SMSF trustees planning to invest in property through a unit trust have been urged to clearly detail and document the governance of the respective trust or risk falling foul of certain provisions in superannuation legislation.
Institute of Financial Professionals Australia head of superannuation and financial services Natasha Panagis noted the Superannuation Industry (Supervision) (SIS) Act limits the ability of fund members to exercise control over a unit trust.
“In many cases, a key issue in determining whether effective control exists comes down to how this strategy and the unit trust structure has been implemented, operated or is documented,” Panagis stated.
“[It’s] really important to make sure that the unit trust is not controlled by any of the SMSFs and all their related parties because of those control tests [in the SIS Act].
“Make sure the unit trust properly documents its governance processes and its actions. Managing the unitholder interest in the private unit trust where an SMSF is a unitholder is going to be critical to the success of [this] strategy for an SMSF.”
She added this task may be made more difficult with changes in the relationships between those involved in the trust.
“Although the unit trust may not be a related trust, care needs to be taken to make sure that any changes in unitholdings between any existing or any new unitholders doesn’t result in the members of the SMSF and their related parties together having control of the trust,” she said.
“So, in other words, making sure that those additional units don’t push the interest over 50 per cent because having control of the unit trust will convert the trust into a related trust and therefore an in-house asset of the fund.”
To avoid falling into the in-house asset trap, she advised practitioners to seek legal counsel with the establishment of the trust.
“The unit trust must be a fixed trust [and] the ATO’s view on what it considers to be a fixed trust is complex,” she said.
“Before entering into any unit trust arrangement, just ensure your clients get some legal advice to make sure it’s set up properly.
“[Investing in property through a unit trust] can be a great strategy, but [you] just need to consider [those issues].”