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I have heard that super funds should not hold units in related unit trusts. Is this right?

The main thing to be careful about is the restrictions on investments that SMSFs can make.

In particular there are the "in-house asset rules", which generally prohibit a super fund from investing more than 5% of the fund's assets in a related party. Normally the unit trust will be a related party, and the acquisition of the units will be an investment - so you will need to be careful about this (especially if the SMSF already has other in-house asset investments!).

For example, if the SMSF has $100,000, the maximum it can generally invest in related parties (in total) is $5000.

There are exceptions to this, but it's best to obtain specialist advice if you would like an SMSF to invest in a unit trust.

Income from a unit trust may also be "non-arm's length income" in the hands of the fund and taxed at penalty rates.

In addition, to be safest, SMSFs should only really invest in fixed unit trusts, so that they have a fixed interest in the trust's assets (and the trustee cannot "siphon" funds out of the trust by, for example, issuing units to someone else for less than they are worth).

For example:

  • Assume a unit trust starts out with no assets.
  • SMSF buys 100,000 units in the unit trust for $1 each.
  • Individual buys 100,000 units in the unit trust for $1 in total.
  • The unit trust now has $100,001, and, theoretically, the SMSF has a 50% interest in that (worth $50,000.50), and the individual also has a 50% interest in that (worth $50,000.50). So the individual has effectively siphoned funds out of the super fund.
  • This can't happen with a fixed unit trust - units must be issued for what they are worth.
  • But, you'll still need to consider in-house asset rules!!

Note: If we receive an order setting up a unit trust with an SMSF subscriber, unless we receive explicit instructions to the contrary, we will assume that the investment in the unit trust is consistent with the SMSF's investment strategy.

Note also that we provide a separate (non-geared) unit trust deed that is specifically tailored to having an SMSF as a unitholder. You can order this Non-Geared Unit Trust online. Of course, this unit trust deed by itself does not guarantee compliance by the SMSF unitholder with the superannuation legislation.

For more information read this Tax Warning for unit subscribers for Super Funds