Business real property as an asset class for investment by Superannuation Funds has more exclusions and exemptions applied to it under the investment rules of the Superannuation Industry (Supervision) Act 1993 (“SISA”) than any other asset class.
For example business real property can be acquired by a Fund from a related party (Section 66 of SISA) and is exempt from the in-house asset rules with respect to a lease or licence between the Fund and a related party (Section 77 of SISA).
Business real property is defined in Section 66(5) of SISA as follows:
“business real property”, in relation to an entity, means:
(a) any freehold or leasehold interest of the entity in real property; or
(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or
(c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph–any interest belonging to that class that is held by the entity;
where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.”
While on the face of it, the meaning of the words “but does not include any interest held in the capacity of beneficiary of trust estate” seems straightforward, it is surprising how often clients wish to invest in business real property via a unit trust structure with the clear expectation that the abovementioned exemptions will automatically apply.
It may be that some clients are drawn to unit trust structures because they are aware that many self managed superannuation funds have in the past invested in business real property via unit trusts. While that style of investment is still possible, historically the investment by some funds in the units of some of those trusts was financed by direct borrowings. That is something that has not been permissible since 1999 and has since largely been replaced by limited recourse financing.
Part of the attraction of unit trusts as an investment vehicle may also be as a result of the view that the ownership of business real property may be conferred not so much as a result of any beneficial interest a unit holder may have in a trust estate but as well by a more direct proprietary entitlement a unit holder may have in the underlying trust assets themselves.
That view is said to draw support from the decision in Charles v Federal Commissioner of Taxation [1954] HCA 16 which held amongst other things that a unit holder in the relevant trust had a “proprietary interest in all the property for the time being the subject of the trust deed”, a finding in that in turn begs the question as to what is the precise nature of that proprietary interest.
Even on the assumption that Charles’ case is still good law, the subject proprietary interest in any business real property must for present purposes be an interest that satisfies the requirements of Section 66(5) of SISA.
There have been a number of cases since the decision in Charles’, mostly to do with the “ownership” of real property for land tax purposes and whether or not the interest of a unit holder or other beneficiary in a trust fund that includes real property gave rise to a caveatable interest in respect of that underlying real property.
While the decisions in those cases appear to variously give support to both sides of the argument, the position following CPT Custodian Pty Limited v Commissioner of State Revenue of the State of Victoria [2005] CLR 98 seems to be that the ownership of units in a unit trust fund that includes real property will not generally confer on a unit holder the required proprietary interest (i.e. estate in freehold in possession) in that underlying real property. The common existence of a trustee’s prior rights (viz a unit holder) of indemnity and exoneration means that it will usually not be possible to say (until those rights of the trustee are satisfied or otherwise discharged) precisely what the nature and composition of the trust fund in question is or will be. Instead, the rights of a unit holder will normally be limited to a non-specific equitable interest in the trust property (held in common with all other unit holders) and an entitlement as against the trustee to the due administration of the subject trusts.
Charles’ case was expressly distinguished in the CPT Custodian decision on the basis of the difference in the exact terms of the trust deeds. It was not over ruled and the basis of the distinction between the cases may yet leave opportunity for a carefully drafted trust deed to find its way through.
Disclaimer: – Please note the comments made in this document do not represent general legal advice and no person should rely upon it/them without seeking advice particular to their own facts and circumstances.
