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SMSFs and unit trusts: tread carefully


I recently assisted a self-managed superannuation fund member who had approached his accountant for advice. He felt the advice was going to cost a lot of money if followed. The member wanted clarification from me on whether his accountant was leading him up the right path.

The member’s SMSF has an investment in a unit trust. The member is the sole trustee of the unit trust and the unit trust’s only asset is a commercial property.

His accountant told him he needed to get rid of the unit trust.

My client was not confident his accountant understood the superannuation law.

I explained that, as he is the sole trustee of the unit trust, he controls the trust and therefore the unit trust is treated as a “related party” to his SMSF under the superannuation law. The law permits his SMSF to invest up to 5 per cent of the total value of its assets in a related party. But it can invest more than 5 per cent if the related party is ungeared.

My client said his SMSF was the only unit holder of the unit trust and that his unit trust was ungeared as it had no borrowings. So far so good. But when I looked at the trust’s financial statements, I noticed it also held BHP shares.

Under superannuation law, for a unit trust to be treated as an ungeared trust, the trust must not have invested in any other entity. The only exception is deposits with an authorised deposit-taking institution such as a bank.

Also, the trust had not made any distributions to the SMSF for several years. My client was also supposed to be in the retirement pension phase but his SMSF has not made minimum pension payments to him for several years.

I could understand why his accountant had advised him to get rid of the unit trust. My client had contravened several areas of the superannuation law.

First, he had contravened the in-house assets provisions as his SMSF had invested more than 5 per cent of its total assets in a related party.

My client was also not in the retirement phase, as his SMSF had not paid the minimum pension payments to him. This means any payments made from his SMSF will be treated as a lump sum superannuation benefit and his SMSF will not be entitled to the tax exemption on the earnings of its assets.

The unit trust also had what could be considered a loan. The fact it had unpaid trust distributions may be treated by the tax office as borrowings

So, how can my client bring his SMSF back into compliance? He will need to either unwind the investment in the unit trust or reduce the unit holdings of his SMSF to 5 per cent or below. If the unit trust does not have cash to do this, it may have to sell the commercial property. Written by - Monica Rule is an SMSF specialist and author of the Self Managed Super Handbook — Superannuation Law for SMSFs in Plain English.

#Superannuation #SMSF #Fund #UnitTrust

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