Ungeared Unit Trusts

A section 13.22C  Unit Trust is a special type of non-geared Unit Trust that allows an SMSF invest in property with a related party.

How an Ungeared Unit Trust works

A Unit Trust is set up that satisfies the requirements of 13.22C, which refers to regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (SISR). The SMSF and the related party each buy units in the Trust. The Trust then uses the money received from selling units to buy the property. All rent and expenses flow through the Trust, and the Trust distributes net income to unit holders in proportion to the units they own.

Key 13.22C requirements

Normally, an SMSF is not allowed to invest in a Trust or Company controlled by a related party because of the in-house asset rules. An Ungeared Unit Trust is a specific exception. To qualify, the trust must meet conditions such as:

• The Trustee of the Unit Trust cannot borrow—this is the fundamental rule for maintaining 13.22C status.

• The Trustee of the Unit Trust cannot lease property to a related party unless the property is business real property.

• The Unit Trust’s assets cannot include interests in other entities, such as shares in companies.

• The Unit Trust cannot make loans, except for deposits with authorised deposit-taking institutions under the Banking Act 1959.

• The Unit Trust cannot hold an asset that has a charge over it.

Pros and cons of an Ungeared Unit Trust

SMSF trustees wanting to co-own property with a related party typically choose between a tenants-in-common arrangement or an Ungeared Unit Trust.

Under tenants in common, each party buys their ownership share directly and receives that share of income or losses. However, if the property is residential, the SMSF generally cannot later buy the related party’s share. An Ungeared Unit Trust provides more flexibility: the SMSF can gradually acquire the related party’s units at market value if desired.

Benefits of an Ungeared Unit Trust  include:

• Enables an SMSF and related party to co-invest in property when the SMSF cannot afford the property alone.

• Allows the SMSF to acquire additional units over time.

• Potential stamp duty savings when transferring units if the property value is below relevant landholder thresholds.

Drawbacks include:

• No borrowing is allowed within the Trust—breaking this rule causes the investment to become an in-house asset.

• The Trust is restricted to property only and cannot hold shares or interests in other entities.

• Separate financial statements may be required to calculate distributions for each unit holder.

If Trustees want to co-own property with an SMSF and use borrowing, they must consider different structures.

Frequently asked questions (FAQ)