Can my SMSF buy units in an unlisted real estate investment trust
Yes, your SMSF can invest in unlisted real estate investment trusts. Keep in mind though that all investments must align with the fund’s investment strategy, the sole purpose test, and SISA legislation and regulations.
What is an unlisted real estate investment trust?
SMSFs can acquire units in an unlisted real estate investment trust which are generally either public wholesale funds run by commercial providers or private smaller investments. A public trust may also be listed on the ASX or other public exchange. A public trust includes a trust where units are offered to the public or there are 50 or more unitholders, except if 20 or fewer unit holders own 75% of the units or hold 75% or more of the income and capital of the trust.
As a public trust, multiple investors can pool resources to acquire or develop commercial, industrial or residential property. An SMSF trustee can invest in real estate that would otherwise be inaccessible due to limited cash or expertise. SMSF investors get a return of income and potential capital gain and tax advantages flowing through the trust structure such as deferred tax and tax-free distributions.
Commercial providers use public unit trusts to acquire and proactively manage property on behalf of investors and charge fees accordingly. These are usually limited to wholesale clients only and are illiquid investments. These unlisted public property trusts are commonly used to develop large commercial buildings, including medical practices, residential high-rises, shopping centres, offices, and industrial sites generally known as a fixed term or closed-end property syndicate. An open-ended property trust pool cash to raise money to purchase additional properties and may also include other assets to diversify their portfolio. Examples of commercial providers our clients have invested in include:
SMSFs can also invest into private unlisted unit trust to hold business premises of the SMSF members under the business real property exemption. Generally, the trust is then a related trust subject to SISA regulations 13.22C.
Units acquired in a related unit trust subject to r13.22C
An SMSF is prohibited from acquiring units in a related unit trust as it breaches the in-house asset provisions. However, there is an exemption under r13.22C. An SMSF can acquire units in a non-geared unit trust if it complies with SISA r13.22C, allowing Michael’s SMSF to invest in a unit trust he and his wife control so their trust can buy business premises and lease them back.
Requirements to satisfy r13.22C include:
- no borrowings
- no charge over assets
- no investments in other assets i.e. no shares in BHP or managed funds or other properties
- no loans to related parties or another entity except a deposit with an authorised deposit-taking institution i.e. Westpac, CBA, ANZ and NAB
- property cannot be leased to related parties unless the property is business real property
- cannot acquire property from a related party unless it is business real property
Audit considerations for an SMSF investing into unlisted assets
Valuation of assets
Valuations can be costly and time consuming when an SMSF invests into an asset which has no readily available public market.
The value of listed property trusts is transparent, objective and easily obtained from the ASX. Whereas, obtaining the market valuation of an unlisted property trust can be more complex.
The SMSF must assess the units at market value at the end of each financial year as well as key events such as starting a new pension, the death of a member and a divorce settlement. When SMSF members exercise control over a private unit trust, they may engage a qualified valuer to conduct a desktop valuation for residential properties. For commercial or industrial properties, a comprehensive valuation with physical access to the premises may be necessary.
An SMSF unable to obtain the market valuation of underlying property of a unit trust can potentially result in the SMSF breaching SISA regulation 8.02B.
Keep in mind, if you are investing via a commercial group such as Whitmore, Harmony Property Investments or FRP Capital you will generally receive a valuation of your units each year which will meet this requirement quickly and easily.
Signed copy of annual financial statements
An auditor requires a signed copy of the annual financial statements of an unlisted unit trust. They may also require evidence of unusual or other significant assets or liabilities of the unit trust.
It can be problematic where the financial statements of the unit trust are delayed or not provided on a timely basis. The audit report must be issued prior to an SMSF lodging their annual return. The general lodgement date for SMSFs is the 15th May following the end of the financial year.
Verifying the units owned by an SMSF as at 30th June
Relying on confirmation of units held in the name of an SMSF and the units held at 30th June depends on the unit trust trustee which sometimes can be difficult to obtain if a smaller provider/one off project (although very easy from a larger commercial provider).