SMSF Unit Trust buys a necklace for wife – now what?
A related unit trust is an SMSF unit trust. An SMSF is not permitted to invest more than 5% in a related trust, including any other “in-house” asset. For example, an SMSF with $1 million of assets could not invest more than $50,000 in in-house assets, including any related trust. A related trust includes a unit trust where an SMSF member and his or her associates hold more than 50% equity, exercise significant influence in relation to the trust, or can hire or fire the trustee. Under the in-house asset rules, if an SMSF held up to 5% of its assets in units, that SMSF unit trust could invest in a real estate property where the other units are held by related parties, such as family members or a family discretionary trust.
This is a common and useful structure for holding real-estate. Through a Unit Trust, individuals and SMSFs can pool their resources to buy a bigger investment property.
However, we are seeing 3 common problems:
SMSF Unit Trust buys a gift for a wifeBe careful not to pay any personal expenses from the Unit Trust. This creates a non-complying loan from the trust to you. Unless your Unit Trust is pre-August 1999, your SMSF is potentially in breach. The Unit Trust Deeds built on our law firm’s website allow you to rectify. This is, generally, without the Auditor being required to note the matter to the ATO. Just follow the rules set out in the Unit Trust (see our Unit Trust here).
Journal entries instead of actual paymentsThe second common issue is failure to physically pay distributions to the SMSF each year. Sure, this is not required under a modern Unit Trust Deed, it is required by the Superannuation legislation. A movement from the Unit Trust bank account to the SMSF bank account is required. Journal entries don’t satisfy the Superannuation law. Failure to physically pay may cause an unpaid present entitlement, which the Superannuation will deem a ‘loan’. And you now have a potential in house asset breach.
Rectification is possible under our law firm’s Unit Trust Deed, but only if you deal with it in time. Otherwise, the SMSF needs to sell its interest in the Unit Trust.
Members also have units in the Unit TrustAn SMSF is not permitted to invest more than 5% in a ‘related trust’. If your SMSF has $2m then it can only invest $100,000 in in-house assets, including any related trust.
A ‘related trust’ includes a unit trust where an SMSF member and associate:
- hold more than 50% of the units; or
- exercise significant influence over the trust; or
- can hire or fire the trustee.
Therefore, if an SMSF held up to 5% of its assets in units, that unit trust can invest in a real estate property – even though the other unit holders are the members, their family and Family Trust (‘associates’).
Non-geared unit trusts permit an SMSF to invest up to 100% of its assets in the related unit trust. This is provided the unit trust satisfies the strict regulations. Failure results in the units becoming in-house assets. Remember an SMSF cannot hold more than 5% of the portfolio in-house assets.
A non-geared unit trust works best holding real-estate with no borrowings against the title deeds.