Strategy, Superannuation

Restrictions on 13.22c trusts may trigger blow-up

Restrictions on 13.22c trusts

Tight restrictions around the use of 13.22c trusts should be a warning to SMSF trustees to approach them with caution, an SMSF technical expert has advised.

SMSF trustees using 13.22c trusts need to be fully aware of the tight restrictions regarding their use, a technical expert has told advisers, adding incorrect usage can lead to a complete and expensive unwinding of all arrangements within the trust.

Colonial First State FirstTech executive manager Craig Day gave the warning to attendees at the recent SMSF Association Technical Day in Sydney, saying that while 13.22c trusts can provide good outcomes for SMSFs and trustees, they needed to approach them “with eyes wide open”.

Day said the reason for this was that when 13.22c trusts were included in the Superannuation Industry (Supervision) Regulations, a number of additional requirements were added to the trust structure so it would not be considered an in-house asset.

“One of those requirements is don’t invest in another entity because they don’t want people streaming through 15 unit trusts and companies and at the bottom there is a loan,” he said.

“Once you breach one of the requirements of 13.22c, section 13.22d kicks in and says ‘that thing is buggered and you can’t fix it’, and you have to unwind the whole arrangement.”

Day said he was originally attracted to the idea of 13.22c trusts when they were first introduced as they were a technical vehicle and he is a technical expert, but “20 years on I run away from 13.22c trusts because I have seen too many blow up”.

He gave an example of an adviser who helped a client with the creation of 13.22c trust, which he said the client caused to unwind after he chose to use it to make further investments outside the trust.

“I said to him [the adviser] to make sure that once this is done and dusted the client does not touch it because if he does something very minor, like not pay out a distribution, it causes the whole thing to fall apart and you can’t fix it and have to unwind everything,” he said.

“He called me up two years later with panic in his voice and I knew immediately that it was this client. He told me he has bought some BHP shares in the trust and asked: ‘Can we do anything?’

“That guy blew up his 13.22c trust and there was a lot of money involved in unwinding everything, so with these things be careful with them.”

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