An SMSF specialist has warned advisers to be aware of increased audit scrutiny of investments in Superannuation Industry Supervision (SIS) Regulation 13.22C unit trusts and the adverse consequences that can result from breaches of the strict associated rules.
“I suspect that a number of breaches have been disregarded in the past as many auditors did not bother to scrutinise the internal dealings of the unlisted entity. This has now changed,” SMSF Alliance principal David Busoli said.
“The ATO has made it quite clear that auditors must look into these entities as part of the SMSF audit standards, so I expect that this will result in some tense discussions going forward.”
According to Busoli, SMSFs often hold units in SIS Regulation 13.22C trusts as it allows them to invest in properties with multiple parties, including associated parties, without the asset being classified as an in-house asset.
“If, however, the entity is not operated correctly, the exemption is lost and the SMSF’s investment becomes an in-house asset. Critically the loss is permanent, so the consequence usually involves the SMSF selling down its holding to comply with the 5 per cent in-house asset limit,” he noted.
He pointed out there are several common breaches of the SIS Regulation 13.22C trust rules, including the involvement of borrowing in the trust, which can include small overdrafts from the entity’s bank account; investing in other entities including via listed shares; failing to pay a distribution to the SMSF; repaying overpaid distributions, classifying the overpayment as a loan; and acquiring property from a related party that is not business real property.
Other breaches that arise regularly include not having a binding lease in place with a related party tenant of business real property or the related party failing to pay its rent, and having it determined the trust is conducting a business due to the rapid time frame in which a property it holds has been developed and sold.