SMSF investing with a Related Party in a Unit Trust - legal?

[BGP]

Hi All,

Long time lurker, first time poster. I'm fairly new to property investing so hoping to tap into the knowledge here for some advice before seeking a Financial Planner.

I'm looking to purchase a property with my SMSF (yet to be established so currently no specific Trust Deed).

As my SMSF does not have enough money to purchase a property in the range I am after I want to invest some of my own money into the property as well, although do not want to have that money be contributed to my Super.

If a Unit trust is established can a SMSF and a related party purchase a property together?

The following link appears to say it can, although I've found other articles that say this is not possible as you cannot invest with a related party more then 5% of your Super's worth.

http://greenfrogsuper.com.au/using-a-13-22c-trust-to-purchase-property-smsf-and-related-party/

The SMSF would not be taking out a loan, it would only buy the appropriate number of units in the trust that it could afford. The balance of the mortgage would be held by myself. The property would be 100% investment, not rented/used by myself or any related party.

Any advice you all can offer here would be greatly appreciated. If you need more specifics please advise but this is more of a proof of concept idea at the moment.

 

[Terry_w]

I haven't looked at the link, but If the trust has a mortgage it wouldn't be allowed. See SIS Reg 13.22C

If the unit trust has no mortgage or charges then it could be possible for you to own say 50% of the units and the SMSF own the other 50%. The SMSF could buy units from you over time. You must seek legal advice as there are many requirements to keep in mind when setting this up.

Or you and the SMSF could buy as tenants in common - not so good as impossible to sell your share to the SMSF later.

Or two SMSF could buy as tenants in common - also perhaps not so good.

Or the SMSF could invest in an unrelated trust which has borrowings.

 

[Redwood]

Hi All,

Long time lurker, first time poster. I'm fairly new to property investing so hoping to tap into the knowledge here for some advice before seeking a Financial Planner.

I'm looking to purchase a property with my SMSF (yet to be established so currently no specific Trust Deed).

As my SMSF does not have enough money to purchase a property in the range I am after I want to invest some of my own money into the property as well, although do not want to have that money be contributed to my Super.

If a Unit trust is established can a SMSF and a related party purchase a property together?

The following link appears to say it can, although I've found other articles that say this is not possible as you cannot invest with a related party more then 5% of your Super's worth.

http://greenfrogsuper.com.au/using-a-13-22c-trust-to-purchase-property-smsf-and-related-party/

The SMSF would not be taking out a loan, it would only buy the appropriate number of units in the trust that it could afford. The balance of the mortgage would be held by myself. The property would be 100% investment, not rented/used by myself or any related party.

Any advice you all can offer here would be greatly appreciated. If you need more specifics please advise but this is more of a proof of concept idea at the moment.

Hi BGP - Firstly welcome.

Without reading the link in detail this is a standard structure using a 13.22 trust.

Ensure you seek advice during this process as an error can be a disaster in consideration of the in-house asset rules.

If you have not set up a fund, please be aware of the costs to set up the fund and the structure which may or may not include a corporate trustee.

Need to consider the type of investment you are purchasing esp if business real property hence advice imperative.

Hope that helps!

Cheers, Ivan

 

[Paul@PFI]

As an adviser who is involved in SMSFs, tax and the SIS Act issues surrounding such investments I would suggest the answer is Yes...However you need detailed and specific guidance. You get one bit wrong it cannot be fixed and the penalties are usually a mega tax problem.

Lots of catches to a 13.22 Trust arrangement. But its also VERY flexible.

Common questions:
- Can the IP owned by the trust be mortgaged. Some say No. I say it can if its structured differently. This intrudes into the area of SMSF loans however.
- A 13.22 trust needs to be ungeared. ie no mortgage over the IP. You can use a home or other security and it works.
- Cost varies. Some ways to save $ will actually harm you so don't.
- Can the property be purchased from a relative. No. The SIS Act has soem anti-avoidance rules and a related trust doesnt get around this problem UNLESS you are prepared to wait three years.
- Commercial property that I lease back ? Yes subject to some issues.
- Cheap deeds online. No. No No. Understand some stamp duty issues and you wont do that.
- So I can transfer units in the trust later to my SMSF so it acquires more bit by bit. NO....There is a way around this problem. Unfortunately I have seen some advisers do transfers. S66 of SIS prohibits a SMSF acquiring any investment from a related party or member etc....The solution is dont transfer units !

The 13.22 trust is also a excellent way to bend and circumvent the contributions caps. Its not a scheme either.

PS : Advice concerning this strategy needs both financial, tax and super advice. Often a mortgage broker too. Beware. First hour consult is free...

 

[Paul@PFI]

The following link appears to say it can, although I've found other articles that say this is not possible as you cannot invest with a related party more then 5% of your Super's worth.

I hear that all the time. At least these days most auditors know its not right. I say most.

A SIS regulation 13.22C trust is exempt from the in house asset test by s71(1)(f) of SIS Act which exempts an asset exempted by "regulation". BUT it must remain compliant with SIS Reg 13.22D at all times. And every other related trust held by the same SMSF too !! One fails. All fail. Read 13.22D and you will see its not a discretion to ignore a breach...Nasty.

 

[BGP]

Thanks for the replies everyone, it is very much appreciated.

My interpretation of your posts is that a trust and a related party CAN purchase a property together through a Unit Trust however the Unit Trust itself cannot hold a mortgage, although this may be avoided by having an another asset as security, ie. my home.

Although an SMSF cannot purchase units from a related party, is it prevented from selling to one (assuming arms-length deal)? ie, can I slowly purchase the units off my SMSF at market rates?

The basic situation I am in is that I'm looking to spend about 300-350K on a property. Super would contribute 20%, with the 80% owned by myself and as a rental property it would be cash flow positive fairly quickly if not straight away. Ideally though I'm not using my home as collateral but do not have another asset to use. I'm not looking to break compliance, however it appeared the Unit Trust was the perfect solution. Ignoring the idea of the Unit Trust then is there a way for an SMSF and a Related party to invest in a property where there is a loan in place? (no loan required for the SMSF, just the related party (me).

While we are on the topic - as you all now have an idea of what I'm after, if anyone can recommend some Financial Planners in the Sydney region who have a good grasp of SMSF investing that would be fantastic.