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A fund wholly owns a pre 99 unit trust which lends money to a related company. Generally a fund cannot lend money to a member or to a related party, subject to the 5% threshold. This pre 99 unit trust is exempt from the IHA rules. When we audit the super fund, do we apply the same level of compliance requirements over the unit trust? In this case, it is the unit trust lending money out, not the super fund. I take the view that this is a contravention, subject to the 5% rules. Accountant disagrees citing that the IHA rules does not apply to a pre 99 trust.
Can I have your opinion please?
Hi Stephen
The common view is that a pre 11 August 1999 Unit Trust invested into by a SMSF are generally exempt from the in-house asset rules. As a result it has been argued that such a Trust could lend money to a related party as long as it was done on an arm's length basis as it is a separate legal entity.
There have been recent cases that have argued that the transactions of the Trust should be "looked through" and that there could be a breach of the sole purpose test under section 62 of SIS where the transactions have not been done on an arm's length basis. Refer the Montgomery Wools case from 2012.
My view is that if a pre 11 August 1999 Unit Trust is to lend money to a related company & that amount will represent more than 5% of the Fund's assets then legal advice should be obtained to review compliance with SIS given the "look through" approach taken by courts.
If other members have a view on this please let the forum know.
Thanks
SMSF AAA