A specialist SMSF lawyer has revealed many advisers are exploiting 50-50 unit trust strategies, with many found to be running multiple trusts in a single fund, as well as a known case of an SMSF with as many as 12.
“We think that people have taken this 50-50 strategy – that really was via some general comments by the ATO, albeit very qualified comments in 2013, which are non-binding on the ATO – and are relying on this very steadfastly without giving caution to their clients about the risks that could be involved,” DBA Lawyers director Dan Butler told the DBA Network SMSF Strategy Seminar in Sydney last week.
“Recently I came across an adviser who said they have a client who has 12 50-50 unit trusts under their one SMSF.
“If you are setting up these 50-50 unit trusts, are you covering your tracks, are you really doing the right job and what is best practice?”
Butler stressed advisers needed to exercise caution around such strategies, but currently many were throwing caution to the wind.
“I liken this to years ago when getting a family trust was a big exercise – you went to a very esteemed law firm, went through advice, they drafted a nice family trust deed, you paid an arm and a leg for it, but that was the process for getting up a family trust,” he said.
“Here [with 50-50 unit trusts], what are advisers doing? They’re going off the shelf, getting it cheap, whacking it in front of clients, saying it’s hunky dory and that the ATO has signed off on this, so go for it.”
He said he had seen SMSFs with multiple 50-50 unit trusts in their fund.
“Caution’s been thrown to the wind. There are advisers who think they know what they’re doing and clients who don’t know what to question,” he said.
“The rule now amongst some of these advisers is that they’ve used all these off-the-shelf suppliers who charge $100 or $200 so they can put more money in their pockets, but they’ve effectively taken on a legal role as well – implicitly, they’ve taken on a legal role because they’ve recommended these documents.
“And as if people aren’t happy with 50-50, they want to stretch it to 75-25.”
He pointed out there were three big traps with 50-50 unit trusts.
The first was whether the ATO had ever actually signed-off on such a strategy, as it was only referred to in the March 2013 National Tax Liaison Group superannuation sub-committee minutes, he said.
“Secondly, what happens if the unrelated party wants to exit?” he said.
“Can the SMSF or the related party of the SMSF buy?
“This is very relevant if the unrelated party is a business ‘partner’ and has to leave.”
Lastly, there was an issue surrounding a swinging vote capacity within the unit trust’s constitution, he said.
“If the constitution of the unit trust said the following: ‘The directors may elect one of them to be chair for a specified period if a meeting of directors is held and no chair has been appointed, or the usual chair is not present within 30 minutes after the scheduled starting time or is unwilling to chair the meeting, the directors present must elect one of them to chair that meeting,’” he said.
“At a meeting of directors, the chair has a casting vote.”