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LRBA, Property

Unit trusts a good LRBA alternative

Non-geared unit trust

Non-geared unit trusts are a smart alternative for trustees with concerns about LRBAs, an SMSF administrator says.

Trustees reluctant to enter a limited recourse borrowing arrangement (LRBA) should consider investing in a non-geared unit trust instead, a leading SMSF administrator has said.

In a blog post on its website, SuperConcepts highlighted non-geared unit trusts as a good alternative for trustees who might have concerns about entering into an LRBA.

“An advantage of a fund investing in a unit trust is that it allows the resources of various entities (including related parties) to be utilised to acquire a property,” SuperConcepts said.

“Investing in this way allows an SMSF to purchase an interest in real property (that is, by acquiring units in the trust) which it may not otherwise be able to do on its own. The other parties can also borrow to finance their purchase of units.”

It noted a potential problem area trustees should clarify before going ahead with a unit trust was whether or not it was a ‘related trust’ of the SMSF.

“If the unit trust is a ‘related trust’ it will be subject to the in-house asset rules unless an exception to the rules applies (for example, the trust meets the ‘non-geared unit trust’ exception discussed below),” it said.

“In contrast, if the trust is ‘unrelated’ to the SMSF it will be excluded from the in-house asset rules.”

For funds that were able to invest jointly with other parties that had capital to invest, a non-geared unit trust could be a particularly attractive option, it added.

“One of the great advantages of using a non-geared unit trust structure is the ability of the super fund to acquire units from other unitholders, even if they are a related party, without breaching the Superannuation Industry (Supervision) Act 1993 or Superannuation Industry (Supervision) Regulations 1994,” SuperConcepts explained.

“This provides an option for SMSFs to gradually increase their stake in the unit trust as the fund balance grows, via contributions and rental income from the property.”

Earlier this year, DBA Lawyers director Dan Butler said unit trusts were a popular structure for SMSFs to invest in but that it was important to understand the various rules involved in order to ensure each investment by an SMSF in a unit trust was compliant and effective.

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