THE AUDITORS INSTITUTE | FORUM

Archived Forums

When you become a member of The Auditors Institute, you immediately gain access to expertise, advocacy for your profession and peace of mind.

Ask a question in our members-only forum or use the search function to find prior technical discussions on your topic. You can expect a response within 24-48hrs.

Want to become a Member?

Join Now

Already a Member?

Disclaimer

The forum is made available by The Auditors Institute Ltd for the benefit of it’s members only, and its primary purpose is to facilitate education, training, and discussion between members. The information and answers provided within the forum are of a general nature and do not consider any specific circumstances, objectives, financial situation or needs related to the matter/s raised. The responses should not be construed as financial advice, and each Member should seek their own professional advice before making any decisions. The Auditors Institute Ltd and its representatives are not responsible for any actions taken based on the information provided in the forum.

To test this feature, visit your live site.

Shalendra Pillay

Aug 26, 2021

in SMSF Technical Forum

I have a SMSF client who is investing 48% units in related trust.

AB Investments Pty Ltd as trustee for AB Unit Trust. Directors are A and B. This entity is buying a property and financed as follows:

AB Superfund and individual trustees are A and B 48%

A 26%

B 26%

Question is under whose name the contact needs to be done. My understanding is to be done in the name of AB Investments Pty Ltd as trustee for AB Unit Trust. Whilst doing my research I came across this:

It is an ATO requirement for the Fund to have a legal enforceable right to the assets that it owns. If the property is purchased through a tenants in common arrangement, it is important that both the names of the related party as well as the SMSF are on the contract of sale.

How's this relevant to the above scenario.

My next question is can AB Investments Pty Ltd as trustee for AB Unit Trust also borrow for investments.

Thanks

Shalendra

1 comment

Comments (1)

THE AUDITORS INSTITUTE

Aug 30, 2021

Hi Shalendra

If a Unit Trust purchases a property it must be purchased in the name of the Trustee of the Trust. In your example if the AB Unit Trust purchases a property it is purchased in the name of AB Investments Pty Ltd. The property is held as AB Investments Pty Ltd as trustee for the AB Unit Trust.

You refer to the tenants in common arrangement and this is not relevant to the Unit Trust example. A tenants in common relationship would be when a Fund and another party jointly own a property. A tenants in common arrangement is a different way of investing in property compared to doing it via a Unit Trust.

In relation to your query the Fund will not be able to invest more than 5% of its assets in the AB Unit Trust if the Trust is a related party and the Trust has borrowed to purchase property (on basis this was to be done after 11 August 1999).

A SMSF is only allowed 5% of its assets in in-house assets. An in-house asset (IHA) is defined in SIS under the Part 8 associates rules. Under those rules an entity such as a trust is an IHA if it is majority owned or controlled (refer sections 70B to 70E of SIS). A SMSF can invest in a Trust if it does not majority own or control the trust. Majority own is referred to as owing greater than 50% of the shares or units.

On the basis that the Fund owns 48% of the units and members of the Fund also own units meaning that ownership is deemed to be greater than 50% then the SMSF would not be able to invest in the Unit Trust (other than up to 5% of its assets). 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).

The IHA & Part 8 associate rules are complicated so they should be reviewed to ensure the trust is not a related party of the Fund / its members. If there is any doubt I would recommend getting legal advice to ensure that the IHA rules have been complied with.

There are IHA exceptions for ungeared unit trusts and these are for when they invest in property (refer Regulation 13.22C of SIS). A Fund is allowed to invest in a related party Unit Trust when the SIS regulations are followed.

The related party ungeared unit trust SIS requirements are as follows:

· No borrowings or loaning of money (eg unpaid distributions)

· Property is not leased to a RP (related party) unless it is BRP (Business Real Property)

· Property has not been acquired from a RP unless it is BRP

· Entity does not carry on a business

· Entity does not have an investment in another entity (eg. Shares)

Using an ungeared unit trust a SMSF and a related party (eg. a member) could each own units in an ungeared Unit Trust that owns property. This could be used when the Fund does not have sufficient money to purchase the property outright. The SMSF can acquire units in the Unit Trust from the related party in the future. Again the rules would need to be followed and any tax / stamp duty implications would need to be considered.