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Hi,
I have a situation where there is a unit trust with an SMSF and a Family Trust ownign 50% each, unrelated and not asking about control tests here. They rent the commerical property the unit trust owns to a related business the SMSF owns 40% and the Family Trust owns 60%. Teh unit trust is geared with a loan to a bank. From an audit perspective as it is quite closely held as a unit trust I am suggesting I need to see:
Rental appraisal as to how the rental rate was determined.
A formal lease agreement.
Copies of the deed, unit certificates and unit register.
Bank statements of the unit trust.
Rent should be paid in accordance with the lease which is monthly in advance.
I will run a title search.
Contract of purchase on the property.
I also note they intend to not pay distributions out to pay down the loan so in my view any distributions not paid within 12 months then need to be treated as loans fro the SMSF and Family Trust and interest applied at market rates?
Would you agree this is how I need to audit this unit trust even though it is technically not related?
Am I missing anything in the above?
Thanks for the question, CV.
The geared unit trust where the SMSF owns 50% of the units and an unrelated discretionary trust owes the other 50% of the units, is assumed not to be an investment in a related party unit trust (in which case the requirements of SIS Regulations 13.22C and 13.22D and section 71(1)(j) of the SIS Act do not need to be satisfied (such as be prohibition against borrowing)).
I agree with the approach you have described in your question, which amongst other things, is essentially designed to test that the rental income (and therefore the distribution from the unit trust), has been arrived at on an arm's length basis.
In relation to your suggestion at Item 8 of the question, I note that SMSFR 2009/3 (about unpaid trust distributions to a SMSF) makes the following comments at paragraphs 25 - 27:
On the basis that the investment in the unit trust in this scenario (an unpaid trust distribution of 12-months standing or greater) is not an investment in a related party unit trust, there are no in-house asset issues if an unpaid present entitlement is considered to be a "loan" from the SMSF unit holder back to the unit trust.
However, any such loan is still an investment made by the SMSF that needs to be made on an arm's length basis - hence the reference in the question to charging a market interest rate on the "loan".
I assume that your reference to "They rent the commerical property the unit trust owns to a related business the SMSF owns 40% and the Family Trust owns 60%" was a reference to a related party of the SMSF owning 40% of the business (perhaps a company or a unit trust) that leases the property from the unit trust that is 50% owned the SMSF.
It is not necessarily inappropriate for an SMSF to own an interest in a business with another entity (although it is certainly not common) - however there would be additional SIS Act considerations that would need to be examined if this was the case.