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Self Managed Super Fund (SMSF) Article
Joint Ventures with SMSFs

By Tony Negline.

This article may be out of date.

6th July 2005

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Many investors want to enter into joint ventures with super funds.

Often a super fund’s job in a joint venture is to provide capital that will enable either quicker expansion of a business opportunity or development of an investment.  The objective is to help everyone make a bigger return.

There are four popular ways that Self Managed Super Funds might use a joint venture.

Firstly, an investor personally owns a vacant block of land which they have good reason to believe is in a good location.  They would like to develop it but are not able to personally raise the funds.  Further, a person has a business concept or invention which needs capital to be fully exploited.  Thirdly an investor has a property which, to maximise value, needs to be redeveloped.  Lastly, a SMSF may want to invest in an agricultural scheme.

The Australian Taxation Office however has a narrow view about what a joint venture is compared to common understanding.  The ATOs view about joint ventures is contained in GST Ruling 2004/2.  The ATO says that a JV is an arrangement between at least two parties that has certain features.  For example, the JV is established to undertake a specific commercial venture, the sharing of product or output not sale proceeds or profits, there is a contractual arrangement between the parties, joint control is exercised over the operation and the costs of the endeavour are shared.

Let’s assume that Harry James is retiring from his small business.  The business owns its office premises which are valued at $250,000.  He has no further use for the premises and the people buying his business don’t want the offices.  The building can be redeveloped into three residential apartments for a cost of about $500,000 and collectively could be sold for $1.5 million.  Neither Harry nor the business have the money to fund the rejuvenation but his SMSF does.

Susan Orchard, the Institute of Chartered Accountants’ super expert, said that a JV would exist if the parties entered into a formal written arrangement but didn’t collectively sell the apartments.  “As the super fund has contributed two thirds of the cost of getting the apartments to market, it should take possession of two apartments which it can sell,” she said.  Harry’s business would take the remaining property.

Suppose however that the parties agreed that the JV would not only develop the apartments but would also sell them.  In this particular case, Orchard says that the ATO would deem this to be a partnership.  If the JV is actually be a partnership then Harry’s SMSF might be seen as running a business which may be a serious breach of the super laws.  Additionally if Harry’s SMSF had invested into a partnership then a breach of the in-house assets test might also have occurred.

Daniel Butler, a Melbourne-based super lawyer, says that the ATO believes that the co-ownership (tenancy in common) of a leased commercial property may be a partnership for GST purposes and hence it may be necessary to register for GST.  “Ironically a partnership receiving passive income, such as rental income, does not have to lodge an income tax return as the partners disclose their own share of rental income,” he said.  This issue will affect any SMSF that jointly owns commercial property with another entity and the partnership’s turnover exceeds the $50,000 GST threshold.

Before a SMSF becomes involved in a JV type arrangement there are various hurdles to satisfy.  The trustees need to carefully examine their trust deed and also the super laws.  For example the sole purpose test (is there a retirement income purpose to the investment, who are the other parties involved in the JV and would the super fund be running a business), the fund’s investment strategy, ensuring the fund’s assets aren’t used to secure borrowings (many building contracts contain security clauses), the clear separation of member personal assets and super fund assets, dealing with all parties at arm’s length and the in-house asset tests.

A frequent mistake many SMSFs make is to enter into a JV without prior advice and formal written agreements.  If the JV is between a super fund and entities or people closely associated with the fund then an appropriately drafted agreement is usually critical to the fund’s complying status.

The absence of a written agreement may mean that the parties can easily adjust their verbal arrangement to suit changed circumstances.  However what happens to the JV’s assets if the other party has financial trouble and is bankrupted or becomes insolvent?  In this instance how does a SMSF establish its claim to an asset when a trustee-in-bankruptcy or liquidator expert is asserting asset ownership?  The answer is, unfortunately, costly court action unless it is clearly spelt out what would happen in these situations.

Super fund trustees have an obligation to make sure their fund’s assets are protected and can be clearly identified.  A trustee would not be able to adequately work out what rights it has without a written agreement providing clear guidance.

Furthermore commercial enterprises are rarely static in structure or purpose for long periods.  There is a necessity to document in what way the JV parties can negotiate and over what period of time.

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