This approach is consistent with the argument that the ownership of the property does not pass until the terms set out in the contract have been met. Under many construction agreements the builder is legally the “owner” of the goods, labour and materials during the construction phase, or for part of it, and ownership passes to the superannuation fund in this case as the construction is completed.
ATO RESPONSE
The ATO view remains as set out in SMSFR 2010/1. That is, the supply of goods and materials cannot be considered as the performance of a service only. Therefore, the acquisition of goods and materials from a related party in the scenario described would constitute a breach of section 66(1).
The option of the SMSF trustees appointing the related party builder as their agent was also discussed at the NTLG meeting. While not ruling out the use of agency agreements as a possible solution, the ATO invited industry groups present at the NTLG meeting to provide more information and examples on how an agency agreement might operate in these situations. The ATO will then consider whether or not an agency agreement could be used by the SMSF trustees in these circumstances to overcome potential breaches of section 66 of the SIS Act.
IMPLICATIONS
To avoid a possible breach of section 66 of the SIS Act, in situations where the SMSF trustees engage 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 goods and materials used to construct the building.
The ATO is yet to issue any determination that specifically addresses the application of section 66 in situations where a related party builder uses goods and materials, purchased under an agency agreement with the trustees, to construct a building on land owned by the SMSF.
Peter Burgess is national technical director of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).
