A unit trust is one of the more common structures used when two or more parties — including SMSFs — want to co-invest in property. The concept is simple: the trust holds the property, investors hold units in the trust in proportion to their investment. Each unitholder’s interest is defined by their units, not by direct ownership of the property.
For SMSFs, unit trusts come with a specific set of compliance considerations that do not apply to direct property ownership. The in-house asset rules, the related trust provisions, and the ATO’s long-running compliance focus on related-party unit trusts all need to be understood before the fund commits capital. If the structure is wrong from the start, the fund ends up holding an in-house asset it cannot legally keep.
Why SMSFs Use Unit Trusts for Property
The most common reason is pooled investment. An SMSF with $500,000 in investable assets cannot buy a $1.5 million commercial property on its own (even with borrowing, the deposit and cash buffer requirements make it impractical). But three SMSFs, or an SMSF and a family trust, can each take units in a unit trust that acquires the property. Each party’s exposure is proportionate to their unitholding.
Other reasons unit trusts appear in SMSF structures:
- Separation of legal ownership from beneficial interest. The trustee of the unit trust holds legal title to the property. The unitholders hold economic interests. This can simplify title transfers when unit holders change.
- Diversification with limited capital. Instead of concentrating 80% of a fund’s assets in a single property, the SMSF takes a 30% interest via units — leaving capital for other investments.
- Development projects. Unit trusts are sometimes used to structure development activities where multiple parties contribute capital and share the returns. The SMSF’s participation is limited to its unitholding.
The In-House Asset Problem
This is where most SMSF unit trust arrangements either succeed or fail. An investment by an SMSF in a related trust is classified as an in-house asset under Part 8 of the SIS Act. In-house assets are capped at 5% of the fund’s total assets at 30 June. An SMSF that holds $400,000 in units in a related unit trust within a $1 million fund is at 40% — eight times the legal limit.
When is the unit trust “related”?
A trust is a related trust of an SMSF if a member, a relative of a member, or the SMSF itself controls the trust. Control generally means the power to appoint or remove the trustee, or the ability to direct how trust assets or income are applied. In practice, most unit trusts where the SMSF and family members or their entities are the unitholders are related trusts.
The ungeared unit trust exception
The SIS Regulations provide one exception that matters. An SMSF’s investment in a related unit trust is not treated as an in-house asset if the trust meets all of the following conditions (regulation 13.22C):
- The trust is an ungeared trust — it does not borrow money (and has not borrowed at any time during the year)
- The trust holds only permitted assets: business real property, listed securities, cash, or term deposits
- The trust does not conduct a business (passive rental income from business real property is acceptable; active trading is not)
- The trust deed does not permit the trust to borrow or conduct a business
If the unit trust satisfies all four conditions, the SMSF’s unitholding is exempt from the in-house asset rules regardless of how large the holding is relative to the fund’s total assets.
The conditions are cumulative and strict. One misstep — the trust takes out a short-term loan to cover settlement costs, or the trust deed has a boilerplate borrowing clause — and the exception is lost. The SMSF’s entire unitholding becomes an in-house asset overnight.
Ungeared vs Geared Unit Trusts
Ungeared unit trusts
No borrowing. All capital comes from the unitholders. The trust holds permitted assets (typically business real property plus cash). The SMSF’s investment is exempt from the in-house asset test (assuming the other conditions in reg 13.22C are met).
The trade-off: every dollar of the property’s purchase price must come from the unitholders’ own resources. For a $2 million commercial property, that means $2 million in combined contributions from the unitholders. This limits the investment to parties with substantial capital.
Geared unit trusts
The unit trust borrows to fund part of the acquisition. This gives unitholders leverage — they contribute less capital for the same property exposure. The downside for SMSFs: a geared unit trust does not qualify for the ungeared exception in reg 13.22C. The SMSF’s unitholding is an in-house asset, subject to the 5% limit.
An SMSF with $2 million in assets that holds $50,000 in units in a geared related unit trust is within the 5% limit (2.5%). But the same fund with $200,000 in units is at 10% — a breach. The trustee must prepare a written plan to reduce the exposure below 5% by the following 30 June.
Important distinction: The SMSF itself can borrow under s67A to fund its contribution of capital to acquire units in a unit trust (in limited circumstances), but that is a different arrangement from the unit trust itself borrowing. The two are frequently confused. Whether the SMSF’s borrowing to acquire units in a unit trust is permissible under s67A is a complex question that depends on the specific structure and has been the subject of ATO guidance. Specialist legal advice is necessary.
Structuring the Unit Trust Correctly
The trust deed is the foundation. For the ungeared unit trust exception to apply, the deed must be drafted to:
- Prohibit borrowing — not just avoid it in practice, but explicitly prevent it. A boilerplate clause permitting borrowing “at the trustee’s discretion” defeats the exception even if no borrowing ever occurs.
- Restrict asset classes to those permitted under reg 13.22C (business real property, listed securities, cash, term deposits)
- Prohibit the conduct of a business — passive rental income collection is not carrying on a business. Active property development or management services may cross the line.
- Define unit entitlements clearly — fixed entitlements prevent the ATO from arguing the trust has discretionary elements that change the control analysis
The deed should be prepared by a lawyer who specialises in SMSF unit trust structures, not adapted from a generic template. SMSFcentral has seen unit trust arrangements fail the ATO’s compliance review because the deed contained standard commercial clauses (borrowing powers, business activity powers) that were never intended to be used but technically disqualified the trust from the ungeared exception.
ATO Compliance Focus
The ATO has maintained a sustained compliance focus on SMSF investments in related unit trusts since at least 2018. The concerns are:
- Non-arm’s length dealings — unitholders acquiring or disposing of units at prices that don’t reflect market value
- In-house asset breaches — funds holding investments in related trusts above the 5% threshold without qualifying for an exception
- Prohibited loans and financial assistance — the unit trust structure being used to provide indirect financial assistance to members or related parties
- NALI — income derived from non-arm’s length arrangements within the unit trust structure being taxed at concessional rates instead of 45%
The ATO’s data-matching programs cross-reference SMSF annual returns against trust tax returns, identifying fund-trust relationships and flagging anomalies. Funds that hold unit trust investments should expect scrutiny.
Where Unit Trust Arrangements Go Wrong
Even a dormant borrowing clause in the deed disqualifies the trust from the ungeared exception. The ATO looks at what the deed allows, not what the trustee has actually done. If the clause is there, the exception does not apply. The fix is a deed amendment removing the borrowing power — but this must happen before 30 June to apply for that financial year.
A unit trust that holds business real property and a term deposit qualifies. A unit trust that also holds unlisted shares in a private company does not — unlisted shares in a non-listed company are not a permitted asset class under reg 13.22C. One non-qualifying asset contaminates the entire trust.
Residential property is not business real property. A unit trust that holds a residential investment property cannot rely on the ungeared unit trust exception, even if all other conditions are met. The SMSF’s unitholding is an in-house asset, full stop.
When a new party joins the unit trust or an existing unitholder exits, the unit price must reflect the market value of the underlying assets. An SMSF that acquires units at below market value is receiving a financial benefit. An SMSF that disposes of units at below market value is providing financial assistance. Both are contraventions, and both attract the ATO’s attention.
Frequently Asked Questions
Yes. Two or more SMSFs can each hold units in a unit trust that acquires property. Each fund’s compliance obligations (in-house asset test, arm’s length terms, investment strategy alignment) are assessed independently. The unit trust itself must be structured correctly — particularly around the ungeared exception if the trust is related to either fund.
Yes, but the presence of a family trust as co-unitholder almost certainly makes the unit trust a related trust of the SMSF (because family members typically control the family trust). The ungeared exception becomes critical — if the trust qualifies, the SMSF’s investment is not an in-house asset. If it doesn’t, the 5% limit applies.
Yes. The unit trust is a separate legal entity for tax purposes. It needs its own TFN, lodges its own tax return, and distributes income to unitholders in accordance with their entitlements. SMSFcentral coordinates the SMSF’s side of this — recording distributions, reconciling against the trust’s tax return, and reporting the income correctly in the fund’s annual return.
The unit trust itself can borrow, but if it does, it is a geared trust and the ungeared exception under reg 13.22C does not apply. The SMSF’s unitholding becomes an in-house asset subject to the 5% limit. Whether the SMSF can borrow under s67A to fund its own acquisition of units in a unit trust is a separate and more complex question. The ATO has issued guidance on this, and the answer depends on the specific facts. Legal advice is needed.
The SMSF’s unitholding becomes an in-house asset from the date the breach occurs. If the in-house asset exposure exceeds 5% at 30 June, the trustee must prepare a written plan to bring it below 5% by the following 30 June. Disposing of units (or the underlying property) to fix a mid-year breach can trigger CGT and stamp duty consequences. Prevention is considerably cheaper than remediation.
The SMSF’s interest is valued based on the unit price, which should reflect the net asset value of the trust (market value of assets minus liabilities, divided by the number of units on issue). The underlying property must be independently valued at market value. The unit price is derived from that valuation, not set independently.
Unit Trust Compliance Is Detail Work
If your fund invests through a unit trust — or is considering it — the structure needs to be right from day one. We monitor the in-house asset position, track the ungeared conditions, and coordinate with the unit trust’s accountant on distributions and valuations.
Call 02 8412 0086 to talk through your fund’s unit trust arrangement, or submit an enquiry online.
Scope of our service
SMSFcentral provides tax, compliance and administration services. We do not hold an AFSL and do not provide financial product or investment advice. Decisions about contributions, investments, pensions or restructuring should be made with a licensed financial adviser.
Last reviewed: 11 June 2026 · Reviewed by Greg Dennis CPA, Director