Hello Antony
Thanks for the question.
The question does not elaborate on whether the two SMSFs are related to each other.
1. Two SMSFs each own 50% of units in a unit trust – buys land, builds house, no borrowings
It is noted that there are no borrowings in this scenario by the unit trust that is purchasing the land and building the house.
If the two SMSFs are related to each other (for example, they each contain members of the same family) then the unit trust could be a Part 8 associate of each SMSF investor, meaning that it needs to meet the requirements of Regulations 13.22C and 13.22D of the Regulations to the SIS Act, to avoid being in-house assets.
From the facts as described, it is assumed that there no borrowings by the unit trust, it does not carry on a business, it does no own interests in other entities and there is no security or charge over the real estate it owns.
If the SMSFs are not related to each other, then this scenario seems fine. The one proviso is to ensure that despite a 50/50 ownership, that no one party has what is called “sufficient influence”.  Where an SMSF, in the absence of a greater than 50% interest has “sufficient influence” in a unit trust, the unit trust is considered to be a related party/Part 8 associate, and the restrictions referred to above, to avoid the operation of the in-house asset rules, need to be satisfied.
2. Two SMSFs buy land directly, as tenants in common, and build a house on the land, with no borrowings
This is likely to be a tax-law partnership and given the absence of any borrowing this appears to be fine – that is, it does not give rise to breaches of the SIS Act.
3. Two SMSFs each own 50% of shares in a company – buys land, builds house, no borrowings
Same as the analysis under heading 1, above.
Other thoughts
A unit trust can access the CGT discount whereas a company cannot.
Where there is a unit trust holding the investment in real estate, consideration needs to be given to the paying out of UPEs within 12 months of their creation, to avoid the UPEs being treated as an extended definition loan from the SMSF back to the UT for SIS Act purposes.
Depending on the State or Territory in which the real estate is located, the choice of structure might have an impact on the annual land tax liability.
Happy to hear the thoughts of other auditors on this matter.
Best regards
The Auditors Institute