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Hi SMSFAAA team,
I am auditing a fund with an investment in a related Unlisted Unit Trust for the 2020 financial year.
The Trust paid trust distribution (weekly drawings) directly to the members of the fund.
The distributions have been recorded as pension from the fund to the members.
The 2019 trust distribution payable was $61,580 and the drawings/distributions from the trust to the members was $91,580 during the year (resulting in $30,000 over distribution). Should it be viewed as a borrowing by the fund?
The 2020 trust distribution payable was $67,130 so the assets of the fund shows a distribution receivable at 30/06/2020 of $37,130.
Can you please advise the breaches you would note in the Management Letter or Audit Report?
Thank you in advance.
Kind Regards
Jean Rey
Hi Jean
A similar issue has been raised previously.
Yes, I am aware of this occurring occasionally in that an accountant will treat a distribution paid by a related trust to a member (rather than to the Fund) as a pension payment made by the Fund.
My view is that technically the minimum pension payment rules have not been complied with (SIS Reg 1.06(9A)) as the pension payments have not been made by the Fund itself.
I do note that the accountant may argue that SMSFD 2007/1 (Self Managed Superannuation Funds: when is a dividend or trust distribution ‘received’ before the end of 30 June 2009 for the purposes of paragraph 71D(d) of the Superannuation Industry (Supervision) Act 1993?) supports their view on the basis that it states:
"25. It is therefore the Commissioner’s view that if an SMSF has requested that a dividend or trust distribution amount be applied or dealt with in some way on its behalf, the SMSF is taken to have received that amount as soon as it has been applied or dealt with as requested. For example, if a dividend or trust distribution amount is to be reinvested in the company or trust respectively, the amount is received by the SMSF when the amount is appropriated for the purchase of additional shares or units, as appropriate. If a dividend or trust distribution amount is to be set-off against a liability owing by the SMSF to the company or trust respectively, the amount is received by the SMSF as soon as the set-off happens."
An approach would be to raise it in your management letter that pension payments must be made by the Fund to the member(s) directly.
Whether the overpaid trust distribution paid in the 2018/19 year should be treated as a liability in the Fund's accounts depends on a number of issues.
DBA Lawyers did comment on this issue in an article found at:
A way to treat the overpaid distribution is a return of capital if the trust deed of the Unit Trust permits it. A concern would be if the overpaid distribution is treated as a loan to the Fund does the Fund fail to now meet the rules in relation to its investment in the ungeared related party unit trust
There is also a risk that an overpaid distribution could be treated as a non-arm's length transaction and there could be NALI (non arm's length income) implications. Under SIS regulation 13.22C the Unit Trust cannot have a loan made to another entity.
I would raise the above concerns in your management letter to the trustees.
It would be great to get other member's views on this query.
Thanks
SMSF AAA