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Legal Tip 147: 5 Different ways a Super fund can own property

Discussion in 'Legal Issues' started by Terry_w, 27th Sep, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    5 Different ways a Superfund can own property

    1. Direct ownership
    The superfund can pay cash to acquire the property.

    2. Custodian Trust and borrowings
    Superfunds cannot borrow to acquire property unless the property is legally owned by a custodian trustee while there is a loan in place.

    3. Tenants in common with someone else
    A superfund trustee can jointly purchase the property with someone else – it could be a member or related entity. The property could not be used as security but the other non-super owner could borrow to acquire their share. It could be tenants in common in equal or unequal shares.


    4. Ungeared Unit Trust
    The trustee of a unit trust can own the property with the SMSF trustee owning units in the unit trust. The SMSF could be the sole unit holder or it could own some of the units with other entities owning the rest.

    The unit trust owned property could not be mortgaged, but the non SMSF could borrow to acquire their units as long as the trust property was not used as security.

    5. Geared Unit Trust
    The trustee of a unit trust can own the property with the SMSF owning units – as above – but for the unit trust to be able to borrow to acquire the property, and to mortgage the property, the SMSF cannot be in control of the unit trust, nor can an associate. An example could be 3 separate unrelated family SMSFs joining forces and establishing a unit trust which borrows money to acquire the property.

    Seek legal, taxation and financial advice before trying any of the above.
     
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  2. RPI

    RPI Property Lawyer, Town Planner Business Member

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    Great post as always. Really appreciate your contributions to the forum
     
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  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Other areas of law may affect or impact the above.

    eg
    - SISA general anti-avoidance rule s85
    - s71 borrowing rules
    - s66 prohibition on a fund acquiring assets from a member, relative or associate
    - Fund giving a charge over assets
    - In house asset rules and a statutory limit
    - pre 1999 unit trust
    - Definitions and terms relating to ungeared public trusts
    - SISA Reg 13.22 A, B , C and importantly D

    Then sometimes what seems practical can hit a wall when it comes to a lender. eg Some banks wont lend to a trust with a SMSF involved or the bank will lend to a ungeared unit trust but seek guarantees from unitholders which contravenes SISA.

    and then there is the need to comply with s52..Investment strategies etc.

    There is also a few ways that can be added to the above list where a non-bank lender can facilitate a non-recourse loan. eg a related party lender v's a bank lender. Recent rule revisions by the ATO on the terms of a arms length borrowing can complicate this but the ability for a related party to act as lender to the fund can still be a very effective strategy in some instances.
     
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  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Add a further "strategy" aligned to a ownership of property using some of the above 5.....

    6. Acquisition from a related entity or person/s (Or arms length seller)
    A strategy in itself, business owner/s may own a factory unit, practice premises, office etc or seek to buy one. SMSF acquisition as a going concern by the SMSF (or multiple SMSFs etc) may shelter the property from creditors and also generate long term tax effective income and CGT outcomes. Issues with caps and even small business CGT concessions can be xplored.