Property, Trusts

Unit trust loans may fail sole purpose test

trust loans sole purpose

Using loans from a unit trust to allow SMSF trustees to purchase property which is then secured by a mortgage is likely to breach the sole purpose test.

SMSF trustees should avoid any property purchasing arrangements involving loans from a unit trust to fund the acquisition as they are likely to breach the sole purpose test, according to an SMSF specialist.

SMSF Alliance principal David Busoli said he recently rejected a proposed property acquisition using a loan from a widely held unit trust, despite some funds having similar arrangements pass an ATO audit, because of the conditional nature built into the arrangement.

“SMSF members, in their individual capacities, contract to purchase a property of their choice. The same individuals, as SMSF trustees, arrange for their SMSF to invest into a widely held unit trust,” Busoli said in an update to his clients, adding the unit trust held genuine investments and was not focused on SMSF investors.

“The unit trust then provides the individuals with an advance of up to 97.5 per cent of the property’s purchase price at commercial rates secured by a first mortgage over the property. The loan-to-value ratio is based on the amount invested by the SMSF in the unit trust.”

He said this arrangement appears similar to an SMSF investing in bank shares prior to the trustees, as individuals, approaching the bank for a home loan.

“If the bank regarded the investment in its shares as a basis for their loan approval, then it would be similar, but it doesn’t,” he said.

“As the loans to the individuals are conditional on their SMSF’s level of investment in the unit trust, it looks like a clear breach of the sole purpose test to me.”

He added the previous successful audits for these arrangements may have been because the “true nexus” between the investment and the loan were not properly considered.

“If a tree falls in the forest and no one saw it, did it happen? Yes, it did,” he said.

“I would not be prepared to enter into an SMSF arrangement with such an embedded flaw on the basis that it might never be seen.”

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