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

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.

 

Great post as always. Really appreciate your contributions to the forum

 

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.

 

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.

 

Thanks for the info here! Any updates to this as of 2021?

 

7. A widely held unit trust. This is a complex and rarer form of structure. A widely held unit trust is permitted to borrow and use the property as loan security. A widely held trust must be "widely held" with limited % ownership by a SMSF and the associates of that fund. The widely held issue generally requires 20+ investors and looks at control. Common for business use premises by larger firms and partnerships. eg 20 partners of XDF Legal. Each Partner owns 5% of the property. Not effective where the SMSF owns a significant %

8. A unrelated trust. Where the trust is unrelated to the SMSF parties, then the fund may be permitted to invest despite gearing. However signifcant legal imprediments could exist.

An area where competent SMSF legal advice must be obtained.