I often field questions concerning the SMSF acquisition of unit trust units from a related party.

Whether such acquisitions can occur depends on the scenario.

If the unit trust is widely held, typically a managed fund, the acquisition can occur. Note that this is not replicated for unlisted shares, even if they are “widely held”.

If the trust is not widely held the considerations become more nuanced. If related parties do not control the trust, then the acquisition is generally prohibited.

If related parties control the trust, whether this be by holding a majority of the units, control of the trustee by voting powers, strength of personality, or some other way, then an acquisition is possible, but the units would generally be in-house assets so both the acquisition, and subsequent investment growth cannot cause the 5% in house asset level to be breached. Note that fund auditors will require details of the underlying trust assets ongoing.

Interestingly, the in-house limitations do not apply if the trust satisfies Regulation 13.22C. In this case it does not matter whether related parties control the trust or not – though they generally do. Such a trust can hold a limited menu of assets which, in practical terms, is generally an ungeared property and a bank account from an Australian bank (not a cash management trust).

Note that the trust must be careful not to trigger a Regulation 13.22D event whereby it permanently loses its exempt status. This might occur if it runs a business (this might be triggered by building multiple properties or a single property for quick sale), allowing the bank account to go into overdraft, retaining distributions as loans or acquiring a prohibited asset such as a listed share.

If the exemption is subsequently lost, the SMSF holding will become an in-house asset if, as is generally the case, related parties control the trust.

As is often the case, the devil is in the detail!

If you’re considering using a new SMSF administrator, don’t forget about our special fee offer.