The super law’s “limited recourse borrowing arrangements” – aka super gearing – limits your ability to improve an asset once it has been bought. While you can improve the asset with other super monies, you can’t improve it with money borrowed through the limited recourse borrowing arrangement.
You’d be wrong to think however that all is lost from the property development perspective and super funds.
Thankfully, the super laws permit the use of another structure where assets – such as real estate – could be owned and developed. For example your super fund owns a half share in a unit trust with you as the related party owning the other half, and then for you to potentially borrow to fund the development piece.
These structures are often called “13.22 trusts” and they’ve been around since late December 2000. They are called “13.22 trusts” because they are defined in Section 13.22c of the Superannuation Industry (Supervision) Regulations. The law deems these trusts to be exempt from the “in house asset” rules. You can learn more about the ‘’in house asset rules” here.
How to structure the trust
This week I’m going to detail how the trusts have to be structured and next week I’ll provide an example as to how you might use them. As you’ll see, these rules are far too complex for what they’re trying to achieve so it’s essential to work through them cautiously. The good news is that in practise these trusts are a lot easier to use than the rules imply although you do need to be vigilant and careful so that you never get any of them wrong.
A 13.22 unit trust can only be used by SMSFs or Small APRA Funds.
The 13.22 unit trust isn’t allowed to lease any asset to your super fund’s related parties unless its business real property (BRP) and the lease is legally binding. Business real property must be used wholly and exclusively in the running of a business. This exemption ceases to apply if the property stops being BRP or the lease stops being legally binding.
The trust can’t lease any asset to non-related parties of your SMSF if they then lease that asset to your super fund’s related parties. This rule doesn’t apply to BRP if it’s leased via a legally binding lease. This exemption ceases to apply if the property ceases to be BRP or the lease ceases to be legally binding.
The trust can’t have any outstanding borrowings.
At all times the 13.22 trust can’t have any of the following investments:
- An interest in another entity, such as a shareholding
- A loan to another entity unless it’s a deposit with an authorised deposit-taking institution (such as a bank)
- An asset which has a charge over it (so the property can’t be used as security for any loan that you as a related party might take out)
- An asset acquired from any of the super fund’s related parties after 11 August 1999 except for BRP acquired at market value.
Two other complicated restrictions also potentially apply to assets that had at any time been owned by your super fund’s related parties. One rule applies for super fund investments which took place before 28 June 2000 and the other for investments that occurred after 27 June 2000. Neither restriction applies to BRP. I won’t describe these two rules here.
The 13.22 trust must conduct all transaction on an arm’s length basis.
If any of the above rules are breached, then the in house asset exemption ceases for all investments your super fund has in the 13.22 trust. According to the ATO (Self Managed Superannuation Fund Determination SMSFD 2008/1), all current and future investments in the [13.22] trust will always be classed as an in house asset and that this continues to apply “even if the circumstance that caused the event to happen no longer exists”.
The list of rules above looks complicated, but as I will show you in my next article next week, this sort of structure does have application for SMSFs considering developing a property for investment purposes.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.