Thanks Dipak for the question.

Section 70E(2) of the SIS Act deals with when a trust is considered to be controlled by an entity (member of an SMSF), and the related parties of the member of the SMSF.

Broadly, where an SMSF, combined with any interests held by the members of the fund personally, or by their relatives, or through other entities controlled by members of the fund, has an interest of no more than 50% in a unit trust, then that unit trust should not be considered to be a related party unit trust.

So, where there are three SMSFs, representing three unrelated families, assuming each SMSF has a 1/3rd (33%) interest in the unit trust, the unit trust should not be a related party unit trust – meaning it can potentially purchase a residential property.

Two sleeper issues to be mindful of:

1.      Consider if the members of the three different funds carry on business or an investment activity together as a partnership. If there is a “partnership” comprised of members of the different funds, this could mean that unit trust is a related party unit trust.

2.      Ensure that even though the ownership interest of each SMSF is clearly less than 50%, that representatives of all three SMSF investors are represented as directors of the corporate trustee, and that all three different investor SMSFs are equally engaged in the decision making processes of the unit trust. 

Also ensure that the no particular SMSF has a power of veto or unilateral power to appoint the trustee.

This is because even in the absence of a greater than 50% interest in a unit trust, an SMSF with say a 33.3% interest in a unit trust, could still be treated as an investing in a related party unit trust, if it has the capacity to appoint the trustee, or if it has the capacity to direct the decision making of the trustee.  

For example, SMSF A, SMSF B and SMSF C all own 1/3rd of the units in a unit trust.   These three SMSFs represent three different and unrelated family groups.  However, the only directors of the corporate trustee of the unit trust are members of SMSF A.  In this situation, such an investment is likely to be a related party unit trust for SMSF A, given the members of SMSF A, as the only directors of trustee of the unit trust, have the capacity to control the unit trust.


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