Having a pre-99 unit trust within a self-managed superannuation fund in the past was particularly useful to circumvent the borrowing rules and other limitations applied to the superannuation fund. Although there was a lot of speculation about closing pre-99 unit trusts when the transitional rules of reinvestment ended in 2009, the pre-11 August 1999 unit trusts are still worth retaining as the rules are less restrictive than post 11 August 1999 unit trusts.
The following table provides a snapshot of certain activities within a pre-99 unit trust:
| Question | Answer |
|---|---|
| Can a pre-99 trust give loans to a related party? | There are no restrictions applied to a pre-99 trust giving loans to a related party, provided the loans are on an arm's length basis. Recent court cases such as Montgomery Wools show that courts clearly look through the transactions of the trust, resulting in a possible breach of Section 62 of SISA. |
| Can a pre-99 trust borrow from a related party? | There are no Superannuation Industry Supervision Act 1993 (SISA) provisions that specifically prohibit a pre-99 trust from borrowing. Notwithstanding, any related party loan needs to be scrutinised closely by the trustees, as potential tax consequences may arise if the borrowing is not entered into and maintained correctly. |
| Can a pre-99 trust's assets be used as security for related party personal loan? | In the Montgomery Wools case, the Australian Taxation Office as well as the Courts have confirmed that if the trustees allowed the property in the trust to be used as security for a loan that was unrelated to the fund or the trust, and in essence placed the interest of the business ahead of the interests of the fund, the trustees have failed the sole purpose test. |
| Can a pre-99 trust carry on a business? | The legislation is silent on whether a pre-99 trust will be able to undertake any business activity, provided the deed permits the trust may be able to carry on a business. |
| Can a pre-99 trust purchase assets from members or a related party? | Again the legislation is silent on whether a pre-99 trust will be able to acquire assets from related parties. The trust may be able to purchase assets from related parties provided the transaction is conducted on an arm's length basis. |
| Can a pre-99 trust lease assets such as residential properties to members or related party? | As per ATO ID 2002/388, a lease arrangement involving related parties of SMSF leasing residential property from the trust does not fall within the definition of an in-house asset. This is because the asset involved is that of the trust and not an asset of the SMSF. The SISA places no restrictions on the members of the SMSF tenanting the residential property of the trust provided the SMSF's investment in the trust is consistent with its investment strategy and the trust is conducting its dealings with SMSF members on an arm’s length basis. |