Unit trusts may get around super borrowing rules

Unit trusts may be the solution for self-managed super funds (SMSFs) seeking to get around limited recourse borrowing arrangements, according to Cavendish Superannuation SMSF specialist executive David Busoli.

Busoli said possible solutions to the limitations of limited recourse borrowing arrangements in conjunction with construction proposals included a unit trust, as long as external security was available.

“Such a trust is able to buy vacant land and build, thus overcoming the limitations on improvements inherent in limited recourse borrowing arrangements,” he said. “A drawback is that the trust cannot borrow or offer its property as security.”

He said to get over this drawback, the SMSF could subscribe for some of the units with the balance held by other parties.

“The other parties may borrow to acquire their units if they wish, though they would have to secure this borrowing elsewhere,” he explained. “These additional units may be acquired by the SMSF at a later date even if they are owned by associated parties or if the trust holds residential property.  Any such acquisition would be a capital gains tax event.”

Another solution was that the SMSF could enter into a limited recourse borrowing arrangement to acquire the units in the trust.

“As the assets acquired are the units and not the underlying assets of the unit trust, the unit trust is able to buy vacant land and construct,” he said, adding that such a loan could only be arranged with the provision of sufficient external security and personal guarantees.

Busoli said under the right set of circumstances these arrangements were more flexible and less uncertain than using a limited recourse borrowing structure to acquire a property directly.