SMSF and trust ownership of property arrangement

Discussion in 'Accounting & Tax' started by FXD, 2nd May, 2019.

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  1. FXD

    FXD Well-Known Member

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    Hi experts,

    Anyone knows if the following ownership arrangement is deemed acceptable from ATO and SMSF
    regulations perspective:

    1. A family trust (DT) set up and take out loan to buy a commercial property rented to unrelated 3rd
    party tenant paying at market rate. The family trust does not trade and only owns the property.

    2. Set up SMSF using some SMSF fund plus SMSF loan to buy another commercial office and rent
    to the same family trust at market rate. The new office becomes the registered business
    address for the family trust.

    The idea is such that the family trust rental income received will pay for leasing the office
    owned by the SMSF, which in turn will use the rent received to service the SMSF loan.

    Is annual profitability of SMSF a mandatory criterion before the above can be structured as there
    will be loans involved for SMSF.

    Thanks,
    FXD
     
  2. Paul@PAS

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

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    1. How does that involve a SMSF ? A SMSF cannot receive income from a DT (or any non-fixed complying trust) . EVER...The income is considered non-arms length income and triggers non-compliance and tax issues. Not a good thing.
    2. Maybe. Must be real business property and arms length rent etc. Cannot be residential premises.

    There is a solution using a ungeared unit trust (SIS Reg 13.22C/D). The UT issues units to you and some to a SMSF. The property the trust buys is NOT mortgaged or encumbered. YOUR units in the trust are funded using borrowed $$$ (use other property as security) where the SMSF units are paid using cash. The annual rental income (bfore interest) is split according to the fixed trust %. The SMSF is +Ve geared. Your share of income is taxable but you can claim a deduction for interest ie neg geared.

    The major issue with a Reg 13.22 trust is the parties must have equity elsewhere in other property. One trap is that it can limit a future sale of the property as new security must be switched. eg Your PPOR is used as the security and you want to sell it.

    Loads of rules and issues apply to Reg 13.22 trusts
     
  3. FXD

    FXD Well-Known Member

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    Melbourne, Victoria
    Hi Paul, the intention is to enable SMSF to buy a vacant office and also the time to look for
    an unrelated party tenant while at the same time able to service the SMSF loan.

    Not suggesting direct income distribution from the trust to SMSF but structuring it in a way as a
    commercial lease, ie SMSF is the lessor and family trust is the lessee.

    Is that still considered non arms length?

    Thanks,
    FXD
     
  4. Terry_w

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

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    Why does the trust need an office if it is not trading? Interest on any rent paid wouldn't be deductible.
     
  5. Terry_w

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

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    The SMSF would need to do what everyone else renting property does - find a tenant and leave the property vacant until it does.
     
  6. Paul@PAS

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

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    If the LEASE is with Part 8 associate (a related party) the key issue will be whether the related party (the DT) is using the premises as real business property. If there is no lease (or lease-like arrangement) with a related Disc Trust that doesnt trade I dont believe it would comply as the test for business real property looks at the property use. Its doesnt look at the property being commercial but at whether the use is for business by the lease occupant. Any rental income may fail the test and be non-arms length income cascading to non-compliance.

    Its a issue that requires legal advice based on more specific details
     
  7. FXD

    FXD Well-Known Member

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    Melbourne, Victoria
    Thanks Paul & Terry.