In this edition of ‘It depends’, senior associate Keeghan Silcock talks about whether your SMSF can engage a related party builder and whether the builder can act as agent for the SMSF to acquire assets.
Hi and welcome to another edition of It Depends. Today I’ll be talking about whether your SMSF can engage a related party builder.
Can my SMSF engage a related party builder?
It depends. So, there is no general prohibition against self-managed super funds from engaging a related party to provide services. This means that it is possible for your SMSF to engage a related party builder to provide construction services. However, there is a prohibition against an SMSF acquiring assets from a related party. So, if you are engaging a related party builder to provide services to your SMSF, it’s important that in the provision of those construction services, the builder does not also provide goods and materials to the SMSF.
Can the builder act as agent for the SMSF to acquire assets?
Given that the provision of goods and materials during the course of a build is an important part of the provision of those construction services, it is possible to put in place an agency arrangement between the related party builder and the self-managed super fund so that the builder can be used as the agent of the SMSF to acquire goods and materials for the construction. The agency arrangement would operate separately to the building contract between the related party builder and the SMSF. It would be really important that the SMSF and related party strictly comply with the terms of the agency deed so that the builder only acquires goods and materials as agent for the fund and doesn’t provide those goods and materials directly to the fund itself. To ensure that the parties properly comply with the terms of the agency deed, the related party builder would need to contract with the other parties on behalf of the SMSF in the name of the SMSF. All of the invoices for goods and materials should be issued to the SMSF in the funds name itself, and not to the builder. This can add an extra layer of complexity to the building arrangements, and it’s something that would need to be not only established properly from the outset, but also then complied with throughout the course of the build. There are other issues that you would need to consider when you are engaging a related party builder by your SMSF. These include ensuring that the terms of the building contract between the parties are on arm’s length commercial terms and that you have independent third party evidence to substantiate this. You’d also need to ensure that the related party builder and none of the other suppliers or parties involved in the build put a charge on the assets of the fund as that can cause compliance issues for the fund.
If you have any questions about using a related party builder by an SMSF or structuring a property development by an SMSF generally, please feel free to contact a member of our team.