SMSF trustees eyeing property investments through non-geared unit trusts have been warned of the need to meet specific conditions to avoid inadvertently turning these trusts into in-house assets.
Institute of Financial Professionals Australia (IFPA) head of superannuation and financial services Natasha Panagis noted trustees would need to meet the conditions outlined in the Superannuation Industry (Supervision) Act and reinforced in SMSF Regulator’s Bulletin 2020/1 relating to SMSFs and property development.
“If the related company or trust conducts a business, such as a property development business, or if there are any other transactions with a related company or trust that are carried out that are not on arm’s-length terms, [that] would breach the 13.22D requirement,” Panagis told attendees of a recent IFPA webinar.
“The important thing to note is if regulation 13.22D is breached, for example, if the SMSF acquires shares in a company or units in a trust, then the investment by the fund in the company or in the unit trust will cease to be covered by the in-house asset exclusion exception.”
She added trustees breaching this provision would have little recourse to resolve it and would likely need to close the structure entirely.
“A breach of the conditions will be seen as fatal and cannot be rectified in the year it occurs or in a future year. So this means the SMSF’s investment in the non-geared related company or trust is going to be forever tainted and can never again be exempt from the in-house asset rules,” she noted.
“It also means that the SMSF will need to divest itself of the investment if the investment is going to be greater than 5 per cent of the fund’s assets in order to get below that 5 per cent limit.
“As a result, where a company or the trustee of a unit trust enters into a transaction that causes the company or the trust to fail the requirements, then that company or the trust would not be able to rectify by selling the shares.
“So trustees that are looking to invest in a non-geared company or trust just need to be aware of all of these specific requirements because a simple error can cause breaching the in-house asset rules and could mean that they need to sell down their shares or units in the trust.”
