Demystifying Unit Trusts: The Power (and Peril) of Regulation 13.22C

Current as of: 19 June 2026.

Welcome to the first instalment of our new series exploring the multifaceted world of Unit Trusts. While these structures are a staple of Australian investment, their versatility often goes untapped. This series aims to demystify how different unit trust types can serve diverse financial goals, from asset protection to sophisticated investment strategies.

We kick things off by examining one of the most powerful, yet strictly regulated, tools available to trustees: the 13.22C Unit Trust which is an investment structure designed to allow a Self-Managed Superannuation Fund (SMSF) to co-invest in property alongside related parties, such as the fund members themselves or their family trusts. Frequently called a “non-geared unit trust,” this structure offers a level of flexibility that would typically be prohibited by the strict regulations of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Bypassing the In-House Asset Rule

One of the most prominent pitfalls for SMSF trustees to be mindful of is the in-house asset (IHA) rule. The IHA rule limits a fund’s investment in related-party entities to just 5% of the SMSFs total asset value and is intended to act as a safeguard by preventing individuals from risking their retirement nest eggs to support personal investments or ventures.

However, Regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs) provides a legal carve-out. Effectively, when a unit trust is established in accordance with Regulation 13.22C and maintained according to the ongoing requirements of Regulation 13.22D, the SMSF’s investment in that trust is excluded from the calculation of the 5% IHA limit. This allows the SMSF to own any percentage of the units in the unit trust (e.g. 75%) while related parties hold the other units. This effectively opens a gateway for investment strategies that combine superannuation capital with external resoures.

Using a 13.22C-compliant unit trust provides SMSFs with two significant strategic advantages for property acquisition. First, it enables capital to be pooled with related parties by allowing the SMSF to invest in a structure with related parties, making high-value property attainable that would otherwise not be.

Secondly it facilitates “creeping” or incremental acquisitions, serving as a rare exception to related-party transaction rules by allowing SMSF members to sell units from themselves in their personal capacity, to their SMSF, incrementally over several years. This gradual transfer is especially valuable for business owners looking to migrate their business premises into a low-tax superannuation environment without the burden of a single, massive liquidity event.

The “Golden Rules” of Compliance: Regulation 13.22C and 13.22D

First, to enter into an arrangement to invest alongside related parties without triggering the in-house asset rules, the unit trust must satisfy Regulation 13.22C. Once that arrangement is entered into, the unit trust must then continuously comply with Regulation 13.22D and remain “ungeared” and passive. Under Regulation 13.22C and 13.22D, the unit trust:

• Cannot borrow money: The moment the trust takes out a loan or allows its bank account to fall into overdraft, it violates the regulation.
• Cannot have a “charge” or mortgage over assets: No assets can be used as security or have a lien against them.
• Cannot invest in other entities: It cannot own shares in companies or units in other trusts.
• Cannot lend money: The trust must not lend money, except for deposits in authorised deposit-taking institutions (ADI) – care must be taken to confirm that the institution that the trust has a bank account with is an ADI.
• Cannot conduct a business: It must be a passive investment vehicle (e.g., holding a rental property). It cannot be seen to be carrying on an enterprise (i.e. buy property 1, sell for a profit, and then purchase property 2 soon after with the intention of selling it for a profit).
• Cannot lease to related parties: It cannot lease residential property to a member or relative. However, there is an exception to this in that it can lease property to a related party if the asset is “Business Real Property” (like a commercial office or shop) and is subject to commercial arms length terms. Refer to section 66(5) of the SIS Act for what constitutes “Business Real Property”.

The “Taint” Risk

The biggest danger with a 13.22C trust is that it is “forever tainted” if any of the ‘Golden Rules’ discussed above are breached.

If a breach occurs, (e.g. the trust enters into a loan or invests in another entity by buying shares), the exception is lost permanently. The units then become “in-house assets,” and if the value of those units exceed 5% of the SMSF’s total asset value, the trustee of the SMSF must prepare a written plan to sell the in-house asset before the end of the following financial year – often resulting in forced property sales and significant tax or stamp duty costs.

Case Study

Consider this case study and circumstances where compliance with Regulation 13.22C is initially achieved, but a subsequent breach of Regulation 13.22D permanently taints the structure. 

John and Helen, owners of a successful manufacturing business, sought to purchase a $1 million commercial warehouse. To facilitate this, they established a unit trust designed to comply with Regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994. It’s important to note that the Acis Fixed Unit Trust Deed will comply with Regulation 13.22C and 13.22D, as long as the “Golden Rules” of Compliance discussed earlier in this article are continuously adhered to. 

The funding was structured as follows:

• SMSF Contribution: $800,000 (80% ownership).
• Members Personal Savings: $200,000 (20% ownership).

By meeting the requirements of Reg 13.22C, the SMSF’s 80% stake was legally exempt from the standard 5% In-House Asset (IHA) limit. The warehouse was leased back to John and Helen’s business at an arm’s length market rate of $5,000 per month.

Regulation 13.22D

The arrangement operated seamlessly for three years. However, a temporary cash flow shortage led the business to delay a rent payment to the unit trust by just three weeks. They viewed this as a minor internal matter, assuming that given they would be effectively “paying themselves”, the delay would not create any issues.

However, under Regulation 13.22D, a unit trust must maintain ongoing compliance to keep the IHA exemption. By failing to call for the rent to be paid on time, the unit trust effectively provided financial assistance in the form of an interest-free loan to a related party. This single administrative delay would “taint” the unit trust permanently.

Once the arrangement was tainted, the SMSF’s 80% interest in the unit trust was automatically reclassified as an in-house asset. Because the SMSF’s total value was roughly $800,000, the IHA ratio increased to nearly 100% which clearly exceeded the 5% IHA threshold.

Under Section 82 of the SIS Act, Helen and John, as the trustees of the SMSF, would be legally required to:

1. Formulate a plan to sell down the asset.
2. Bring the IHA level back under 5% by the end of the following financial year.

For John and Helen, this would likely result in a forced sale of the warehouse or the SMSF’s units, potentially triggering significant capital gains tax liabilities and stamp duty costs. However, being a property that is vital to the operation of their business, they could have the Unit Trust sell the property to the SMSF via an LRBA. While this will ensure the property remains their own (albeit in the SMSF), this will still have duty and CGT implications from the sale, along with interest costs arising out of the LRBA, highlighting the importance of continually complying with Regulation 13.22D.

The Necessity of Continual Vigilance

The use of a unit trust to comply with Regulation 13.22C is a useful tool of investment, but failure to ensure continuous compliance with Regulation 13.22C and 13.22D will taint the structure forever. This means that even minor infractions like a three-week delay in the payment of rent as seen in the case study, or even an accidental bank overdraft, trigger a permanent loss of the exemption. For SMSF trustees, this structure demands more than just a carefully thought out and implemented investment strategy, it also requires rigorous accounting and constant professional oversight to prevent a simple administrative slip from destroying a retirement legacy.

Acis does not provide advice in relation to commercial law, taxation, duty, company law or any other matter. We do not purport to provide advice nor should you construe anything in any correspondence with us, or material provided by us, as advice of any kind.