Investments, Superannuation

New investment structure danger

SMSFs investment transparency

A new investment vehicle has sparked concerns over compliance issues it may cause SMSFs due to its lack of transparency.

A technical specialist has expressed concern over a new investment arrangement being pitched at SMSFs that could result in compliance breaches due to its lack of transparency.

Specifically, Heffron technical and education services director Leigh Mansell raised her worries over limited liability partnerships, which she is seeing an increasing number of SMSFs enter into.

The investment structure is such that the SMSF agrees to allocate capital to the limited liability partnership and the other party in the arrangement only has the obligation of divulging the investment plan to the fund trustees, Mansell noted.

“What sort of problems can we have with these things? A potential danger zone could be in-house assets,” she told delegates at the Heffron Super Intensive Day 2022 held in Sydney last week.

“[But] the trick with all of this is how are you going to know because one of the things that I’ve spotted in one of the [arrangements] I’ve looked at is you’re not necessarily privy to the information. So they tell you in the partnership deed quite often ‘this is how we’re going to invest the money’, but they will often say ‘but we are not going to disclose to you the precise detail of what we invest in’.

“So the problem zone could be have you got an in-house asset issue? You don’t know.”

To this end, the fundamental issue for SMSFs is a partnership investment could ultimately be in a related party, she noted.

According to Mansell, the use of gearing could be another problem for SMSFs, again due to the lack of transparency of these investment structures.

“The couple that we’ve looked at again [show there could be a risk] if the partnership [or general partner] itself borrows … there a risk that your client, the self-managed fund, has also borrowed,” she pointed out.

“[Does the fund] own a chunk of that borrowing and is that in breach of the borrowing provisions? Remember [the Superannuation Industry (Supervision) Act] says you’re only allowed to borrow in certain circumstances [and] this won’t meet an LRBA (limited recourse borrowing arrangement) [definition and] this won’t meet any of those other circumstances, so have we got a problem with borrowing?”

She warned advisers to inform their clients that while limited liability partnerships may look like investments in unit trusts, they are very different.

Some of the attractions of these arrangements are that tax losses are distributed to the SMSF and if the general partner provides early venture capital for an entity, the resulting capital gains will be completely exempt from tax, she acknowledged.

Limited liability partnerships are only being pitched to SMSF trustees who meet the definition of a wholesale or sophisticated investor and are not prevalent in the sector, she said.

As such the issues flagged may yet be resolved as these investment structures are continuing to evolve, she noted.

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