Superannuation Planning
Back in the 1990s, a popular strategy for owning and acquiring assets by a Self Managed Superannuation Fund (SMSF) was to purchase these assets in a unit trust that was wholly owned or partly owned by the SMSF. This structure enabled the unit trust to acquire assets and use borrowings to do so.

In 1999, the government changed the rules so that any units in a related unit trust purchased by a SMSF were to be considered as “in-house assets”. An in-house asset is generally a loan to or an investment in a related party. To ensure a SMSF maintains its compliance status (i.e. continues to be taxed at 15%, or 0% if it is paying a pension) the market value of the in-house assets must be limited to no more than 5% of the market value of all assets owned by the SMSF. Therefore, from 1999 onwards, the use of unit trusts as a vehicle in which to invest by SMSFs virtually ceased.

However, where a SMSF already owned units in a related unit trust on or before 11 August 1999, an exemption to the in-house asset rule was provided, so that any units acquired by the SMSF from 12 August 1999 to 30 June 2009 would not be regarded as an in-house asset, provided certain rules were met.

Generally, there were 2 options for a SMSF under section 71D and 71E of the Superannuation Industry (Supervision) Act 1993 as amended (SIS Act). The provisions allow for:

  1. Distributions actually paid from the unit trust to the SMSF during the period 12 August 1999 to 30 June 2009 to be reinvested in additional units in the unit trust (71D); or
  2. Additional investment in units by the SMSF up to the amount of the debt in the unit trust as at 11 August 1999, provided the appropriate election was made before 23 December 2000 (71E). Section 71D will not apply if an election has been made under 71E.

Once 30 June 2009 passes, any purchases of units made by the SMSF in the related unit trust will be caught under the in-house asset rules and limited to 5% of the market value of the fund assets. Also, any distributions unpaid as at 30 June 2009 that exceed the 5% in-house asset exemption may also be regarded as in-house assets and cause the SMSF to be in breach of the SIS Act.

If you have a related unit trust, what action do you need to take?

  1. Contact elliotts on 07 3833 3999 to discuss the application of the provisions to your personal situation;
  2. Ensure additional unit trust investments are made before 30 June 2009 under either section 71D or 71E if needed; and
  3. Ensure unpaid unit trust distributions are paid in cash before 30 June 2009.

Moving forward from 1 July 2009, it is important to ensure profits earned by the unit trust are paid regularly to the SMSF to ensure in-house asset rules are not breached.

The importance of taking action is critical as these transitional provisions cease to apply after 30 June 2009