Common dispute areas outlined with SMSFs, unit trusts

Mr Butler pointed out that there are a range of events or issues that can cause problems for unitholders including death, loss of capacity, bankruptcy, litigation, divorce or other family or personal issues.

“While an investor may initially know and get along with their other unitholders, [these] events can result in another person becoming a unitholder or controlling a unitholder entity which may not be a desirable outcome for the remaining unitholders,” he cautioned.

“Further, unitholders may simply be experiencing an irreconcilable dispute and require some mechanism for one or more unitholders to divest their unitholding.”

Unless difficult decisions are dealt with up front, Mr Butler warned that costly disputes can arise unless there is a suitable agreement in place.

He gave an example of two super funds that own units in a unit trust that owns a property.

“Let’s say one person wants out. You would need to work out how the process of buying out the other person would be conducted,” Mr Butler said.

In many cases, SMSFs, he said, have 50/50 arrangements in unrelated unit trusts with another fund.

“At 50/50, it’s not necessarily a related trust. However, if one of those funds was to take up extra units, then that trust would become a related trust,” he said.

“If one of those funds wants to take the other investor out, and the trust no longer qualifies as a non-geared unit trust, then that may force your hand because the super fund cannot have more than 5 per cent of its value [in that asset]. If you’ve got $1 million in the fund, then it cannot have more than $50,000 of its investments in in-house assets.”

In that situation, Mr Butler said the super fund will need to make a decision to dispose of the entire amount out of the super fund to another entity such as a family trust or outside of super in their personal name.

Mr Butler explained that having safeguarding provisions in a unitholders agreement can help protect against situations like this and potential contraventions of the SIS requirements such as the in-house asset rules.

A unitholders agreement, he explained, is a binding contract entered into by the trustee with each unitholder.

“Most agreements have standard elements, but the specifics are as agreed between the parties and are designed to suit the needs of each particular relationship,” he said.

The unitholders agreement, he said, will specify issues such as how units will be valued, what decisions require a special resolution or greater majority, how units can be offered for sale, for what value and to who, and when a unitholder will be forced to sell their units.

It might also include restrictions on the ability of unitholders to sell to a third party or to use their units as security for a loan and what happens if the unitholders disagree on any issue in relation to the unit trust.

“Most agreements [also] provide for alternate dispute resolution method, which must be undertaken before any unitholder can resort to the courts. For example, the parties may be required to involve an independent person to help arbitrate or mediate the dispute,” he noted.

He gave another example of a unit trust with a property where one of the unitholders wants to make improvements to the property.

“Let’s say it’s a bit old and decrepit and [one unitholder] wants to spend on it, but the other doesn’t want to chip in any more money or they’re happy that they’re getting a bit of rent and if improvements are done the tenant might have to be kicked out,” he said.

“How do you work out matters like that? If there are four unitholders, we may want a 75 per cent majority for that decision to be made. We can specify that for certain decisions in the unitholders agreement, such as improvements to the property where it’s more than a certain amount of capital expenditure on the property, deciding to dispose of the property and any other suggestions the [unitholders] decide to put in the agreement.”