SMSF Property Schemes Under Scrutiny: ATO TA 2023/2, NALI Risks, LRBA Structures and 13.22 Trusts If your SMSF is involved in property, particularly through related parties, borrowed funds, or layered trust structures — the ATO is likely already looking at arrangements like yours. Taxpayer Alert TA 2023/2 made that explicit. Structures that channel property profits […]
SMSF Property Schemes Under Scrutiny: ATO TA 2023/2, NALI Risks, LRBA Structures and 13.22 Trusts
If your SMSF is involved in property, particularly through related parties, borrowed funds, or layered trust structures — the ATO is likely already looking at arrangements like yours. Taxpayer Alert TA 2023/2 made that explicit. Structures that channel property profits through related entities, use non-commercial loan terms, or attempt to fund GST through a Limited Recourse Borrowing Arrangement are now firmly in the ATO’s crosshairs. Understanding where the lines are drawn is no longer optional for trustees and their advisers.
Contents
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Overview of ATO TA 2023/2
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What is Non-Arm’s Length Income (NALI)?
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GST Funding via LRBA Loans — Why It’s a Problem
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Use of SPVs (Special Purpose Vehicles)
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13.22 Trust Structures and Related Party Dealings
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Practical Example of a High-Risk Structure
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ATO Red Flags and Audit Triggers
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Risk Mitigation Strategies
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FAQs
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General Advice Warning
Overview of ATO TA 2023/2
ATO Taxpayer Alert TA 2023/2 targets a specific class of arrangements where the tax outcome an SMSF achieves bears no resemblance to what independent parties dealing at arm’s length would achieve. The ATO’s concern is not with property investment per se,it is with structures that use complexity to manufacture a tax advantage.
The alert specifically focuses on SMSFs that:
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Enter into property developments or acquisitions via related entities
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Use non-commercial loan terms
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Channel profits through interposed entities such as trusts or companies
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Attempt to minimise tax through artificial structuring
The ATO’s position is unambiguous: if a structure delivers a tax benefit inconsistent with genuine arm’s length dealings, the ATO will challenge it. That challenge can include NALI assessments, Part IVA anti-avoidance determinations, and contraventions that the fund’s auditor reports to the ATO.
What is Non-Arm’s Length Income (NALI)?
Non-arm’s length income arises when an SMSF derives income under terms that differ materially from what two independent, unrelated parties would have agreed to. In practical terms, this means any arrangement where the SMSF receives an inflated benefit,or incurs an artificially low cost,because of its relationship to the other party.
The tax consequence is severe. The ATO taxes income that qualifies as NALI at the top marginal rate, regardless of the fund’s otherwise concessional tax position.
The following table summarises how income classification changes the tax outcome:
Common triggers that can cause the ATO to reclassify income as NALI include:
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A discounted purchase price from a related party
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Below-market interest rates on a related party loan
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Free or subsidised services provided by a related party
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Related party influence over how income is generated or allocated
Each of these, individually or in combination, can draw the ATO’s attention and expose the entire income stream to the 45% rate.
GST Funding via LRBA Loans — Why It’s a Problem
One of the specific concerns raised in TA 2023/2 is the practice of funding GST costs through the same Limited Recourse Borrowing Arrangement used to acquire a property. This may seem administratively convenient, but it creates a material compliance risk.
The typical structure looks like this:
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The SMSF borrows via an LRBA to acquire a property
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The loan amount includes the GST component of the acquisition
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A related party funds the entire amount, including the GST
This approach is problematic because LRBA rules under the Superannuation Industry (Supervision) Act restrict borrowing to the acquisition of a single acquirable asset. GST is a transaction cost,it is not part of the asset itself. Consequently, bundling GST into the borrowing arrangement stretches the LRBA beyond its permitted scope and may breach the SIS rules entirely.
The following table sets out what is and is not permitted under an LRBA:
Where GST needs to be funded, trustees should source it separately, from the fund’s existing cash reserves or another compliant funding source outside the LRBA structure.
Use of SPVs (Special Purpose Vehicles)
Advisers sometimes insert Special Purpose Vehicles into property structures for legitimate reasons: isolating risk, facilitating joint ventures, or separating development activity from the SMSF’s core investments. The problem arises when related parties control those SPVs and use them in ways that erode the arm’s length nature of the SMSF’s dealings.
Specifically, an SPV creates NALI exposure and potential Part IVA anti-avoidance issues when it is:
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Controlled by a related party of the SMSF
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Used to divert income that would otherwise flow directly to the fund
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Structured with non-commercial terms that benefit the related party at the fund’s expense
The ATO is not simply looking at each entity in isolation, it is looking at the overall economic effect of the structure. Furthermore, if the net result is that a related party benefits from the SMSF’s investment on non-commercial terms, the arrangement is at risk regardless of how many layers sit between the fund and the ultimate outcome.
13.22 Trust Structures and Related Party Dealings
A trust that meets the conditions in regulation 13.22C of the SIS Regulations can allow an SMSF to invest in a related unit trust without treating that investment as an in-house asset. This is a valuable exception, but it is also a strictly conditional one. Any deviation from the prescribed requirements collapses the exemption entirely.
The core conditions that must be satisfied are:
Common Breach Points
Trustees frequently underestimate how easy it is to breach these conditions. The most common points of failure are:
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The trust borrows funds, even temporarily or informally
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The SMSF injects capital into the trust on non-commercial terms
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The trust undertakes development activity rather than passive asset holding
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Profits are distributed in a manner that disproportionately benefits related parties
Consequences of Losing 13.22C Status
Once any of these conditions is breached, the trust loses its 13.22C status and becomes an in-house asset. That reclassification triggers the 5% in-house asset limit, potentially requiring forced disposal of the asset and exposing the fund to compliance penalties. In short, a single breach can undo the entire structure’s exempt standing.
Practical Example of a High-Risk Structure
It helps to see how these individual risk factors combine in practice. The following scenario illustrates the kind of arrangement the ATO is specifically targeting under TA 2023/2.
The scenario:
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An SMSF establishes a unit trust intended to qualify under regulation 13.22C
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A related party SPV is appointed to manage a property development through the trust
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An LRBA loan is used to fund both the land acquisition and the GST component
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Development profits flow through the SPV before being distributed
Risk assessment:
No single element of this structure is necessarily fatal on its own, but in combination they create a position that is very difficult to defend. The likely outcomes include the ATO assessing income at 45% under the NALI provisions, unwinding or penalising the structure, and the fund’s approved auditor reporting contraventions to the ATO.
ATO Red Flags and Audit Triggers
The ATO is actively reviewing SMSF arrangements in this space, and it has become increasingly sophisticated in identifying structures that warrant closer examination. Trustees should be aware that the following consistently draw scrutiny:
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Property development activities conducted within or through an SMSF structure
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Related party loans that fall outside the ATO’s safe harbour terms
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Complex multi-entity structures involving trusts, companies, and SPVs
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Unusual profit allocations that do not reflect economic contributions
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Documentation that does not accurately reflect the commercial reality of the arrangement
A useful practical test: if your adviser needs to spend significant time explaining why the structure is compliant, that complexity is itself a red flag. The ATO applies substance-over-form analysis, and arrangements that exist primarily for their tax effect, rather than genuine commercial purpose,are the ones the ATO is most likely to challenge.
Risk Mitigation Strategies
Simplify the Structure and Use Safe Harbour Terms
Keep the structure as direct as possible. Direct property ownership by the SMSF, without interposed entities, eliminates most of the risk associated with TA 2023/2. In other words, layered structures should only be considered where there is a genuine non-tax reason and where a specialist adviser has thoroughly assessed the compliance implications.
Use safe harbour loan terms. Where a related party LRBA is used, the interest rate, loan-to-value ratio, and repayment schedule must reflect what a commercial lender would require. The ATO has published safe harbour benchmarks for this purpose. Therefore, departing from those benchmarks without strong justification is high risk.
Avoid Development Activities and Separate GST Funding
Avoid development activities. The superannuation system exists for the accumulation of passive investment returns,not active business or development activity. Specifically, SMSFs that engage in development, even indirectly through a related entity, risk triggering NALI, breaching the sole purpose test, and attracting auditor contraventions.
Fund GST separately. GST costs associated with a property acquisition should come from the fund’s own cash reserves or another compliant source that sits outside the LRBA. As noted earlier, bundling GST into the borrowing arrangement is not consistent with the LRBA rules.
Review trust structures carefully. If the fund holds units in a 13.22C trust, trustees should verify the trust’s compliance with all relevant conditions at least annually. Moreover, trustees should not assume that a structure compliant at establishment has remained compliant as circumstances change.
FAQs
Can my SMSF invest in property development?
Generally no. Property development involves active business activity, which sits outside the passive investment model that underpins the SIS compliance framework. Development activity can trigger breaches of the sole purpose test, NALI assessments, and in-house asset issues depending on how the structure is arranged. There are narrow circumstances where development-adjacent activities may be acceptable, but these require careful specialist advice before proceeding.
Can I lend money to my SMSF?
Yes, but only under strictly commercial terms that reflect what an arm’s length lender would require. This means documented loan agreements, market-rate interest, and repayment schedules that trustees actually follow. Non-compliant loans — whether in their terms or in practice — can trigger NALI on any income associated with the borrowed funds, and may also breach the SIS rules on related party dealings.
Can GST be borrowed under an LRBA?
No. The ATO’s position is that GST is a transaction cost and not part of the acquirable asset being financed. Including GST in the LRBA borrowing takes the arrangement outside the permitted scope of the LRBA rules under the SIS Act. Consequently, trustees should plan to fund GST from existing cash reserves or other compliant sources before settlement.
Are unit trusts structured under regulation 13.22C still viable?
Yes — provided the trust rigorously maintains compliance with all 13.22C conditions on an ongoing basis. The exemption is not a set-and-forget arrangement. Any borrowing by the trust, any charge over its assets, or any non-commercial dealing with related parties will cause the trust to lose its exempt status and reclassify it as an in-house asset. In practice, regular compliance reviews are essential.
What happens if I breach NALI rules?
The ATO will assess income from the arrangement at 45%, effectively eliminating the concessional tax treatment that makes the SMSF structure worthwhile in the first place. In serious cases, the consequences extend beyond a tax assessment: the fund’s auditor is obliged to report contraventions to the ATO, which can trigger an ATO audit, administrative penalties, and in egregious cases, disqualification of the trustee.
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General Advice Warning
The information contained in this article is general in nature and has been prepared without taking into account your personal objectives, financial situation, or needs. It does not constitute financial product advice, legal advice, or tax advice. Before acting on any information in this article, you should consider whether it is appropriate for your circumstances and seek independent advice from a qualified SMSF specialist, registered tax agent, or legal adviser. SMSF compliance is a complex area subject to change; the application of these rules will vary depending on your specific facts and arrangements.
