There are other arrangements that the SMSF may use to purchase a property without borrowings.
Acquire the property as tenants in common
Tenants in common means that the co-owners of the property owns defined shares (for example, one may own 60% share and the other own 40% share), and each owner can deal with their share of the property, including disposal. There is no right of survivorship.
SMSF may acquire property as tenants in common with a member or related party.
The same restriction on acquiring from member or related party applies or leasing to member or related party, except business real property. See commercial property from related party.
No parties can provide a lender a mortgage over the property to secure a borrowing.
The trustee should ensure that the SMSF's share of income is received by the SMSF.
Property through an ungeared related unit trust
The unit trust structure is administratively superior for share ownership. The real property is purchased and held by the unit trust, with the SMSF and others (including member or related party) owning a share through holding units in the unit trust.
To satisfy the strict criteria of superannuation laws, the unit trust cannot have any borrowings. Bank/cash account held by the unit trust must be with an authorised deposit-taking institution. The unit trust must not have other investments or carry on other activities. These types of unit trust are known as 13.22C unit trust (deriving the name from Regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994).
The same restriction prohibiting the SMSF from acquiring a property from member or related party, or leasing to member or related party, applies to the unit trust, except business real property. See commercial property from related party.
The property held in the unit trust must not be provide to a lender as security to secure a borrowing.
A SMSF can acquire further units in the unit trust from a member or related party. This allows for the SMSF to increase its share over time. Any acquistion must be made on arm's length basis. For example, the original share on inception of the unit trust was SMSF holding 50% of the units and the member personally holding 50% of the units. Over the next 5 years, the SMSF purchase 10% of the member's unit holding each year. After the 5 years, the SMSF will own all units of the unit trust.
Income and expenses are accounted for in the unit trust, and distribution of net income is paid to unitholders. The unit trust is a flow through entity, and is not taxed provided it distributes all its net income each year. The net income paid to unitholders retain it character, and the unitholders is taxed on those income.
Superannuation Accounting Services can set-up the unit trust, and look after the accounting, determine the distribution amounts, and prepare the financial report and tax return.
