Why a 13.22C unit trust makes super sense

Why a 13.22C unit trust makes super sense

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Over the last few years there has been significant growth and interest in clients using a Limited Recourse Borrowing Arrangement (LRBA) to buy property in their SMSF.

However there are restrictions and constraints that make the LRBA structure less than ideal. For example:

  • SMSF’s with LRBA’s are unable to refinance and improve the property
  • There are restrictions on the types of properties that they can bought.
  • There are restrictions on the amount that be borrowed.
  • The reduced non-concessional contribution caps mean that property purchases are generally small and tend to be in regional centres.
  • LRBA can be expensive to set up.
  • Not very suitable for members in pension phase (as property is a lumpy asset).  

With a 13.22 Unit Trust otherwise known as a Non-Geared Unit Trust (NGUT) a number of these issues can be mitigated.

Without being too technical, a NGUT allows clients to “co -invest” with their SMSF in a property without affecting section 66 of the of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) which prohibits certain assets being purchased from related parties.

In summary the benefits of the NGUT structure are:

  • They are more flexible then a bare Trust as units can be issued or redeemed as circumstances require.  
  • The members can borrow directly from the bank to purchase units in the unit trust, which is often less expensive than borrowing using a LRBA (in terms of both setup costs and ongoing interest paid).
  • It allows members to participate in larger property purchases that may be not be funded via their SMSF due to the balance in their SMSF being too small and the restrictions on Non Concessional Contributions.  
  • There are no restrictions around developing a property as there are with Bare Trusts.
  • There may also be stamp duty savings in the transfer of units if the value of the property owned by the unit trust is below the landholder threshold of the relevant state or territory.

Note whilst there are a number of benefits with a NGUT, there are number of rules that need to be adhered to, so as to ensure the clients SMSF fund remains complaint.

It also worth noting that investing in property via super is likely to become more popular if Labour gets into government as they are proposing restricting negative gearing and reducing the CGT discount.

Under this scenario investing in a property via an SMSF using an LRBA or a NGUT will both advantageous as the profits will be taxed at a lower rate in the super environment.

If clients are considering a property purchase and would like to investigate a whether a 13.22C Unit or LRBA structure would be appropriate, you can find more information about us at www.accountingandadviserservices.com.au

 

Why a 13.22C unit trust makes super sense
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