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SMSF - Property investments using related unit trust

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.

This article is not a substitute for independent professional advice. We do not warrant the accuracy, completeness or adequacy of the information or material in this article. All information is subject to change without notice. We and each party providing material displayed in this article disclaim liability to all persons or organisations in relation to any action(s) taken on the basis of currency or accuracy of the information or material, or any loss or damage suffered in connection with that information or material. You should make your own enquiries before entering into any transaction on the basis of the information or material in this article. Please ensure you contact us to discuss your particular circumstances and how the information provided applies to your situation.

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