In a case involving a joint venture agreement for a housing development, a former builder has been ordered to pay damages to an SMSF. The District Court of South Australia cited breach of fiduciary duties as basis of its decision.
The case of Polley & Anor v Zollo & Ors [2019] SADC 76 involves Neil Polley, a dyslexic who suffered from paraplegia caused by injuries sustained in a motor vehicle accident. Mr Polley is the sole director and shareholder of the Neil Polley Superannuation Fund and the corporate trustee of the fund. He sought orders against Alex Zollo, who was formerly a licensed builder.
In August 2014, Mr Polley and Mr Zollo agreed to form a joint venture to develop housing and accommodation suitable for persons with a disability. Mr Polley thought the SMSF would provide the funds and Mr Zollo his building and development expertise. Mr Zollo did not inform Mr Polley that his building licence had been cancelled in 1997 and that he became bankrupt. In 2012, Mr Zollo had given an undertaking to the court that he would not be involved as a director in any company that was a licenced building contractor.
In December 2014, Mr Polley and Mr Zollo incorporated SA Disability Housing Pty Ltd (SADH) as the legal entity for their joint venture agreement. They were both shareholders of that company and Mr Polley was the only director.
It was a term of the joint venture agreement that once property was developed and sold, the first charge upon the proceeds of sale was the repayment of the capital provided by Mr Polley’s SMSF.
On 22 December 2014, SADH then purchased property at 22 Whysall Road Greenacres for $345,000. The whole of the purchase price was provided by Mr Polley’s SMSF. The improvements on the Whysall Road were all at the cost of Mr Polley. Mr Zollo made no financial contribution to the purchase price.
In early February 2015, Mr Zollo located property at 72-74 Muller Road Greenacres and advised Mr Polley that it should be purchased by the joint venture. The purchase of that property was settled on 22 May 2015, and Mr Polley, through the second plaintiff as the trustee of his SMSF, paid the whole of the purchase price and stamp duty costs for such purchase.
Mr Zollo suggested that to maximise the benefits, the Muller Road land should be held in the names of the trustees of their SMSFs, that a portion of the land should be transferred in specie to his own SMSF and that, by doing so, Mr Zollo’s entitlements to 50% of the balance of profit after expenses in respect of that land would be satisfied.
Mr Polley transferred 24/100th parts of the land. However, Mr Polley thought that the Muller Road land was to be developed in accordance with the parties’ joint venture agreement. Mr Zollo also suggested another property that Mr Polley purchased. Mr Polley thought that the sum of $130,000 was a part payment for the purchase of the Hillcrest land, whereas it was a payment directly to Mr Zollo of a fee for the assignment of the contracts to purchase the Hillcrest land.
Judge Paul Slattery ordered Mr Zollo to pay the corporate trustee of the SMSF the sum of $130,000 and make a declaration that he procured the transfer of the 24/100th interest in the Muller Road land on the basis of misleading conduct or breaches of fiduciary duty.
He also made an order declaring that the agreement for the transfer of 24/100th of the Muller Road land was void.
Judge Slattery also ordered damages to be paid in favour of Mr Polley, for breach of fiduciary duties to be assessed or agreed.
Whilst the case is a great outcome for Mr Polley, there is no comment from the ATO regarding their opinion on transfer of the $130,000 and portion of land from the SMSF to Mr Zollo’s SMSF. But it does show that judges have an increased understanding of SMSFs and the joint venture itself was valid.
This case is a reminder of knowing the salient points related to property development in an SMSF. Learn more about the details of the case and other information about running a business in SMSF from Effective PD’s webinar. To subscribe, visit www.effectivepd.com.au. Effective PD offers an innovative way for busy accountants to be on top of their game with continuing professional development in a brief, flexible and easy way.
