Borrowing in Unit Trusts - Options After June 2009

The rules concerning investments with related parties have changed many times in recent years. Those concerning related unit trusts are perhaps the most complex. The most recent changes occurred in August 1999 and can have some ongoing impact until 30 June 2009. This Fact Sheet addresses only unit trusts that were in existence before 11 August 1999. Quite different (and much more restrictive) rules apply to trusts established after that date.

In discussing related party unit trusts, the type of arrangement generally refers to a unit trust where units have been issued to the super fund (and possibly to other parties such as members or related companies or trusts) and where the unit trust has made investments that involve borrowings. The generic term for these unit trusts is “geared unit trusts”.

When the legislation was changed in August 1999, the intention was to prohibit new investments in geared unit trusts. However, as many of these unit trusts had committed to a long-term loan, it was decided that some generous “grandfathering” provisions would be inserted into the law. Note that these new provisions apply to the super fund, not to the unit trust. Nothing about these changes stops the unit trust from buying new assets or from borrowing more or from refinancing within the trust.

There are three (3) possibilities for investing more super fund money into a geared unit trust after 11 August 1999. These are:

  1. Using a “section 71(E) election” to purchase new units in the trust, where these new purchases do not exceed the level of borrowings in the unit trust as at 11 August 1999.
  2. Paying any calls on partly-paid units, where the first call had been made before 11 August 1999.
  3. Reinvesting any distributions that are payable to the super fund in respect of unit trust income.

If the first option is chosen (the “section 71(E) election”), then neither of the other options are available. However, options 2 and 3 can be taken together.

All of these options expire on 30 June 2009. As of 1 July 2009, there are really three choices with respect to continuation of the unit trust. The availability of these choices will depend on several factors, most importantly the amount of borrowings within the unit trust.

If there are still borrowings in the unit trust at 30 June 2009, then the grandfathering rules still apply to say that the super fund’s investment in that unit trust is not an in-house asset. However, any profits made in the unit trust must be actually paid to the super fund once the profit has been calculated. Note that this is the accounting profit, not the tax profit.

For example, if the net profit for the unit trust for the year ended 30 June 2009 is calculated in October 2009, that calculated profit must be paid to the super fund as soon as practically possible. Generally, that would be expected to happen within 30 days, so by the end of November 2009.

The profit or distribution cannot be simply reinvested as more units, it must be paid to the super fund. In addition, no further investments can be made by the super fund in the unit trust after 30 June 2009.

Alternatively, if all borrowings have been repaid by 30 June 2009, new investments by the super fund MAY be possible if the unit trust can be determined to be a “non-geared unit trust”. Very strict conditions apply, so seek advice if required. These conditions include:

  • No borrowings of any kind;
  • No charge over any unit trust asset;
  • No investment in or loan by the unit trust to individuals or entities (in other words, no shares or managed funds, no loans to anyone);
  • No acquisition of assets from a related party, except business real property;
  • No leasing of assets to related parties, except business real property; and
  • The unit trust does not conduct a business.

The third choice is to continue under the old rules, with no borrowings, but without meeting the strict conditions of a “non-geared unit trust”. This has the same conditions as the first choice, outlined at the top of this page.

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