Many Self-Managed Superannuation Funds (SMSF) may wish to acquire real property but find that they do not have the cash to acquire it and are either unable or unwilling to finance the purchase through a Limited Recourse Borrowing Arrangement (LRBA). In cases like this, the superannuation legislation allows for funds to acquire properties through the use of fixed unit trusts.
A fixed unit trust structure allows investors to combine their resources to acquire an investment. Under a fixed unit trust structure, the property is purchased by the unit trust and it is the unit trust that receives rental income and pays any rental expenses in relation to the property. The unit trust then distributes the net income to each of the unitholders in accordance with the unit holdings.
There are several types of trust structures to acquire property through that SMSF trustees may wish to consider:
Related fixed unit trust
The most basic form of a fixed unit trust is a related fixed unit trust which is where a SMSF member, a standard employer-sponsor or their associates hold more than 50 percent equity in the unit trust, exercise significant influence in relation to the trust or can remove or appoint the trustee.
A “related party” is broadly defined by Part 8 of the SIS Act and includes an SMSF member, a standard employer-sponsor of the SMSF, the member’s relatives, a partner in a partnership (including a property partnership) and a company or trust that is controlled or significantly influenced by an SMSF member and their associates.
A key area of concern in relation to the related fixed unit trust are the “In-House Asset” (IHA) rules laid out in the Superannuation Industry (Supervision) Act 1993 (SIS). These rules restrict a SMSF to investing no more than 5% of the market value of the fund’s assets in in-house assets, which severely compromise a fund’s ability to acquire real property in this structure.
However, Section 13.22C of the SIS Act provides an exception to the IHA rules. The fixed unit trust will be considered to be a Section 13.22C fixed unit trust if the rules outlined in Section 13.22C of the SIS Act are followed, the main elements of which include the following:
- The fixed unit trust cannot borrow money. This is a critical requirement for a fixed unit trust to be considered as a Section 13.22C unit trust.
- The fixed unit trust cannot loan money to any entity (including unpaid distributions).
- The property cannot be acquired from a related party unless it is business real property.
- The property cannot be leased to a related party unless it is business real property.
Unrelated fixed unit trusts
Unrelated fixed unit trusts allow two or more unrelated parties to combine their resources to acquire real property. The key to this type of fixed unit trust structure is that neither party is considered to “control” the fixed unit trust. The fund will be only be considered to have control when the fund or its related parties hold more than 50% of the equity in the unit trust and right to the income and capital of the fixed unit trust. Where the SMSF is considered to have control, the units in the unit trust will be considered a related trust and so will be caught under the in-house asset rules with an investment limit of 5% total assets as described above.
It may be possible to structure a fixed unit trust that involves two or more unrelated parties (where each party is not caught by the Part 8 rules) so that each party holds exactly 50% of the units. The ATO has confirmed that a 50/50 percentage unitholding arrangement would not, by itself, give rise to a related trust relationship. Where there are only 2 unit holders, and the ownership is 50/50, it is important the constitution of the corporate trustee and fixed unit trust deed do not include a casting vote clause as this could inadvertently make one party have control which in turn could result in a significant breach of the SIS Act.
The above information is factual in nature and is intended for general use only and therefore should not be considered advice.