{"id":5939,"date":"2015-10-13T00:55:01","date_gmt":"2015-10-12T13:55:01","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=5939"},"modified":"2015-10-14T16:14:14","modified_gmt":"2015-10-14T05:14:14","slug":"smsfs-investing-via-unit-trusts","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/investments\/smsfs-investing-via-unit-trusts\/","title":{"rendered":"SMSFs investing via unit trusts"},"content":{"rendered":"
\"SMSFs<\/div>\n

A unit trust is a popular structure to hold property and other investments. This article examines numerous methods how an SMSF may invest in a unit trust and also covers a proposed tax change that will impact on the tax treatment of certain unit trusts once finalised as law.<\/p>\n

Many publicly offered managed investments fund are structured as a unit trust to allow multiple investors to invest in a diversified investment portfolio. Typically, large managed investments funds invest in shares, property and a range of securities. The units in the trust reflect each investor\u2019s proportionate equity or interest in the trust. The concept of owning a unit in a unit trust is a similar but different concept to owning a share in a company.<\/p>\n

On a smaller scale, unit trusts are also popular for self managed superannuation funds (\u2018SMSF\u2019) to invest in especially to acquire real estate. One or more SMSFs and\/or other investors can combine their finances to acquire an investment property via a unit trust structure. In some cases, this may allow each investor access to a better property with considerably more upside potential compared to investing alone.<\/p>\n

In particular, an SMSF may only want to hold a proportionate interest in a unit trust to minimise risk. There may be one or more related or other investors that also participate in the same unit trust. Each investor invests in units which, in turn, is used to finance the unit trust\u2019s acquisition of property.<\/p>\n

However, an SMSF has to be very careful to ensure it complies with the raft of superannuation rules before investing in a unit trust. We examine some of the key rules below.<\/p>\n

Related unit trusts<\/h3>\n

An SMSF is restricted to investing no more than 5% in \u2018in-house assets\u2019 (\u2018IHA\u2019) which includes investments in related parties and related trusts.<\/p>\n

A related party is, broadly, a close family member, a partner in a partnership and a company or trust that is controlled or significantly influenced by an SMSF member and his or her associates.<\/p>\n

A related trust includes a unit trust where an SMSF member and his or her associates hold more than 50% equity in the unit trust, exercises significant influence in relation to the trust or who can hire or fire the trustee.<\/p>\n

Therefore, an SMSF with $1,000,000 of assets could not invest more than $50,000 (ie, 5%) in IHAs (including any related trust). Such a unit trust could invest in a real estate property where the remaining units were held by others including related parties such as family members, relatives or a related family discretionary trust.<\/p>\n

This may not be attractive to an SMSF where it\u2019s likely the 5% limit will be exceeded. For instance, if an SMSF invested more than 5%, this would contravene the Superannuation Industry (Supervision) Act 1993<\/em> (Cth) (\u2018SISA\u2019) and significant penalties could be imposed on an SMSF by the ATO.<\/p>\n

There is an exception discussed below; involving non-geared unit trusts (\u2018NGUT\u2019) that allows an SMSF to invest in a related unit trust.<\/p>\n

Non-geared unit trust<\/h3>\n

A NGUT allows an SMSF to hold up to 100% of the units issued in that \u2018related\u2019 unit trust. This is permitted provided the unit trust complies with the strict criteria in the Superannuation Industry (Supervision) Regulations 1994<\/em> (Cth) (\u2018SIS Regulations\u2019) and continues to comply with that strict criteria. Failure to comply can result in the units becoming IHAs. As discussed above, an SMSF cannot hold IHAs that exceed more than 5% of the value of the fund\u2019s assets.<\/p>\n

Broadly, a NGUT is an ideal structure for holding real estate with no borrowings secured on the title to that property. This is because, the strict criteria in the SIS Regulations requires the trust must not:<\/p>\n