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Pre 99 trust owns 100% in related unit trust (X) and also has a loan with this trust. Trust X does not have bank statements and all transactions run though pre 99 unit trust and loan between the trusts. There is no loan agreement and no interest/repayments are paid. The accountant agrees that the X trust is a subsidiary of the pre 99 unit trust. I think this will be still a breach of the in house asset.
Could the loan in pre 99 unit trust be recorded as a return of capital (if loan payable) or additional investment in the X trust (if on debit side)?
Hi Joanna
Normally a pre August 1999 trust is a protected trust from the pre August 1999 investment by the Fund being treated as an in-house asset. If there has been a scheme to get around the in-house asset rules this is where a Fund investing in such a trust could be in breach of the in-house rules.
In relation to a Fund being able to acquire additional units in the pre August 1999 trust these would normally be treated as an investment in a related party and be restricted to up to 5% of the Fund's assets.
Transitional rules allowed additional units to be acquired in pre August 1999 trusts up to 30 June 2009 under sections 71A to 71E of SIS.
The rules are complicated and I would need more details to provide a proper response.
I would recommend that the trustees of the Fund get professional advice to ensure that they are complying with SIS. Also given that there is no loan agreement in place and no interest / repayments are being made you would also want to consider the NALI / NALE potential implications.
Thanks
SMSF AAA