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Re: Is there any reason we cannot occupy a dwelling 50% owned SMSF if we pay commercial rent to the

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We purchased a house in a unit trust about 10 years ago. 50% in our SMSF and 50% owned by me personally (a beneficiary of the fund).  Now the property needs work and we are selling our current house.  One option is to close the unit trust, transfer the property in specie to the SMAF and to me, move into the house and pay commercial rent to the super fund.  Reading the 'in-house' investment rules and the related ruling it seems this would not breach the sole purpose test if we pay a full commercial rent. 

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Hi Markandmerran,

 

There seems to be a couple of issues here that need to be dealt with individually. 

 

  1. The first thing you should seek legal and financial advice on is who is the trustee of the unit trust. If the trustee is you  personally, or an entity that you control (such as a company where you are the sole director and shareholder), then the trustee of that trust may actually be a related party of the SMSF under section 70B of the Superannuation Industry (Supervision) Act 1993. That would mean that the SMSF's investment in the unit trust would be an investment in a related party. This will also be the case if, as unitholder, you have the power to remove or appoint a new trustee. Based on what you have stated in your question, it sounds like you may be in control of this unit trust.

    If the market value of the SMSF's unit trust investment is more than 5% of the market value of the SMSF, then the entire investment would be a prohibited in-house asset  and the trustee of the fund is required to prepare and implement a written plan by the end of the income year to reduce the value of the SMSF's in-house asset ratio to less than 5% of the market value of the fund.

  2. If you were to close the unit trust and have the units redeemed as a 50% interest in the property directly (50% each for you and the SMSF), then moving into the property becomes a separate in-house assets issue. Where real property is leased to a related party of the fund, the value of the lease becomes an in-house asset, and is subject to the same restrictions as above. Additionally, the trust deed may not allow the trustee to transfer ownership on redemption of the units, and I would strongly advise you obtain legal and financial advice on this course of action. This could also possibly trigger a CGT event with tax implications for you and for the SMSF.

    If you close the unit trust and contribute your 50% share in the property into the SMSF, that would be a related-party acquisition, which is also prohibited (except for listed shares or business real property). =
  3. Generally the only time that a related party can lease property from an SMSF is where the real property satisfies the "business real property" test - this is very unlikely to apply to a residential property, as it would not satisfy the "underlying use" or "wholly and exclusively" conditions of that test.

I hope I have cleared that up a bit for you, and again I would strongly encourage you to seek legal and financial advice before you proceed with any transactions between potentially related parties.

 

Kind Regards,

TaylorY

This is my personal view; I’m an ATO employee who chooses to help out here in my own time

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Hi Markandmerran,

 

There seems to be a couple of issues here that need to be dealt with individually. 

 

  1. The first thing you should seek legal and financial advice on is who is the trustee of the unit trust. If the trustee is you  personally, or an entity that you control (such as a company where you are the sole director and shareholder), then the trustee of that trust may actually be a related party of the SMSF under section 70B of the Superannuation Industry (Supervision) Act 1993. That would mean that the SMSF's investment in the unit trust would be an investment in a related party. This will also be the case if, as unitholder, you have the power to remove or appoint a new trustee. Based on what you have stated in your question, it sounds like you may be in control of this unit trust.

    If the market value of the SMSF's unit trust investment is more than 5% of the market value of the SMSF, then the entire investment would be a prohibited in-house asset  and the trustee of the fund is required to prepare and implement a written plan by the end of the income year to reduce the value of the SMSF's in-house asset ratio to less than 5% of the market value of the fund.

  2. If you were to close the unit trust and have the units redeemed as a 50% interest in the property directly (50% each for you and the SMSF), then moving into the property becomes a separate in-house assets issue. Where real property is leased to a related party of the fund, the value of the lease becomes an in-house asset, and is subject to the same restrictions as above. Additionally, the trust deed may not allow the trustee to transfer ownership on redemption of the units, and I would strongly advise you obtain legal and financial advice on this course of action. This could also possibly trigger a CGT event with tax implications for you and for the SMSF.

    If you close the unit trust and contribute your 50% share in the property into the SMSF, that would be a related-party acquisition, which is also prohibited (except for listed shares or business real property). =
  3. Generally the only time that a related party can lease property from an SMSF is where the real property satisfies the "business real property" test - this is very unlikely to apply to a residential property, as it would not satisfy the "underlying use" or "wholly and exclusively" conditions of that test.

I hope I have cleared that up a bit for you, and again I would strongly encourage you to seek legal and financial advice before you proceed with any transactions between potentially related parties.

 

Kind Regards,

TaylorY

This is my personal view; I’m an ATO employee who chooses to help out here in my own time