In the latest SMSF Adventures with SuperConcepts podcast, executive anager Graeme Colley said although self-managed funds can invest in unit trusts, there are many factors that must be considered.
Mr Colley said SMSFs can invest without limitations in a public unit trust, but when investing in private unit trusts that are not listed on the stock exchange its imperative to take into account related-parties conditions.
“If an SMSF own less than 50 per cent of the units in that unit trust there’s no restrictions on the value that they can invest in the unit trust,” he said.
“However, if the combined value of the super fund and other associated parties with the SMSF is 50 per cent or greater than 50 per cent of the total number of units issued by the unit trust, then you need to be careful.
“Where you’ve got control of the trust by what we call related parties, then you’re restricted to the percentage of the superannuation fund that can be invested in that type of trust. That’s called an in-house asset.”
Mr Colley said related parties include the superannuation fund, the trustees of the super fund, the members of the fund, and their relatives, and any companies or unit trusts that they control.
He added if any units that are owned in that unit trust by any of those related parties gives control over the unit trust, then the superannuation fund is limited to its in-house asset limit.
“The in-house asset limit is an amount equal to no more than five per cent of the total value of the superannuation fund,” he said.
“So, if you’re going to invest in a unit trust it’s best to get some advice to work out whether related parties control the trust.
“If the related parties do control the trust, then the fund is limited to investing no more than five per cent of the total value of its investments in all its in-house assets.
“It’s not only this unit trust, but any other investments that they might have in the superannuation fund that’s invested in related-party assets, so you really need to be careful.”
He warned the five per cent test is an annual occurrence so there is no room for flexibility after the first compliance test.
“The first time it’s tested is before the superannuation fund decides to make the investment in the in-house asset and every year following that,” he said.
Yes, the test is “more than 50%”. However, read up on what are referred to as “50/50 unit trusts”. You need to be extremely careful if you push the 50% envelope that you don’t otherwise “control” the trust. This includes who can remove the trustee of the trust, voting rights in the trust, control of the trustee if it is a company and its shares, even the existence of a “casting vote” at a meeting of trustee directors and/or shareholders (standard in most off-the-shelf company constitutions).
The “control test” is also not as black and white as just “no more than 50%”. Case law has shown you may be deemed to control a trust with less than 50% of units, or even none at all, if it can be demonstrated that the trustee is somehow being directed by you.
Less than 50%, or no more than 50%? s.70E(2) suggests that control of a trust arises where a group in relation to an entity has a fixed entitlement to more than 50%. Can anyone clarify this?