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Dear Sir/Madam,
I also have read Reg. 13.22 B, C & D and also asked something before but still not sure, please help me which one as below is still not comply Reg. 13.22 C & D that make SMSF breach In-house asset rules
A SMSF invested in a fix Unit Trust. Two members of SMSF are also the same two individual trustees of Unit Trust (Husband & Wife). SMSF holding 30% units and the wife holding 70% units in Unit Trust. A review Unit Trust that has issues as below
1/ In 2018 the husband bought a commercial property from a person and only husband is owner this property. On Transferee Statement of State Revenue Office, I see they have tick YES for question “Are you acting on behalf of a trust? The source money for buy this property is also not involve to Unit Trust. This property is not added in 2018 Financial Report of Unit Trust.
They add this property in 2021 Balance Sheet of Unit Trust with the cost the same as on Settlement Statement in 2018.
Please guide me what documents the auditor really need ask to evidence for legal transfer property into Unit trust in 2021 FY? Is the husband registered with State Revenue Office in 2018 that enough legal for this unit trust bought property or the trustees whether need prepare another legal transfer document for Unit Trust?
2/ The husband legal owner this property but he does not hold any unit. Total issue more value of units is equal total cost of new property. Trustees of Unit Trust just sign Certificate of Units to issue more units for the wife without have any transaction payment from the wife or prepare docs in Unit Trust.
Is this also ok for the way to issue more unit in Unit Trust? If not, please guide me what need ask for audit?
3/ A transaction recorded in SMSF:
Debit for increase Unit Trust Investment code Eg 10,000 units Trust (= $10,000) and
Credit Personal Contribution deducted code $10,000 in SMSF report (no need claim)
and only send auditor signed Certificate of Units to issue more units for SMSF.
The SMSF did not payment $10,000 into Unit Trust account but Unit trust issue units that look like issue to the wife.
Is this Certificate of Units legal valid? Please guide me whether any issue audit for record transaction as above?
4/ Please guide me whether any issue audit if this commercial property of unit trust renting out to the company. The director of company is related with members of SMSF such as their children /brother / sister etc. Eg they renting for doing restaurant
Is this also satisfied for business real property or not?
5/ For get market value of properties in Unit Trust to calculate market value of each unit as at 30th June for SMSF, they based on value of Council rates that away over 6 months from 30th June year report and these values of council are much lower than value of the cost of properties (about 50-60% of cost price).
Is this also ok for audit to accept market value from council rates?
Many thanks
Thanks for the question. Apologies for not having responded to it sooner.
In relation to matter 1/ - from the facts as presented in the question it seems unclear as to whether Husband was the legal and beneficial owner of the property when he it was acquired in 2018, and then Husband sold the beneficial ownership to the trustee of the Unit Trust in 2021 OR
Did the Unit Trust buy the property in 2018 - where Husband had the legal title but was holding the asset on behalf of the trustee of the Unit Trust?
If Husband (also a member of the SMSF and a trustee of Unit Trust, along with wife) acquired the legal title in the property on behalf of the Unit Trust, there should be a declaration of trust, confirming that Husband holds the legal title for benefit of the trustee of the Unit Trust. This would be an item of audit evidence that the fund auditor could request be provided.
Ensuring the facts are correctly established will be then allow for a consideration as to what the SIS Act and SMSF audit issues are in relation to this matter.
Although the purchase in 2018 reflected Husband as the legal owner, it would be helpful to follow the source of the funds which was used to make this purchase.
Some matters to consider would be when did the SMSF subscribe for units in the Unit Trust and how were the subscribed funds reflected in both the SMSF’s accounts and the Unit Trust’s accounts.
Also consider how the SMSF funded its subscription of units in the Unit Trust? Did the members of the SMSF make non-concessional contributions to the SMSF so that the SMSF could subscribe for its units in the Unit Trust? Did the members trigger their three-year bring forward in relation to non-concessional contributions?
If the correct understanding of the facts was that Husband was the beneficial owner of the real estate when it was acquired in 2018 and then it was disposed of the Unit Trust in 2021, then the Unit Trust should hold a land sale contract for this transaction. Stamp duty would also presumably have been paid (or is required to be paid). The Trust should have paid market value at the time of the sale in 2021 – which cannot be assumed to be the market value in 2018.
If this was the case, it would be expected that there was a movement of cash from the Unit Trust to Husband in 2021 to reflect the settlement of this purchase.
Again, there are a lot of assumptions at play here.
The members of the fund in their capacity as trustees of the SMSF/directors of the corporate trustee of the SMSF, need to clearly explain the true state of the facts in this scenario. The lawyer for the Husband who advised on the 2018 real estate purchase may also be able to clarify as to what has really taken place.
In relation to matter 2/ whilst Wife may not have personally paid cash to receive units, assuming Husband paid cash on Wife’s behalf, then issuing Wife units that reflect the cash paid on her behalf by Husband should be an acceptable practice. Where this is what has occurred, as auditor you would expect the fund members to provide some type of documentation confirming that the units issued to Wife were based on consideration that was provided by Husband.
Ultimately, what we are seeking to test, is that the units issued to the SMSF represent cash subscribed by the SMSF for units (or payments by fund member(s) to Unit Trust directly on behalf of SMSF – discussed below in matter 3) and that none of the units issued to Wife represent an application of the resources of the SMSF.
In relation to matter 3/ if there are journal entries indicating that the wife made a non-concessional contribution into the SMSF of $10,000 by directly paying for units in the Unit Trust – then if this is what was meant to have happened, the units should be reflected as being held by the trustee of the SMSF, not by the Wife (it seems Wife was issued the Certificate of Units). Or if they are held by the Wife, there should be a declaration of trust over these units confirming that Wife holds them on behalf of the trustee of the SMSF.
Again, the facts are a little uncertain with this matter. Questions need to be asked to the fund members as to what truly occurred in relation these units.
In relation to matter 4/ to remain as an asset that is excluded from being an in-house asset under Regulations 13.22C and 13.22D (and Section 71(1)(j) of the SIS Act), where a related party unit trust owns real estate that is leased to a related party tenant, the real estate needs to be “business real property”. If the real estate is used as the premises from which the business of running a restaurant is conducted from, assuming this is the only activity for which the leased real estate is used for, it would seem the business real property requirement has been satisfied.
In relation to matter 5/ often council rates are applied on what is referred to as the Site Value, which is the market value of the land only – ignoring any buildings on the land.
Furthermore, council rates (whether based on Site Value or Capital Improved Value) can be based on a valuation that is several years old.
With this in mind, it would be suggested that a more appropriate type of evidence would be a real estate agent’s appraisal or an independent valuation.