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Case Study – Smith Superannuation Fund

• John Smith is the sole member of the Smith Superannuation Fund

• At 30 June 2017 the fund has $1.2m in total assets (at market value)

• The fund owns 100% of the units in Smith Unit Trust

  • The value of the units at 30 June 2017 is $1m.

• During the 2017 financial year, the Smith Unit Trust loans $5,000 to an unrelated party

Question – What is the value of the breach?

Where a fund has an investment in a related party trust, it is imperative the trust conforms with the 13.22 SIS regulations to ensure the units owned by the SMSF remain a exempt in-house asset under s.71(1)(h) of SISA. Where the trust fails to comply with 13.22C of the SIS regulations, the units held by the SMSF will lose its exempt in-house asset status.

For further information regarding related party trusts and the 13.22C and 13.22D regulations refer to our previous blog “Comparing SMSF’s Investments In Unit Trusts”.

With the above case study, due to the Smith Unit Trust loaning to an unrelated entity, the Smith Superannuation Fund will now have a breach due to the trust not meeting 13.22C.

A question we often receive is whether the value of the breach for the SMSF is the amount of the transaction that caused the breach (i.e. the $5,000 loaned from the trust to the unrelated party) or if the amount of the breach is the market value of the units in the Smith Unit Trust owned by the fund (i.e. $1m).

The breach is in fact the market value of the trust.

Where a fund has this type of breach, the units will be considered an in-house asset of the fund and the fund will be required to reduce its holdings in the trust to represent no more than 5% of the fund’s assets (permitted in-house asset threshold).

Therefore, extreme care must be taken when dealing with related party unit trusts as the consequences when the trust does not comply with the rules can be significant, and potentially require a restructure of assets held by the trust given the fund must sell down its holding in the unit trust in order to rectify the breach of the SMSF.