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About 10 years ago I bought an investment property via a unit trust in a SMSF. At that time the only way to have a property in a SMSF was to also set up a unit trust. The property is 60% SMSF and the company loaned 40%. During the ownership of the property the company has been paid interest each year as a share of the distribution. I would now like to pay back the money borrowed and wanted to check if I should pay back the whole amount borrowed or pay it back in stages as the SMSF now has the cash to cover it. Regards, CG
Answer
10 years ago SMSFs could not borrow money so the SMSF cannot now have a loan that it is considering repaying. Accordingly, the scenario you describe doesn’t fit how these unit trusts operated back then, but it may just be the words you choose and the way you understand it. Would it be technically correct that this is a non geared unit trust? Which means of course that the property cannot be used as security for a loan. 60% of the units are held by the SMSF and 40% by a company? Each year the profits are distributed 60% to the SMSF and 40% to the company?
If so this means that now the SMSF would like to own more of the units in the non geared unit trust so it will have to purchase the units off the company. It can do that but the company will be subject to CGT on the underlying increase in the value of the units represented by the capital growth in the asset.
Is it possible that the company is trustee for a trust and it is really the trust that is the beneficial owner of the units? It would be strange to have the units owned by a company because a company does not qualify for the 50% CGT discount.
After 10 years the CGT bill might make it expensive to transfer the units across. Though if the building is used in your business and you qualify for the small business CGT concessions the CGT might be reduced to nothing.
One thing is for sure the longer you wait the more CGT that will apply so if you are going to do it do it now, subject to your accountant’s advice on other things that maybe happening this year that I don’t know about. The only reason you would stagger the transfer is part of a tax strategy to not bring the capital gain into account all in the one year.
I realise this answer still leaves you unsure whether it applies to your particular circumstances. You need to ask your accountant if your arrangement is a non geared unit trust where the SMSF owns 60% of the units and the company owns 40%.
