Getting a property into a SMSF from a Trust

Discussion in 'Accounting & Tax' started by thesuperman, 15th Aug, 2017.

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  1. thesuperman

    thesuperman Well-Known Member

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    If an income producing residential property is held in a unit trust and the unit holder is a discretionary trust, is it possible to change the unit holder to become a SMSF instead? If so, what type of tax implications would apply?

    1. Would there be any CGT involved when changing the unit holder from a DT to a SMSF?
    2. Would there be be any stamp duty involved?
    3. Would there be no land tax payable since the unit holder will now be a SMSF?
    4. Would the SMSF need to physically put up money equivalent to the market value of the property to "buy" that property?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes it could be possible but many complex issues. Seek legal advice.

    1. Cgt event.
    2. Could be none or could be ad valorem duty depending.
    3. Depends. In NSW the unit holder would be assesed assuming a fixed trust.
    4. no. But it probably should
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes - Provided it is a SIS Reg 13.22C fixed unit trust that always complies and then the unitholder is NOT a discretionary trust for a period of more than three years. Its possible after THREE years that a SMSF could invest provided Reg 13.22 C and D are continually complied with.

    Legal advice AND financial advice AND tax advice are all needed. The complex part is the financing. The property itself can never be used as loan security in the three years and after the SMSF takes an interest in the unit trust.

    CGT would be a issue and stamp duty can also be involved. Sometimes. Depends.

    There is a simple but fatal issue many inexperienced people ignore with this transaction. No units can be transferred.
     
  4. thesuperman

    thesuperman Well-Known Member

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    Terry & Paul, thanks for the info.
     
  5. Mike A

    Mike A Well-Known Member

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    redeem and issue units dont do a transfer
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I found a major deed provider fixed trust that requires transfer . Check the deed.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have read a paper by lawyer which states a SMSF can acquire units from a related party. I looked at the legislation and I think it may be possible - but I am not advised on this and haven't done in depth research.
     
  8. thesuperman

    thesuperman Well-Known Member

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    What's the tax/legal advantage of doing a redeem & issue of units rather than a transfer? Would CGT still be payable on those units or stamp duty in NSW? Eg. property originally purchased at $500k at the start, now it's worth $1mil.
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The advantage of redeem and reissue is that SIS Act s66 prohibits an acquisition of a fund asset from a member or a part 8 associate. SIS Reg 13.22 deals with excluded inhouse assets and does not address prohibited assets such as one s66 considers. SISA s66(2A) appears to give permission BUT....s66(2A)(c) is not seemingly met. The inhouse asset limit is not given exception. Various lawyers argue possible permission (or otherwise) but frankly I have never seen a judgement that says this and for that reason avoidance of the concern is best practice and this same arguement persists since 1999

    Redemption of former units and issue of new units is not a inhouse asset by virtue of Reg 13.22 PROVIDED all conditions in 13.22C and 13.22D are and always have been met .... complex. AND means s66 is not triggered.

    Duty may not apply in NSW if the value of land is under the applicable threshold and the legal owner does not change. A CGT event does occur. So not dutiable but CGT applies to the unitholder that redeems. Market value is a requirement.
     
    Last edited: 16th Aug, 2017
  10. Ross Forrester

    Ross Forrester Well-Known Member

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    We prefer redemption and issue.

    Most auditors I have spoken to are ambivalent in this matter. I have also had the ATO look at a few high value funds that did this (not from me) and it did not even get a mention.

    It is not that hard to do a redemption and re-issue.

    Also if the units are not a majority share you can get a discount for a minority interest when you do it - this is important for determining the market value of the unitts transferred and redeemed.

    49% of units owning a $1m property < $490k
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I would think that if the unit trust is a fixed trust the market value of 49% = 49% of the value of the trust assets. Ideally a trust where a SMSF invests should have a right of redemption and a right to valuation of units prescribed in the deed. A deed that allows a trustee to refuse redemption or to determine some other basis for valuation is a concern as it may not be a Reg 13.22 fixed trust. It may even by a hybrid trust which SISA doesnt permit. ie a non-fixed unit trust

    But a widely held unit trust I agree....Units may only be worth what a new investor is prepared to pay and not be the same as a % of the trust apparent value. Just look at managed funds - A buy sell spread is a feature of a market price.

    Valuation of units is a funny beast. Many auditors dont give it much thought. In reality a unit trust investment shouldnt be valued based on what a REA opinion says. The true value is less than this when costs of realising that market value are factored in. eg a $1m property may be worth $1m but the arms length market value may be $970,000 after marketing, agent and legals etc are all considered. I guess it depends on a going concern assumption ....
     

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