SMSFs using a unit trust for investments need to ensure the underlying assets are properly protected to prevent any claims against the unitholders in the case of loss, an SMSF legal expert has warned.
DBA Lawyers principal Daniel Butler said that when an SMSF is involved in a unit trust arrangement it becomes a unitholder and there is a common misconception a unit trust will offer limited liability to the holders, but this is not the case.
“Don’t expect limited liability as a unitholder. We review quite a number of unit trust deeds that our clients’ super funds are investing in and we actually have to amend the deed to bolster the asset protection provisions,” Butler said as part of a recent webinar.
“Asset protection comes from having appropriate limitation of liability wording in the deed, otherwise the trustee can go to the unitholder and say ‘you’re up for it as we have a deficiency here’ and the unitholders have to shell out of their own pockets.”
He said this was tested in the 2002 case of Fitzwood Pty Ltd v Unique Goal Pty Ltd, which stated “a unitholder should not benefit from the fact that the trustee is picking up a liability for them, and the trustee is empowered to pass on that and then claim indemnity against those unitholders”.
SMSFs should always use a corporate trustee at the unit trust level, but it should not be the same trustee as for the SMSF, he said.
“This is very circular and not a very good set up. There should be a separate, preferably sole purpose, corporate trustee at the unit trust level,” he noted.
“At the same time, you need to make sure the directors comply with the trust deed and the constitution because they can also be on the hook and are liable if they act in breach of trust outside the scope of their powers or if there’s a limitation on being indemnified under that deed.”
These things acted as an insurance policy because unit trusts often invested in high-risk activity, he said.
“SMSFs with individual trustees are fooling themselves. We pay for insurance and a corporate trustee is very affordable insurance in a different matter, but is great protection,” he said.
