Speaking at a seminar in Sydney, DBA Lawyers director Daniel Butler said while practitioners or auditors may not be constructing the constitution and documents of a unit trust themselves, by recommending a unit trust strategy and putting forward particular documents for the client to use, they need to be aware they are implicitly stating to the client that the documents are fit for purpose.
Mr Butler explained a 50-50 unit trust involves two separate SMSFs each holding a 50 per cent unit holding in a trust. This trust may be used to hold property and other investments.
The ATO confirmed in 2013, he said, that a 50-50 unitholding arrangement would not give rise to a related trust arrangement.
“It should be noted, however, that the ATO has broad powers and unless this type of 50 per cent/50 per cent arrangement is carefully implemented and documented, it could result in a contravention of SISA with significant penalties,” he warned.
Mr Butler said there are various traps with this strategy which are in some cases catching out practitioners.
If the constitution of the corporate trustee for the trust, for instance, provides a casting vote to a chairperson, this can give rise to a related trust relationship.
“For this reason, it is generally much safer to have, for example, three unrelated SMSFs undertaking such an investment with, say with 33.3 per cent units each. This would not give rise to a related trust relationship,” he said.
Mr Butler said he also saw another case where an adviser had set up a unit trust with a number of siblings in the same unit trust which they used to complete a development.
“The adviser made the call that it was not a related party trust, which was purely negligent advice,” he said.
“The adviser then ducked for cover and avoided dealing with the client’s issue. I’m now involved in the process of trying to get compensation for the client.”
"We’re seeing advisers who think they know what they’re doing [with these structures] and clients who just don’t know what to question.”
Mr Butler said this is also an issue for auditors who should be having a “deep look under the hood of these trusts during an audit”.
Auditors he said may be assuming too much risk and signing off on poorly constructed documents.
“Auditors may want to insist on a legal opinion that the 50-50 structure is straight down the line rather than one of the ones with a swinging constitution,” he said.