In the first instalment of the four part series on self managed superannuation fund trustees developing property, we considered the tricks and traps for fund trustees developing property directly.
In this update, we consider the commercial and superannuation law issues associated with developing property through a related or unrelated unit trust structure.
Can a related unit trust undertake a property development?
An option for structuring property development projects is for the fund trustee to invest in a unit trust that holds the development land by subscribing for units in the unit trust. Importantly, where the unit trust is a related party of the fund, the investment will be an in-house asset under section 71 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) unless the requirements of regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) are complied with as follows:
- the trustee of the unit trust is not a party to a lease with a related party of the fund unless the lease relates to business real property;
- the trustee of the unit trust does not borrow;
- the assets of the unit trust do not include an investment in another entity (except an approved deposit-taking institution);
- the trustee has not given a charge over the trust assets;
- the trustee has not made a loan to another entity;
- assets acquired from related parties of the fund after 11 August 1999 are business real property acquired at market value;
- the trustee does not conduct a business; and
- transactions are on arm’s length terms.
In practical terms, this means that the unit trust must be a passive investment vehicle that only invests in real property. The trustee for the unit trust will also be prohibited from borrowing to fund the development. Importantly, the trustee for the unit trust should not conduct a business of property development. Thus, depending on the size and scale of the development, the trustee should consider engaging a third party to develop the land for a fee.
When is a unit trust a related party?
The unit trust will be a related party of a fund where the fund trustee controls the trust as follows:
- the fund trustee and/or its associates have a fixed entitlement to more than 50% of the income or capital of the trust;
- the fund trustee and/or its associates have the power to influence the trustee for the unit trust, either directly or indirectly within the meaning of section 70E(1) of the SIS Act (Sufficient Influence); or
- the fund trustee and/or its associates have the power to appoint or remove the trustee for the unit trust.
Can a fund trustee invest in an unrelated unit trust?
The unit trust will be unrelated if the fund trustee and its associates do not:
- have a fixed entitlement to more than 50% of the income and capital of the unit trust. This means that the fund trustee could hold 50% of the units without the unit trust being a related party of the fund;
- exercise Sufficient Influence; or
- have the power to remove or appoint the trustee for the unit trust.
Power to appoint or remove the trustee
Can a pre 11 August 1999 unit trust undertake a property development?
Will any distributions to the fund trustee be non-arm’s length income?
- the parties are not dealing at arm’s length terms; and
- the fund trustee receives an amount it would not otherwise have received if the parties were dealing on arm’s length terms.
Similarly, income the fund trustee derives as a beneficiary of the trust, other than because of a fixed entitlement to income, will be treated as non arm’s length income and taxed at 45%. Therefore, it is important to ensure that the unit trust is a fixed trust, meaning that the entitlement of unit holders to receive income and/or capital from the unit trust is fixed and indefeasible.
On the basis of the recent case of Colonial First State Investments Limited v Commissioner of Taxation  FCA 16, it may be necessary to ensure the power to amend the trust deed for the unit trust does not extent to reducing or varying the rights of unit holders to receive income and/or capital distributions from the unit trust.
Stay tuned for Part 3 where we consider the commercial and superannuation law issues associated with borrowing to develop property and the importance of properly documenting a property development arrangement.
commercial aspects of entering into a land development.