14 and 14a of The Self Managed Super Handbook) and leasing a business real property is one of the exceptions under the in-house assets rule under the Superannuation law (refer to Chapter 15).

At a later date, due to their business’ expansion they decided more production space was required. As they are in the building and construction business, they decided 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 spent in doing the renovation as well as paid for all the materials.  The members thought this would be okay as all the transactions were conducted at commercial rates and the SMSF has not been taken advantage off.  In fact they thought the SMSF had benefited from the professional and reliable renovation done by them.

As you would all be aware, under the superannuation law you cannot pay yourself a fee for acting as a trustee of your SMSF, but you can pay yourself a fee for providing any other professional services to your SMSF, as long as that fee is at commercial rate.  The type of services a trustee can provide to the SMSF are things like preparing accounting work for the SMSF as the accountant for the SMSF, maintenance work required on the SMSF’s properties as a professional handyman for the SMSF –even 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 and paying themselves fees for services performed at commercial rates.   However, the members cannot supply the building materials themselves as the transaction would be considered as an acquisition.  It does not matter that the building materials were acquired by the SMSF from the related party at commercial rate. This is where the trustees have contravened the law.

The Tax Office has issued a Self Managed Superannuation Fund Ruling (SMSFR) 2010/1 that covers this point.  Click on the hyper link and have a read of Paragraphs 18 and 19.  If you think the Ruling is not very clear, than you may also wish to read Paragraph 7.1 of the Minutes of the Meeting held between the Tax Office and Professional Bodies on 8 December 2010.  The Minutes are quite lengthy so I have summarised the write up on this point:

“ …The ATO view remains as set out in the ruling.  The supply of these goods and services cannot be considered as the performance of a service only.  A service is performed for the SMSF and assets acquired as building materials are not insignificant in value and function.  In cases where an SMSF engages a related party to construct a building on land owned by the SMSF, it must be clear that the related party is only providing building services and not any materials used if a breach of section 66 is to be avoided”.

So while providing certain services to the SMSF is fine, trustees cannot supply materials to the SMSF. The law states that this is considered an acquisition regardless of whether commercial rates were applied.