A unit trust (‘the unit trust’) is established for the purpose of acquiring a property (or alternatively an existing unit trust is to be used), which is a ‘related unit trust’.
The fund members subscribe for units in the unit trust, possibly borrowing money from a commercial lender to fund the subscription, and the SMSF also subscribes for units.
The trustee of the unit trust purchases an asset (‘the asset’), such as a property which is rented out.
The arrangement has one or more of the following characteristics:
- The asset acquired by the unit trust is used as a security for the money borrowed by the members to subscribe units in the unit trust;
- The assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property; and/or
- The assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not a business real property.
The ATO considers that arrangements of this type give rise to the following issues, being whether:
- The investment arrangements may also be in breach of the sole purpose test;
- The SMSF’s investment in the unit trust fails to meet the requirements of Regulation 13.22C of the SIS Regulations (which provides an exclusion from the in-house asset rules for ‘non-geared unit trusts’); and
- The SMSF’s investment in the unit trust is an in-house asset under S.71 of the SIS Act, therefore counting towards the 5% limit under S.83
As a result of non-compliance with the SIS Act, the SMSF may become a non-complying superannuation fund for tax purposes and, if the unit trust needs to dispose of the relevant property, the unit trust may incur a CGT liability, or the members and the SMSF may be required to include a capital gain in their assessable income if they need to redeem their units in the unit trust.