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Related-party opportunities carry risks

There were many opportunities and alternatives for SMSFs entering into transactions with related parties, however, it was critical for advisers to be aware of the risks and the possible breaches they would need to manage.

“There are related-party opportunities and they can be a really good option when you can’t do something under the borrowing rules, but remember the rules are messy and there are wide holes in lots of things you can do,” Cooper Grace Ward partner Scott Hay-Bartlem told the Institute of Chartered Accountants in Australia SMSF Day in Sydney today.

“Beware also of anti-avoidance and those other possible breaches and sole purpose provisions, even if you have pre-1999 unit trusts floating around, because they’ll [ATO] catch you anyway.”

Hay-Bartlem said related-party transactions were a complex topic for advisers, particularly in regards to the use of unit trusts as an investment vehicle for SMSFs.

Unit trusts are considered a related party or related trust when there is a fixed entitlement to more than 50 per cent of income or capital, the trustee or majority of trustees is accustomed to or under obligation to act in accordance with or might reasonably be expected to act in accordance with wishes or directions, and there is the ability to appoint or remove the trustee or the majority of trustees.

However, unit trusts weren’t necessarily “dead”, as the unit trust could be structured so as not to be a related party, Hay-Bartlem said.

“You can do that by having two unconnected entities,” he said.

“If you have two super funds each with 50 per cent of the units and we structure our control at unit trust level properly, that unit trust is not a related party of the fund.

“That means the units aren’t in-house assets of the fund and it means in the trust the trustee can buy and the unit trust trustee can borrow.”

As long as the two funds were not related parties, unit trusts were an alternative to a limited recourse borrowing arrangement (LRBA), he said.

“If you’ve got clients looking at limited recourse borrowing arrangements, you’ve got to have a single acquirable asset, which rules out a whole lot of things you might want to do – you can’t buy, sell, trade, swap, develop or sub-divide, et cetera,” he said.

“Where you have two parties getting in bed together through their super funds and they’re coming to you for a LRBA, and they want to do something that they can’t, is something like [using a unit trust] going to be the answer?

“So unit trusts do work in some situations and you can use two, three, four or five provided that when you aggregate people together, you don’t get over 50 per cent [in terms of fixed entitlement].”

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