Will that unit trust be an in-house asset? Yes, if the unit trust is a “related trust”. The unit trust will be a related trust if the super fund controls the unit trust. The concept of “control” is also very strictly and broadly defined.
If the super fund holds more than half of the units or has more than half the votes at unitholder meetings, it will be said to control the unit trust.
Alternatively if Roger is Ted’s business partner, they’d be “associates” and together would control the unit trust, again making the unit trust an in-house asset. The super fund could not then invest more than 5 per cent of its worth in the unit trust.
The government will allow an investment into what might otherwise be an in-house asset, but prescribes the eligibility criteria in such a way as to try to ensure that the investment is as “safe” as possible. The rules are set out in Superannuation Regulation 13.22C and so naturally trusts used for these investments are called 1322C trusts.
A super fund can invest in a 1322C trust like any other investment by the fund, but qualifying as a 1322C trust can be difficult for the parties involved. If at any time the unit trust fails to meet any of the qualifying criteria, it can never again be a 1322C trust.
A 1322C trust cannot operate a business, borrow money, mortgage its property, hold an interest in another entity, lease property to a related party (business real property excepted), loan money or acquire an asset from a related party, and all of its dealings with other parties must be at arm’s length.
A super fund wanting to partner with others in another legal entity to develop real estate or engage in some other investment must consider carefully whether that entity is an in-house asset and, if so, whether an alternate structure, including potentially a 1322C trust, is necessary for the fund to remain compliant with the law and avoid the allegation of back-door benefits.