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BACKGROUND
Commercial property where a business operates from. The commercial is owned by a fixed unit trust (FUTA), there are 300 units in the fixed unit trust. Three non related Discretionary Family Trusts each own 100 units in the fixed unit trust. Each Discretionary trust has a corporate trustee. A director of each corporate trustee work in the business another fixed unit trust ( FUTB).
The fixed unit trust (FUTA) has no other investments apart from cash that has been generated from rent of the commercial property. Direct link between property and the cash. We know commercial property where a lease in place is classified as business real property. That an smsf is allowed to buy Business Property from a related party. We often see a mum & dad smsf buying a commercial property from the members themselves via the concession of Business Real Property.
MY QUESTION
If one of the directors establishes an smsf with his wife and himself as members, is the smsf allowed to purchase the 100 fixed units associated that is held within their Discretionary Family Trust. Thereby meaning that the smsf will now effectively own 1/3 of the commercial property. Value to be paid for the fixed units will be established by a valuation of the property from an independent industry expert.
I believe that there is no problem on the basis that:
The underlying asset is business real property.
That you can apply a look through process as to the related party via FUTA. No different if the 1/3 of the property was held in the members individual names.
That no other material assets are owned by FUTA.
The Discretionary Family Trust will be subject to CGT on the sale of the units to the smsf.
Am I correct in my understanding that the above is an acceptable arrangement?
Any additional concerns I should be looking out for?
Hi Campbell
Thanks. The question is can a SMSF purchase units in a unit trust from a related party.
My view is it can only be done if the requirements of SIS regulation 13.22C are complied with.
As a starting point SIS section 66 states that a Fund cannot acquire assets from a related party unless the assets are:
i) listed shares, or
ii) business real property, or
iii) an asset the regulator has approved by legislation.
My view is that a look through process could not be used on the basis that the the underlying asset is BRP.
Under regulation 13.22C of SIS the units in the trust (or shares in a company) could be acquired from a related party if:
1) the trust does not lease an asset to a related party unless it is BRP, and
2) the trust does not have any borrowings, and
3) the trust assets do not include:
i) an interest in another entity, or
ii) a loan to another entity, or
iii) an asset that has a charge over it, or
iv) has an asset that was acquired from a related party (other than BRP).
That is a Fund can acquire from a related party units in a unit trust that owns property that is ungeared (if the SIS regulations are followed as noted above).
I note further guidance can be found in SMSFR 2009/1: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993:
"When will an entity hold an interest in the capacity of a beneficiary of a trust estate?
106. A trustee of a trust holds legal title of trust property, which may include real property, and deals with that property for the benefit of the trust's beneficiaries. A beneficiary of a trust can benefit from trust property in different ways depending on the terms of the trust deed that defines a beneficiary's interest in a trust estate.
107. An interest held by a beneficiary may not confer equitable proprietary rights in the trust property. For example, the terms of a trust deed may only give a beneficiary interests in the income of the trust, or in the case of a discretionary trust, a beneficiary will ordinarily only hold rights which relate to the proper administration of the trust by the trustee. The nature of these interests and rights held by beneficiaries will not give them any interests in the underlying property held by the trust estate. For the purposes of the business real property definition, these interests are treated in similar way to share held in a company.[49] The beneficiary does not hold an eligible interest in real property under the definition.
108. In contrast, if the trust deed invests a beneficiary of the trust with a proprietary interest in the entirety of the trust assets, that beneficiary will also have a proprietary interest in each of those assets.[50] In these circumstances, although a beneficiary may hold an eligible interest in real property held by the trust, the exclusion in the business real property definition of interests held as beneficiaries of a trust estate will operate.
Does a share in a company confer an interest in real property held by the company?
109. A share is personal property which represents an interest of a shareholder in the capital stock of a company.[51]
110. Accordingly, a share in a company does not confer rights to the shareholder in assets owned by the company.[52] Instead, a share confers a right to a proportion of the share capital of the company. Therefore, owning shares in a company that in turn holds an eligible interest in real property does not thereby confer that interest to the shareholder. As a result, a shareholder does not hold business real property by reason of holding the share."
Thanks
SMSF AAA