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Roslyn Arthur

Mar 19, 2021

TRUST INVESTMENT WITH UNRELATED PARTIES.

in SMSF Technical Forum

TRUST INVESTMENT WITH UNRELATED PARTIES

As we know, Bank Interest is extremely low at present and usually a fully franked dividend may get 4%. I have a client who wants to set up a Unit Trust and use the superfund to hold units in that trust and through that lend to totally unrelated clients and charge approximately 10-15% interest. There may be another unrelated party also to invest in the trust. Would this be a legal investment for the SMSF please?

2 answers0 replies

Comments (2)

Campbell McCart

Mar 25, 2021

I agree with the control test of greater than 50% of the unit trust then it becomes a related party. My further concern would be the security the Unit Trust would be getting from the borrower. I would fall back to the sole purpose test. Drawing a long bow, I consider there would be a breach if no real or reliable was security was provided so as to protect the members interest at the end of the day. I have seen in the past similar products (solicitors mortgage ) fail. High returns = high risk.

THE AUDITORS INSTITUTE

Mar 19, 2021

Hi Roslyn

A SMSF can lend money to an unrelated party. The investment / loan needs to be made on an arm's length basis (section 109 of SIS) & must be in accordance with the Fund's investment strategy.

If the Fund was to invest in a unit trust & the unit trust was to be the lender you would need to make sure the in-house asset (IHA) rules are not breached. As an example if the Fund owned or controlled more than 50% of the units the unit trust would be a related party & the Fund would only be able to invest up to 5% of its assets in the trust (under the IHA rules - refer section 71 of SIS). There are IHA exceptions for ungeared unit trusts but these are for when they invest in property (refer Reg 13.22C of SIS).

Thanks

SMSF AAA