Understanding SDA Capital Requirements for SMSF

In the realm of self-managed superannuation funds (SMSFs), the endeavour to construct Specialist Disability Accommodation (SDA) properties often raises the question: Why does it necessitate nearly half a million in capital?

The answer lies in the stringent regulatory requirements, particularly the ‘One Contract’ rule mandated by the Australian Taxation Office (ATO), coupled with the complexities inherent in SDA investments.

The SDA scheme aims to bolster the inventory of accessible housing across Australia, necessitating the construction of such properties. However, within the framework of superannuation legislation, any property investment within an SMSF must adhere to the ‘One Contract’ requirement. This safeguard is designed to avert SMSFs from delving into intricate and potentially precarious property investment structures, shielding both the fund and its members from financial risks and legal entanglements.

When an SMSF opts to finance an SDA build through borrowing, the transaction escalates in complexity due to the involvement of lenders, loan agreements, security arrangements, builders, and the limited recourse nature of borrowing. This multi-party involvement leads to additional contracts and heightens the potential for increased complexity and risk.

So, how does this impact the required funds? A typical lender may demand a deposit of 20-25% of the project cost, translating to a substantial initial investment. Moreover, engaging a ‘One Contract’ provider, who oversees the entire project, incurs a fee of approximately 10-11% of the project cost. Additional expenses such as stamp duty, certification, SDA registration, and tenancy costs further escalate the financial outlay, often pushing the total capital requirement to nearly half a million dollars, especially as SDA projects increasingly breach the seven-figure mark.

What role does a ‘One Contract’ provider play in this scenario? Essentially, they assume responsibility for building the property, with the SMSF purchasing it upon completion. This arrangement entails the payment of a deposit by the super fund, with the balance settled upon project completion, safeguarded by a put and call agreement. The provider’s fee encompasses holding costs, transaction expenses, and a margin for profit, typically around $95-100k.

Despite the stringent ‘One Contract’ requirements and the associated expenses, SDA investments within SMSFs remain an enticing prospect due to their favourable tax treatment and potential for positive cash flow. Nevertheless, comprehending the regulatory demands is paramount. For those with substantial SMSF capital, opting for a cash transaction can circumvent the need for a one contract provider, offering greater transparency and reduced risk.

Thanks for reading, Dave G Stewart.

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