NALE guidance leaves unit trusts in limbo
The ATO’s draft guidance around the application of non-arm’s length expense laws has left SMSF trustees who own real estate via a unit trust structure in limbo, and could make this form of property ownership less attractive in the coming years, according to DBA Lawyers.
The law firm’s director, Dan Butler, told SMSF Adviser that while the ATO had given some leeway to SMSF trustees when it came to general expenses relating to their duties as a fund trustee, the same leeway did not appear to have been extended when it came to trustees of a unit trust, which is a reasonably popular way that SMSFs own property.
“The only example of a unit trust in the law companion ruling (LCR 2019/D3) is one that doesn’t come up very often, where a fund borrows money to buy units in a unit trust and gets a favourable loan, and in that case the NALI provisions would apply,” Mr Butler said.
“But it doesn’t actually examine what happens inside the trust, in a case where the trust may own business real property and is receiving above-market rent for that from a related-party business, or if there are management services like collection of rent provided to the property by a related party for free.
“At the super fund level, the ATO fleshed it out and said as a trustee you don’t need to charge for it, but if you’re a licensed real estate agent, you have to charge. But we have no guidance in respect of what happens in a unit trust, because it’s not a super fund and it doesn’t have the provisions that apply for a super fund where you cannot charge for a trustee service.”
Mr Butler said the ATO needed to provide better guidance for SMSF trustees who held property via unit trusts, as they may need to change their arrangements before the end of this financial year.
“It would be interesting to see how many super funds have unit trusts and how many of them have overlooked this potential issue, because at this stage it’s hard to gauge what they should be doing,” he said.
“Let’s say the unit trust has to pay for the services of the related party, it might force a lot of these people to put their property management to a real estate agent.
“We do need clarity and we need it fast because the ATO’s practical compliance guide (PCG 2019/D6) was only going to give some leeway for the 2019 and 2020 financial years, and FY2020 is about to finish, so these taxpayers may have to adjust what they are doing.”
Mr Butler said if the ATO decided not to apply the same treatment to unit trust general expenses as to SMSF general expenses, it would have a significant impact on the attractiveness of owning property via unit trusts for SMSFs.
“A unit trust has been a prudent structure to own real estate because it allows, among other things, for ready transferability of units — if the fund wants to acquire further units over time, it can, subject to certain rules; whereas, if an SMSF owns real estate directly, you have to go to a lawyer and have a conveyance,” he said.
“It’s important for advisers to monitor the outcome of the ATO on this position, because it could make a unit trust less attractive if you won’t be expected to charge [for trustee services] at a super fund level; whereas, at a unit trust level, if you don’t charge, you’ve got NALI.”