Documentation, Strategy

Structures key to compliant investments

SMSFs structures investment

SMSFs need to closely examine how they investment with related parties to prevent the creation of benefits that may be considered non-compliant.

The potential for SMSFs to create a non-compliant ‘back-door benefit’ through the incorrect use of assets or business relationships will require them to closely examine what investment structures they use, according to a superannuation legal expert.

Townsends Business & Corporate Lawyers principal Peter Townsend said the rules relating to what an SMSF can invest in appear to be confusing, but they have a “basic logic” to them that should be followed by fund members.

“Government regulation prohibits using your super to invest in your other businesses or investment schemes, your family’s business structures or other investments where what you are doing is supporting the investment because of the relationship rather than adopting the independent and objective investment assessment that you would do if the investment were totally at arm’s length,” Townsend said.

Townsend added any investment in these in-house assets, including those controlled by associates of a member, was restricted to no more than 5 per cent of the total value of the asset and SMSFs should be cautious when setting up investment structures.

He noted the case of a couple with an SMSF considering a property development with friends who held a family trust where the super fund and the family trust provide the capital to buy the land and carry out the building work.

“Will that unit trust be an in-house asset? Yes, if the unit trust is a so-called ‘related trust’. The unit trust will be a related trust if the super fund controls the unit trust,” he said.

“So, if the super fund holds more than half of the units or has more than half the votes at unitholder meetings, it will be said to control the unit trust.”

He added if one of each of the couples was a business partner with the other and together would control the unit trust, it would also be considered an in-house asset and subject to the 5 per cent rule

“The government will allow an investment into what might otherwise be an in-house asset, but prescribes the eligibility criteria in such a way as to try to ensure that the investment is as ‘safe’ as possible,” he said, referring to 13.22C trusts, which he noted were heavily restricted in their use.

“A 13.22C trust cannot operate a business, borrow money, mortgage its property, hold an interest in another entity, lease property to a related party (business real property excepted), loan money or acquire an asset from a related party and all of its dealings with other parties must be at arm’s length.”

As such, he recommended that SMSFs fully consider the implications when investing under a trust structure.

“A super fund wanting to partner with others in another legal entity to develop real estate or engage in some other investment must consider carefully whether that entity is an in-house asset and if so whether an alternate structure, including potentially a 13.22C trust, is necessary for the fund to remain compliant with the law and avoid the allegation of back-door benefits,” he said.

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