Daniel Butler, director of DBA Lawyers, said in a recent online update that developers will often set up a special purpose unit trust, complete the development, then wind it up.
“This is done typically for asset protection. However, one practical risk is that the assets of the unit in which the SMSF has invested are subject to a mortgage or charge,” Butler said.
“It should be noted that to do this you need to make sure that you have a well-drawn trust deed. If you do not have a well-drawn unit trust deed, the unit holders would be at risk of being sued if, for example, the development goes pear-shaped and there’s a deficiency of funds in the unit trust.”
If this happens, Butler said, the trustee could be chasing the unit holders unless there is an appropriate limitation of liability and indemnity.
He said asset protection comes from having appropriate limitation of liability wording in the unit trust deed, otherwise a trustee has a right of indemnity against trust assets and unitholders (Fitzwood Pty Ltd (ACN 005 180 163) v Unique Goal Pty Ltd (In Liq) (ACN 064 926 843) [2002] FCAFC 285 at [135]).
Additionally, the unit trust should have a corporate trustee and ensure the company complies with its constitution.
“We see quite regularly unit trust deeds that need propping up and extra clauses put in to limit the liability,” he said.
“Having a corporate trustee is essential, and making sure the corporate trustee complies with the constitution and also that the directors act within the power of the deed is also very important.”
Butler continued that directors can be liable if they breach the trust and act outside of the realms of the governing rules.
“You need to be mindful of that, so it’s good to have quality documents. Unit trusts do get into a range of risky activity – any property investment or development is quite risky,” he said.
“You should also be careful with the unit trust in that banks generally want security over every property held by a family group, especially the directors and SMEs. If a unit trust can borrow, and let’s say it’s a non-related trust, in that instance, just watch out where the bank does place its security because if it’s under a super fund, the security should be all right if it’s a non-related unit trust.
“However, if there’s any leverage of the equity of the contributors, then that could give rise to issues – both SIS issues and NALI-type issues.”
Butler added in numerous court cases, the unit trust’s property was secured for the family’s business or personal debt and referenced the case of Montgomery Wools.
“[In this case] the unit trust property under the super fund was used for security by the bank, for the business, and that property got taken away from the unit trust and caused a range of problems for the SMSF,” he said.
