SMSFs and related party improvements to property

SMSF Academy's Aaron Dunn looks at a related party undertaking improvements to a property at no cost, and explains whether increases in the property value constituted a contribution.

The growing interest in property investment within self-managed super funds has certainly extended to individuals looking to undertake some of the property improvements themselves to build retirement savings (eg, builders).

Recent discussion within the NTLG Superannuation Technical Sub-group looked at the issue of a related party undertaking improvements to a property at no cost, and whether increases in the property value constituted a contribution.

To better understand this issue, let’s take a look at an example.

Example

Kylie is a builder and has acquired a property within her SMSF. It is her intention to undertake renovations to the property to improve the overall value of her and her husband’s superannuation balances.

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Kylie renovates the kitchen within the residential property held by the SMSF, and she supplies her labour and materials at no cost to the fund.

Upon completion of the renovation, a market revaluation of the property shows an increase in market value of $40,000.  

The cost of materials is $12,000, and Kylie determines that her services would have been $13,000 if she had invoiced the fund for her building services.

According to Tax Ruling, TR 2010/1, a contribution is “…anything of value which increases the capital of the super fund provided by a person whose purpose is to benefit one or more particular members of the fund or all members in general.”

Putting aside the potential related-party acquisition issues (which would be a breach of section 66, SIS Act), the provision of such materials supplied ($12,000) to the fund would be a contribution.

The more pertinent question is whether the $13,000 of labour supplied to the fund at no cost is a contribution – or is the entire $40,000 increase in market value in fact the contribution?

The industry view held that such an amount would not constitute a contribution, because Kylie is supplying her services at no cost and does not raise an invoice, therefore meaning that the provision of services cannot increase the capital of the fund.

Such ‘free’ labour neither creates an asset of the fund, nor decreases a liability of the fund, and so cannot increase the capital of the fund to be classified as a contribution.

The ATO, however, in its response to this question, confirms that such an amount would in fact be a contribution (as per TR 2010/1).

Citing paragraphs 29 and 30 of TR 2010/1, the ATO’s view is that a situation where:

• the fund provides materials used to make improvements to an asset of the fund; and
• a related party of the fund provides the services needed to achieve the improvements
  • would result in an increase in the capital of the fund for the purposes of benefiting any or all of the members of the fund.  

According to the ATO, the value of the contribution would be determined on the facts as to whether the contribution is $25,000 or $40,000. 

In determining whether an amount will constitute a contribution, consideration needs to be given as to whether the services provided would result in an increase in the capital of the fund.

The provision of accounting services by a related party accountant to the fund (a no cost) would not be a contribution, whereas in Kylie’s case, the increase in capital of the fund  (market value has increased) means the amount does count as a contribution.

Aaron Dunn is the managing director of The SMSF Academy and the author of TheDunnThing blog.