A technical specialist for the sector has warned using unit trusts as an investment vehicle for SMSFs can have significant adverse consequences should any compliance issues arise from the arrangement.
“Unit trusts do [enjoy] legislatively favourable treatment if they are managed correctly, but if you get them wrong, they are a massive problem,” Smarter SMSF education and technical manager Tim Miller told attendees of a recent SuperGuardian technical webinar.
“If you get your trust structure wrong [when an SMSF is involved], then you’re going to have issues with regard to the arm’s-length nature of transactions with the in-house asset rule breaches, with non-arm’s-length income situations, and there is no way of fixing [any such troubles] other than redeeming and getting out of the investment.
“So you really want to be mindful of ensuring that all parties associated with the [unit trust] transactions understand how the rules work and are dealing with them appropriately.”
To this end, Miller stipulated SMSF members must understand how the Superannuation Industry (Supervision) (SIS) rules apply to investments in unit trusts.
“Number one is we’ve always got to look at the sole purpose test, so what is the purpose of the investment and why we are undertaking it in this particular manner,” he said.
Further, he identified the rules regarding the provision of loans or other forms of financial assistance to members as being relevant, as well as the restrictions around acquiring assets from related parties and gearing rules, such as those applying to SIS Regulation 13.22C unit trusts.
He pointed out the cautious steps outlined above are pertinent due to his personal experience in dealing with certain practitioners.
“I’ve seen this across the 20-plus years that I’ve been in the admin space where you’ll have advising groups, accounting groups and other groups, where they will pool the investments of their clientele together to give them greater access to assets,” he shared.
“So the use of trusts is a good way of effectively collectively investing on behalf of clients as long as you structurally get the process right.”
