Unit Trusts

13.22c trust

Unit Trusts are an alternative approach to co-owning property.
Co- own a property with a related party.
May offer great flexibility.
Use trust’s money to acquire the property.
Subscribe to the trust by purchasing units in the trust.

Trustees of SMSFs that wish to own property in their SMSF have a variety of different options available to them depending on their particular circumstances.

A common way is to purchase a property whereby the ownership is shared between the super fund and a related party. A common way to do this is to own the property directly as tenants in common. The super fund and related party each pay for their ownership interest from their own funds and they are then each entitled to that share of income or loss from the property.

Utilising this strategy may allow for the purchase of a property that neither the related party nor the SMSF could purchase on their own and can be useful in certain circumstances. One of the potential drawbacks to this strategy is that the super fund cannot purchase the related party’s share of the property if it is a residential rental property. So, if for some reason the related party wished to sell their portion and the SMSF did not; the SMSF could not buy out the related party unless the property was business real property.

There is another strategy that can be considered which may offer a higher level of flexibility when co-ownership of a property is desired. This strategy involves the use of what is referred to as a 13.22C trust.

As a brief summary, a unit trust is established which meets the conditions of S13.22C and the SMSF and the related party purchase units in it. The property is then purchased by the unit trust with the proceeds it received from the sale of the units. The unit trust receives the rent and pays the expenses in relation to the property and the net income of the trust is distributed to the unit holders according to the number of units held.

There are particular rules and regulations that must be adhered to in order to make this strategy work effectively and remain compliant for SIS purposes, but it is worth considering in certain circumstances.

The related party can borrow to acquire their units in the unit trust (generally by offering another asset as security) and then claim the interest on the loan as a personal tax deduction because the trust is income-producing. This effectively allows them to gear their share of the ownership much like they would if they owned it as a tenant in common with the SMSF.

The unit trust must comply with the provisions of 13.22c at all times. Any breach of any of the provisions will mean that the trust is subject to the in-house asset rules which limit the value of this investment in the fund to 5% of its assets. This almost always means that the SMSF must dispose of its investment in the trust even if the breach is rectified; –

To comply, a unit trust must not borrow or have outstanding borrowings More Info Here

SUMMARY OF 13.22c RULES:

  • The trustee of the unit trust cannot borrow;
  • The trustee of the unit trust cannot be a party to a lease with a related party (unless the asset is business real property); More Information
  • The assets of the unit trust cannot include:
    • An interest in another entity (for example, the unit trust cannot purchase shares in a company with its surplus funds)
    • A loan to another entity, unless the loan is a deposit with an authorised deposit-taking institution within the meaning of the Banking Act 1959 (generally this means that it can have an Australian bank account only);
  • An asset that has a charge over it;
  • An asset that was acquired from a related party of the superannuation fund after 11 August 1999, unless the asset was business real property acquired at market value;
  • An asset that had been at any time (unless it was money or business real property acquired at market value) an asset of a related party of the superannuation fund since the later of:
  • The end of 11 August 1999; and The day 3 years before the day on which the SMSF first acquired its unit/s.

Such a structure is an exception to the in-house asset rule under section 71(1)(j)(ii) of the SISA.
Loans to Trust
Unit Trust Loans
SMSF and Related Unit Trusts

SMSF borrowings
Borrowing to invest
SMSF Investing via related unit trust

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Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has been prepared without taking into account any of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.

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