Property – when the SMSF hasn’t enough to borrow itself – acquiring assets from related parties may be possible using a non-geared related unit trust or company.
From August 1999, the only other alternative for your SMSF to invest in a related party unit trust or company (holding greater than the 5% in-house asset limit) is via the non-geared exemption under SIS regulation 13.22B and 13.22C. A SMSF investment using these provisions is not considered an in-house asset.
One of the benefits of the non-geared unit trust or company holding business real property, is it can provide flexibility of ownership between your SMSF and other related parties compared to direct ownership via tenants in common. Of course, you will need to consider the potential impact capital gains and stamp duty may have when transferring units or shares between parties.
However, these non-geared unit trusts and companies are significantly limited to what assets they can hold or activities they can undertake. The restrictions include not being able to:
- Borrow or allow a charge over any assets;
- Run a business;
- Hold an interest in another entity (e.g. can’t hold shares in company);
- Loan money to another entity;
- Lease an asset to a related party, except if the asset is business real property;
- Acquire an asset from a related party of the SMSF after 11 August 1999 except if business real property;
- Acquire an asset that has previously been owned by a related party since the later of 11 August 1999, and three years before the SMSF first invests in the non-geared entity.
Most importantly, if the non-geared unit trust or company breaches any one of the above provisions, then the exemptions under SIS regulation 13.22B and 13.22C ceases immediately; resulting in your SMSF’s investment in the non-geared unit trust or company being classified an in-house asset. This is regardless if the breach is rectified during the current or future financial years.
For a good explanation, see The SMSF Coach article
Want to know the options and how property works in SMSF? See our FREE slides SMSF & Property Overview
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