Unit trusts a NALE risk

unit trusts NALE

SMSF investments in unit trusts can create NALE issues if a member of the fund is also a trustee of the unit trust in question.

SMSF members who are trustees of unit trusts in which the fund has invested must acknowledge this arrangement can create non-arm’s-length expenditure (NALE) issues for the superannuation vehicle, a specialist lawyer has said.

DBA Lawyers senior associate Shaun Backhaus highlighted the issue using the situation of where a unit trust, in which an SMSF has a holding, is involved in developing a property.

“An SMSF member who is also [a trustee of a unit trust involved in property development] might seek out [and] interview architects, planners, other advisers they need and engage with them,” Backhaus said.

“They might be involved in the council approval process … [and] later on [they might be] involved in renting [the property] out to possible tenants and managing the tenants on an ongoing basis.

“All of these things might seem common, but I think really put us at risk of having non-arm’s-length expenditure flowing through [to the] super fund.”

According to Backhaus, the situation is made more delicate because the safe harbour provisions for trustee services contained in section 17 of the Superannuation Industry (Supervision) Act do not apply to unit trusts.

In light of these circumstances, he suggested individuals refer to the trust deed of the unit trust to ascertain what the requirements of the trustees are or to the unitholder agreement, which might detail what the trustees are required to do.

“I suppose the takeaway [message] with these situations is when [the SMSF] is investing in these unit trusts you do have to think about what that member, or their associate, will be doing for the unit trust and is this something they should be remunerated for, and if so, how do you benchmark that,” he suggested.

“The sorts of services will vary depending on the type of investment [in which the unit trust is involved]. I expect the obligations of a trustee [of a unit trust] that invests in long-term ETFs (exchange-traded funds) will be a lot less than the oversight a trustee of a big property development [is required to do].”

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