More Complex LRBAs using Unit Trusts

The ATO has also expressed concerns with LRBAs involving unit trusts.  Typically in these arrangements, a unit trust is established with the super fund holding units and members (or other related entities) also holding units.  The trustee of the unit trust then buys real estate and holds the real estate as an asset of the unit trust.

The trustee of the super fund borrows money to acquire the units in the unit trust. Often the members also borrow money to finance their acquisition of the units in the unit trust.

The concerns of the ATO are set out below and we have provided our commentary in respect of the concern.

Concern (a)

The asset acquired by the unit trust is used as a security for the money borrowed by the members which is used by the members to acquire the units

The issue is the unit trust is a related unit trust and by allowing a charge over the assets of the unit trust, the unit trust will not fall within an exception to the in house asset rules.  The exception (often called the Reg 13.22C exception after the number of the relevant SIS provision) will not apply if there is a charge over the assets of the unit trust.  Consequently, the value of the units in the unit trust will be treated as an in house asset of the superannuation fund.

Additionally, the charge provided by the unit trustee indirectly amounts to the provision of financial assistance by the super fund to the members, in that the value of the super fund investment in the unit trust is subject to the charge.  The provision of such financial assistance is not permitted by the SIS Act.

Concern (b)

The assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property.

The issue is that the trustee of the unit trust, in acquiring an asset from a related party (where the asset is not business real property), has breached one of the pre-conditions for the unit trust not being counted as an in house asset of the super fund.  Consequently, the value of the unit trust will be counted as an in house asset of the fund.

Additionally, other SIS provisions may have been breached – such as the sole purpose test.

Concern (c)

The assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not business real property.

The issue is that the trustee of the unit trust, in leasing an asset of the unit trust to a related party (where the leased asset is not business real property), has breached one of the pre-conditions for the unit trust not being counted as an in house asset of the super fund.  Consequently, the value of the unit trust will be counted as an in house asset of the fund.

Similarly to concern (b) leasing the asset of the unit trust to a related party may breach other SIS provisions.