Investing with other people – Unit Trusts and SMSF

Sam Martel Tuesday, 12 November 2019

We have been fielding questions recently relating to unit trusts.

Unit trust are commonly used as an entity to purchase and hold real estate. They are generally used when there is more than one party involved.

When a self-managed super fund (SMSF) is involved the rules instantly become more complex. The following scenarios are a very high level view of what can potentially be achieved using a unit trust.

Scenario 1

Mother and Daughter wish to pool their resources and purchase a commercial building.

A unit trust will be established, the Mothers SMSF will hold 10 units and the Daughter 10 units.  

As the unit holders are related, and together hold >50% of the equity in the trust, the unit trust will not be able to use the building as security to borrow money to finance the purchase.

The Mother’s SMSF and the Daughter will each have to contribute cash to the unit trust to fund the purchase of the property.

This option is commonly explored, in most cases the Daughter cannot raise the cash required without using the building as security for a loan and the deal does not go ahead.

Scenario 2

Mother and her two friends decide to pool resources and purchase a commercial building.

A unit trust will be established, the Mothers SMSF will hold 10 units and her friends 10 units each (total 30 units).

The key to this scenario is that the unit holders are not related and no one unit holder owns >50%.

Each of the unit holders contribute enough money to the unit trust to meet the deposit required by the bank (perhaps 50% of the property value), the balance of the money will be financed by a loan from a bank. The bank may take security over the commercial property in this scenario.

The unit trust may allow investors access to better investments with considerably more scale and upside then investing by themselves. There is always an inherent increase in risk when investing with other people and this needs to be considered and managed with unit holder’s agreements where possible.

Again, there are very specific and complex rules governing the use of unit trusts and SMSF’s. If you can see an application for a unit trust or SMSF in your own situation, please give us a call to workshop the feasibility.