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Dear SMSFAAA - your thoughts please - This SMSF initially subscribed and acquired 120 units in a closely held Non-related unit trust (there are a total of 9 unit holders each with approx 120 units held initially - i believe this is known as the initial 'subscribed amount' used to setup the trust - i dont believe this changes from 9 total unit holders or their percentages of total unit holdings). Subsequent to this, something bizarre occurs - This SMSF gives this same closely held non-related unit trust $135,000 and reports it as an asset in the balance sheet (material amount). An enquiry to the accountant returns that it is a 'contribution' of further funds to the unit trust but they dont know how to treat it. After requesting the loan agreement, the smsf Accountant said 'its not a loan', yet does not know if its an investment. Background information to the unit trust: 9 unit holders who are all doctors went in together to put a deposit on a property that the ANZ bank is then helping them settle on (which i believe is a day hospital); This all happened in year 1. I recieved the unit trust deed, register, UT 2022 financials,
What evidence should i have seen or should i be receiving here for the $135,000 sent to the Closely held unit trust?
I believed that this would have resulted in further units issued with accompanying unit certificates to all parties who made additional investments in this unit trust - but the accountant asked why. The accountant believes that their fixed entitlement (unit holding percentages) dont change amongst all the unit holders and the $135,000 still means their fixed entitlement remains the same after the contribution.
Do unit certificates (legally) need to be issued from the unit trust each time money is poured in from the smsf?
The accountant has really made me question my thinking about this audit now and i turn to you for your opinion. please help.
Hi Mark
Yes if a SMSF makes an investment in a Unit Trust whether that be a loan or a purchase of units there has to be appropriate paperwork issued at the time of the investment being either a loan agreement or new unit certificates. This is what would be required to meet the requirements of section 109 of SIS the "arm's length" requirement.
The Fund is also at risk of the investment being treated as NALI (non-arm's length income) if the transactions has not been done on an arm's length basis.
Any investment in the trust would also need to consider the in-house asset rules.
If the trustees do not provide appropriate documentation there may also be a breach of section 35C(2) of SIS that requires:
"The trustees must provide the auditor with the necessary documents to complete the audit in a timely and professional manner; and within 14 days of a written request from the auditor".
Thanks
SMSF AAA