Self Managed Superannuation Funds (SMSFs) Cessation of transitional arrangements for SMSF investment in related Unit Trusts

On 11 August 1999, the Government announced stricter “in-house assets” rules for investments by SMSFs in related parties and related Unit Trusts.

At that time, the Government also announced certain transitional arrangements which applied to SMSF investments in related Unit Trusts made during the period between 11 August 1999 and 30 June 2009. These transitional arrangements included:

1. The reinvestment by a SMSF of its earnings in the Unit Trust – the total purchase price of the reinvestments in the Unit Trust was not to exceed the sum of the Unit Trust’s distributions received by the SMSF between 11 August 1999 and 30 June 2009.
2. If the related Unit Trust had a loan as at 11 August 1999, then the SMSF was permitted to make further investments in units in the related Unit Trust up to the level of the loan principal as at 11 August 1999.
3. If the SMSF held partly paid units in the related Unit Trust as at 11 August 1999, then it was permitted to make further investments in the Unit Trust up to the unpaid amount of those units.

All of these transitional arrangements ceased on 30 June 2009.

In future, an SMSF’s dealings with a related Unit Trust will need to be carefully monitored to ensure that it does not become non complying because of a breach of the in house assets rules governing investments in related Unit Trusts.

In particular, the following matters should be recognised as potential areas of concern regarding the SMSFs continuing investment in a related Unit Trust:

1. The assets and any gearing of the related Unit Trust will need to be maintained at a level that ensures that there will be sufficient funds available to pay out the SMSF’s share of the Unit Trust’s net income each year. An unpaid entitlement to net income will constitute an in house asset of the SMSF.
2. Any reinvestment by the SMSF in the related Unit Trust will be an in house asset unless the Unit Trust can satisfy the strict requirements related to the so called “ungeared unit trust” exception to the in-house asset rule.

Advice should be obtained before any investment is made by an SMSF in a related Unit Trust after 30 June 2009.

Advice should also be obtained where major changes in the assets or gearing of the Unit Trust are planned. If it is decided to vest (or wind up) the Unit Trust, then advice should be sought regarding any relevant income tax, capital gains tax, GST and stamp duty implications.

If you require advice in relation to any of the above matters, please contact Robert O’Keefe of Wisewould Mahony Lawyers.