Ungeared Unit Trusts

A section 13.22C unit trust is a non-geared unit trust that allows an SMSF to invest in property with a related party.

As a brief summary, a unit trust is established which meets the conditions of S13.22C and the SMSF and its 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.

Although the unit trust provides some degree of flexibility to the SMSF as well as the related party, 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.

Generally, an SMSF is not permitted to invest in a unit trust or a company where the related party has a majority shareholding. This is enforced by the in house asset rules. However, the section 13.22C unit trust is an exception to the in house asset rules.

Some of the section 13.22C rules include but are not limited to:

• The Trustee of the Unit Trust cannot borrow. This is the most important requirement for a unit trust to be considered as a section 13.22C unit trust.
• The Trustee of the unit trust cannot be a party to a lease with a related party (unless the asset is business real property)
• The assets of the unit trust cannot include an interest in another entity, such as shares in a company
• The assets of the unit trust cannot include a loan to another entity, unless the loan is with an authorised deposit-taking institution within the meaning of the Banking Act 1959
• The assets of the unit trust cannot include an asset that has a charge over it

To access the full 13.22C section under the SIS Act, please click on the button below:

Trustees of SMSFs that wish to own property with their SMSF have two options available: tenants in common or a section 13.22C unit trust.

In a tenants in common arrangement, the SMSF 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. However, a limitation that may arise from this arrangement is that the SMSF cannot purchase the related party’s share of the property if it is a residential rental property. For a section 13.22C unit trust, there is more flexbility in this regard. The SMSF can acquire all of the units in the section 13.22C unit trust if the related party wishes to sell their portion. Units from the related party can be purchased overtime at market rates.

Other advantages of a section 13.22C unit trust include the following:

• This allows the Fund to co-invest in a property with a related party. This may come in handy if the Fund is unable to afford the property on its own
• Flexibility in acquiring further units in the section 13.22C unit trust
• Potential stamp duty savings in the transfer of units if the value of the property owned by the unit trust is below the landholder threshold of the relevant state

However, due to the stringent rules around section 13.22C unit trusts, the disadvantages may include:

• There can be no borrowings in the section 13.22C unit trust, or the Fund will be in breach of the in house asset rules
• The section 13.22C unit trust can only be used to invest in property. It cannot hold an interest in another entity, therefore the asset in the unit trust cannot include shares in listed or unlisted companies
• A separate set of financial statements may be required to determine the distributions paid to respective unit holders

If Trustees would like to co-own a property with their SMSF with a loan. For more information on the property investment with a loan, please click on the button below: