WHAT YOU NEED TO KNOW

A reg 13.22C non-geared unit trust is not included as an in-house asset at the time of the initial investment, provided certain criteria are met. Some trustees may think they are investing in a reg 13.22C non-geared unit trust because it does not have outstanding borrowings. However, other criteria must be satisfied for the non-geared unit trust to be correctly categorised as a reg 13.22C non-geared unit trust.

This article explores some of the criteria required for an investment to be a reg 13.22C non-geared unit trust and the events that can cause the investment to no longer be a reg 13.22C non-geared unit trust. These events will typically lead to the investment becoming an in-house asset where the trust is controlled or majority-controlled by related parties.

REASON TO USE A NON-GEARED UNIT TRUST

Non-geared unit trusts are a legitimate exemption to the in-house asset definition. A non-geared unit trust allows one or many related investors to come together to invest in property. A non-geared unit trust provides flexibility in ownership as the SMSF can acquire further units in the unit trust from a related party without infringing s 66 of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’).

There may also be 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 or territory.

COMPLIANCE AND THE APPEAL OF A REG 13.22C NON-GEARED UNIT TRUST

It is a superannuation law requirement that the trustee of an SMSF must take all reasonable steps to ensure that the in-house asset rules comply (s 84(1) of the SISA).

Subject to some exceptions, an in-house asset of a superannuation fund is an asset of the fund that is:

• a loan to, or an investment in, a related party of the fund;

• an investment in a related trust of the fund or

• an asset of the fund subject to a lease or lease arrangement between a fund’s trustee and a related party of the fund.

A non-geared unit trust must satisfy the criteria in reg 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) to qualify for the in-house asset exemption. It must also not trigger any event in reg 13.22D, or it will fall back as an in-house asset.

REG 13.22C INITIAL CRITERIA

The checklist below provides a high-level simplification of the criteria for the unit trust not to be an in-house asset:

• The superannuation fund has fewer than six members.

• The trustee of the unit trust does not have a lease with a related party of the superannuation fund.

An exception applies if the lease relates to business real property.

• The trustee of the unit trust does not have outstanding borrowings.

• The assets of the unit trust do not include:
– An interest in another entity; or
– A loan to another entity except for a deposit with an authorised deposit-taking institution (e.g., certain approved banks) or
– An asset that is subject to a charge (including a mortgage); or
– An asset (excluding money) that was ever owned by a related party, subject to certain excluded timeframes. An exception also applies if the asset was business real property acquired at market value.

Please note that the above is a simplification. In reality, the full criteria in the law must be satisfied for the non-geared unit trust to be correctly categorised as a reg 13.22C non-geared unit trust (at the time of the initial investment).

SISR REG 13.22D TRIGGER EVENTS

Meeting the criteria to be a reg 13.22C unit trust at the time of the initial investment does not guarantee that the asset will never be an in-house asset.

Regulation 13.22D of the SISR is perhaps less discussed but is equally as important as reg 13.22C. Regulation 13.22D specifies a list of triggering events that would cause reg 13.22C to cease to apply to the non-geared unit trust. These triggering events are traps for many trustees.

Some common traps within this area that lead to the units being an in-house asset include:

• The trustee of the unit trust acquires any interest in another entity, even (for example) listed securities.

• The trustee of a unit trust makes a loan to another entity other than a deposit with an authorised deposit-taking institution. This means a deposit with any non-approved institution will trigger reg 13.22D.

• The trustee of the unit trust borrows money.

• A charge or mortgage is given over an asset of the unit trust.

• The trustee of the unit trust conducts a business. There is no exception for conducting a property development business, so people doing any developments with real estate must be extremely careful.

• The trustee of the unit trust leases one of its assets to a related party unless the asset is business real property. A triggering event may also occur if the property loses its status as business real property.

• The trustee of the unit trust conducts any transaction otherwise than on an arm’s length basis. This trap is triggered regardless of whether the transaction favours the unit trust or the other party. In this sense, it is more restrictive than the requirement under s 109 of the SISA. This requirement is not hinted at in the initial reg 13.22C list.

• The trustee of the unit trust acquires an asset (excluding money) that was at any point owned by a related party, subject to certain excluded timeframes. An exception applies if the asset was business real property acquired at market value.

Where any triggering event occurs, with no exception, the non-geared unit trust will cease to be a reg 13.22C non-geared unit trust. For more details about triggering events, please refer to reg 13.22D of SISR.

CONSEQUENCES OF TRIGGERING AN EVENT UNDER REG 13.22D

Where a trigger event under SISR reg 13.22C will cease to apply to an asset of a fund, furthermore, neither regs 13.22B nor 13.22C will apply to any other asset of the fund that is: (a) acquired by the fund at any time, and (b) an interest in the unit trust. This means a trigger event in reg 13.22D will taint the unit trust forever for that superannuation fund.

As a result of reg 13.22C ceasing to apply, an investment will likely become an in-house asset. It will be subject to the in-house asset rules if it becomes an in-house asset. For example, the investment in units will be included in a calculation of the market value ratio of the fund’s in-house assets, which must not exceed 5%.

CONCLUSION

A trustee of an SMSF who maintains a non-geared unit trust investment should check that all the criteria in reg 13.22C are satisfied before making the initial investment. Care should also be taken to ensure no events under reg 13.22D occur.

WE’RE HERE TO HELP!

If you have any issues, questions or feedback regarding our monthly SMSF Bulletin or if you’d like clarification or further advice on the content of this month’s edition or any other SMSF audit concern – don’t hesitate to reach out to me at +61 416 123 446 or trosati@rosatiwang.com.