Thinking About A Joint Venture Involving Your SMSF?

What is a Joint Venture?

A joint venture (JV) usually refers to two or more entities carrying on an activity in association. In most joint ventures, each joint venturer brings their own skills, assets and finances to the table to achieve a common goal, splitting the output of the project based on their interest once the project wraps up. It’s the splitting of output rather than profit that distinguishes a joint venture from a partnership.

Joint ventures can take various forms. Some joint ventures involve the parties being bound by the contractual agreements put in place to achieve their stated goals, known as a joint venture agreement. Others are more structured. This can include when the parties incorporate a separate legal entity, such as a new company, to undertake the joint project as a nominee for the joint venturers. More on the different types of joint ventures later.

In Australia, there’s no one form that a joint venture must take to be identified as such, but they typically feature:

• A coming together of parties to realise a one-time commercial project
• joint venture participants contributing and managing their own finances
• A sharing of output rather than profits
• A statement in the constituent documents that the arrangement is not intended to be a partnership
• Each party remaining a separate legal entity
• The incorporation of a nominee company or legal entity to manage the activities of the joint venture

What are the Advantages of a Joint Venture?

Plenty of people would know the feeling of having a brilliant idea but not quite having the capacity or the capability to spin it into gold. When opportunities come knocking, there are compelling reasons to consider a joint venture to commercialise an idea or fill a gap in the market.

Here are some benefits and advantages of joint ventures:

• Share resources with the joint venture partners to do something you can’t do on your own
• They’re a temporary association between parties who can part ways upon project completion.
• Unlike partnerships, joint venturers are usually only liable for their owns debts and not expenses of the joint venture

What are the Disadvantages of a Joint Venture?

Limitations and disadvantages of joint ventures include:

• Navigating different commercial drivers and risk appetites of the parties
• Limited control over other joint venturers making poor commercial or economic decisions
• Wavering commitment to the project by other joint venturers
• Unclear joint venture objectives and expectations
• Differing levels of expertise and investment from joint venturers

Joint Ventures Vs Partnerships. Know The Difference.

All partnerships are joint ventures, but not all joint ventures are partnerships. Confused? Keep reading.

If you’re trying to decide if a joint venture or a partnership is the right structure for kicking off a commercial project with other parties, ask yourself if it’s a one-off undertaking or if the arrangement will be ongoing.

If it’s a one-off, an joint venture could be the way to go, as a standard joint venture agreement will contractually oblige each party to carry out their required duties. If you’re intending to have an ongoing business relationship with the other party then explore a formal partnership, company or trust.

Either way, we recommend you seek professional legal and accounting advice and speak to one of our commercial lawyers in Melbourne.

SMSFs and Joint Ventures

An SMSF may look to form a joint venture when i nvesting in a property development project . A common way that an SMSF achieves this is by entering an arrangement with an unrelated third party.

The following considerations are critical to ensure that the SMSF continues to stay on the right side of the superannuation rules.

Joint Venture Documentation

Sometimes there’s a misconception that the arrangement someone is participating in is a joint venture because it’s supported by documentation. Many taxpayers think they’re conducting their activities as a joint venture when in fact they’re partners in a general law partnership.

Parties must determine – based on their intentions, the terms of the agreement and the particular arrangement – whether their arrangement is a joint venture or a partnership.

Sole Purpose Test

There is nothing in the superannuation rules that prohibits an SMSF from carrying on a business.

However, a fund is required to be maintained for the sole purpose of providing benefits to its members on their retirement, or to their dependents if a member dies before retirement.

The trustee of an SMSF must be able to demonstrate (by way of objective evidence) that the acquisition of the property would meet at least one of the core purposes of provision of retirement benefits to members.

In-house Assets

Care must also be taken to make sure the arrangement is not a partnership. A partnership interest will be an in-house asset for the SMSF. Where in-house assets exceed 5% of the market value of the SMSFs assets, then the SMSF will need to take corrective action to reduce this below 5%.

Joint Venture’s With Related Parties

SMSFs are generally prohibited from acquiring assets from a related party.

A related party includes a close family member, a partner in a partnership, and a company or trust that is controlled or significantly influenced by an SMSF member and his or her associates.

It is common for a joint venture to involve an SMSF (who owns property) and a related party builder (who has the skills and experience to undertake development of the property).

Extreme care must be taken in these circumstances as the trustees of an SMSF will contravene the prohibition on acquiring assets from related parties if goods or materials used in the property development are provided to the SMSF by the related party builder.

To ensure that the superannuation rules are adhered to, the following steps should be taken:

• The related party builder is engaged to provide services only and not any building materials.
• The SMSF should acquire the building materials directly from an unrelated supplier.

This is typically achieved under an agency arrangement with the related party builder.

Seek Legal Advice When Entering an SMSF Joint Venture

Whether it’s under a joint venture agreement, using a nominee company, a unit trust, a partnership or an SMSF otherwise investing directly in a property development, the SMSF trustee must exercise caution.

Joint ventures can also be super rewarding and allow your SMSF to do things that are otherwise impossible. But before you get involved in a joint venture with your SMSF, speak to one of our commercial lawyers for expert advice.