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Dawood Hassan

May 01, 2024

Residential properties held in a Unit Trust with two relates Unit holders.

in SMSF Technical Forum

Hi there,

I hope you're doing well.

I have a question about a potential situation. In this scenario, a residential investment property is held under a Unit Trust, with both members of the SMSF owning 50%, and the remaining 50% units owned by the SMSF itself. At the end of the year, 50% of the profit is allocated to the SMSF. However, there is no cash left in the Unit Trust's bank account to be transferred to the SMSF because the individual unit holders are withdrawing all the cash. Consequently, the value of the SMSF's share in the Unit Trust is increasing while the share of the individual members is gradually decreasing. It appears to me that the SMSF is effectively buying the shares of the related individual unit holders. Could this be considered a breach of Section 66?

Additionally, is there a requirement to transfer the share of profit to the SMSF each year?

2 comments

Comments (2)

Dawood Hassan

May 05, 2024

Thanks for the reply.

THE AUDITORS INSTITUTE

May 03, 2024

Hi Dawood

I assume the Fund has invested in an ungeared unit trust as per SIS Regulations 13.22C & D.

A SMSF can acquire units in an ungeared unit trust (that meet the rules) from a related party without breaching section 66 of SIS.

Yes an unpaid trust distribution not paid within 12 months of the relevant year may be considered to be in effect a loan. If there is a loan in the Unit Trust then the rules re SIS Regulations 13.22C & D may be breached. If breached then the investment would be an in-house asset.

Most of the articles / commentary in this space is in relation to when a SMSF invests in a related party unit trust.

The ruling SMSFR 2009/3 - Self Managed Superannuation Funds Ruling - Self Managed Superannuation Funds: application of the Superannuation Industry (Supervision) Act 1993 to unpaid trust distributions payable to a Self Managed Superannuation Fund states:

"1. This Ruling considers whether a Self Managed Superannuation Fund (SMSF) contravenes certain provisions of the Superannuation Industry (Supervision) Act 1993 (SISA)1 when the SMSF is presently entitled to distributions from a related trust which are not paid to the SMSF."

That is the ruling is relating to a SMSF investing in a "related trust".

The ruling states:

"7. In addition, it is the Commissioner’s view that, when an overall consideration of the factors surrounding the non-payment of the trust distribution is seen as an arrangement for the provision of credit or financial accommodation, it will satisfy the extended definition of ‘loan’ in subsection 10(1). "

Section 109 requires arm's length transactions so whether the investment is with a related party unit trust or unrelated unit trust the investment must be made on an arm's length basis. As per the ruling:

"27. The Commissioner’s view is that arm’s length beneficiaries would not generally allow substantial amounts of distribution entitlements to remain in the trust without receiving an appropriate return on this amount, for example a market rate of interest."

Another issue trustees have to consider is whether trust distributions owing to a SMSF (that are not paid on a yearly basis) become NALI (non arm's length income) and the resulting provisions may then apply.

Thanks

The Auditors Institute