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Antony Joseph

Apr 11, 2022

in SMSF Technical Forum

A unit trust acquired a residential property in QLD and all the units of the unit trust are held by a SMSF with 6 members . SMSF acquired units of the Unit trust with cash of SMSF and there are no loans involved and was happened three months ago. The residential property has a development potential. (SMSF purchased the units originally because at the time, the bank was not able to fund the purchase)

Now the SMSF wants to sell the units of the Unit trust at market value to a family trust where the directors of the trustee company of the family trust are two members of the SMSF. Family trust will seek loans from banks to settle this property. Family trust can pay the SMSF the bank rates interest if needs to be for holding the units for three months.

Am I correct in my understanding that selling of units from SMSF to family trust are an acceptable transfer? Any additional concerns I should be looking out for? .

Thanks in advance

1 answer0 replies

Comments (1)

THE AUDITORS INSTITUTE

Apr 11, 2022

Hi Antony

As a starting point section 66 of SIS does prohibit the acquisition of assets from related parties (other than certain exceptions) but does not prohibit the sale / disposal of assets to related parties.

That is the units in the trust could be sold to a related party if it was done at market value (as per section 109 of SIS).

As auditor you should be reviewing that what is being proposed does not cause a breach of the ungeared unit trust rules and hence a breach of the in-house asset rules. My concern is in relation to the Trust's assets possibly being needed to be used as security to effect the sale or a loan being made by the Fund or Trust to a related party to effect the sale.

I assume the unit trust that you are referring to is a SIS regulation 13.22C investment. The SMSF would not be able to invest in the trust under the regulations if the trust has (amongst other requirements):

1) a loan to another entity, & or

2) an asset that has a charge over it.

Care needs to be taken that as part of the transfer of the units that the SIS regulation 13.22C or the in-house asset rules are not breached. Again the transfer would also need to be done on an arm's length / commercial basis (section 109 of SIS). If there is any doubt re SIS compliance legal advice should be obtained re the transfer.

Thanks

SMSF AAA