Ungeared unit trusts could potentially become a relevant structure again for SMSF trustees should a ban on limited recourse borrowing arrangements (LRBA) go ahead.
“One of the questions we occasionally get asked, particularly nowadays, is that if LRBA get banned or something happens, what alternatives will there be potentially for buying lumpy, illiquid assets?” Heffron SMSF Solutions technical services manager Leigh Mansell said.
“In the context of business real property, how can a fund buy a lumpy asset and how can we slice and dice it, given that LRBAs may get banned in the future?
“A couple of challenges that we often think about when we’re dealing with these lumpy assets is that they’re usually pretty expensive, so normally you’ve got to come up with money from somewhere, so an LRBA has been great in that regard because you could get a large chunk of money.”
Mansell said before LRBAs were around, trustees entered into ungeared unit trusts, which worked differently to an LRBA arrangement.
“Say, for example, we have a client who wants to buy a lumpy asset such as a property but the SMSF has only $500,000,” she said.
“As an alternative to the LRBA what you could do is establish an ungeared unit trust and the trust itself buys the lumpy asset, the SMSF trustee buys units in that trust and another related party buys some other units.
“Effectively you have got a trust controlled by the family group that is specifically carved out from being an in-house asset.”
Furthermore, the ungeared unit trust structure solved the divisibility issue as it dealt with those units on a piecemeal basis, she said.
“We can buy and potentially sell units while the trust structure itself owns the lumpy asset,” she said, adding that over time the fund would be able to own 100 per cent of the units.
“This is why it’s a good alternative to borrowing – the fund doesn’t have to have that other $500,000 today.
“This used to happen quite a lot before we had LRBAs, so they might become relevant again going forward.”
