If your SMSF is looking to invest in a unit trust involved in property development, there are important compliance rules to follow. Things get trickier if a person connected to the SMSF also wants to provide consulting services to the unit trust. Here’s a straightforward look at what you need to know.

Stick to Arm’s Length Rules

SMSFs must follow arm’s length rules for all transactions, meaning everything needs to be at market rates. For consulting services, this means:

1. Charge Market Rates: The fees should match what’s standard in the industry for similar work. Otherwise, the arrangement could be flagged as non-arm’s length.
2. Fair Terms: Agreements should include standard details like clear deliverables, payment terms, and timelines.

Watch Out for Non-Arm’s Length Income (NALI)

Getting the fees wrong can lead to serious tax problems. Here’s what to avoid:

• Undercharging or Free Work: If the fees are too low or not charged at all, it may count as a non-arm’s length expense (NALE). This could result in all income from the unit trust being taxed at a hefty 45%.
• Overcharging: Setting fees too high to boost the SMSF’s income might also trigger the NALI provisions, as it gives the SMSF an unfair advantage.

Keep Clear Records

Good documentation can save you a few headaches:

• Prove Market Rates: Keep evidence showing how you determined the consulting fees.
• Get Independent Approval: While unrelated directors approving the fees is helpful, the SMSF trustee also needs to check that everything is arm’s length.
• Be Prepared: Have all your paperwork ready, including proof that the transaction is fair and reasonable. Share this with your auditor early to avoid delays.

Tackling Valuation Challenges

Investing in property development comes with extra hurdles, especially when it comes to meeting market value requirements under Regulation 8.02B. Since projects can often span years, valuations can be tricky.

To stay compliant:

• NAV Calculations: Make sure net asset value (NAV) calculations are accurate and based on solid methods.
• Detailed Records: Keep thorough documentation to support valuations, especially for end-of-year reporting.

Key Takeaways

Investing in a unit trust and charging consulting fees isn’t off-limits, but you need to plan accordingly. Here’s how to stay on the right side of the rules:

• Charge and document fees based on market rates.
• Check for risks of NALI and avoid giving the SMSF any excess benefit.
• Keep transactions transparent and well-documented.
• Proactively address valuation challenges for property investments.