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The smsf that I am auditing has an investment in a related party unit trust (not pre-99). It is the only investment of the fund other than the bank account. The other party is the family trust. On the balance sheet it appears that the family trust has withdrawn more funds as drawings from the unit trust on top of their distributions i.e., there is an asset account in their name. My query is - would this be considered a loan to another entity under 13.22C? Any advice would be greatly appreciated.
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I agree with SMSF AAA. I just wanted to suggest, that if the primary asset of the unit trust is a property, that you check the "loan amount" hasn't occurred due to a failure to conduct tax effect accounting correctly. I frequently see related trusts with "loan accounts" caused by the unit trust claiming deprecation and the full proceeds of the profit being paid to the unit holders.
Hi Tanya
Yes to be an allowable investment in a related party unit trust under SIS regulation 13.22C & D the trust is not allowed to have "a loan to another entity, unless the loan is a deposit with an authorised deposit-taking institution".
My view is that normally if more money has been taken by the Family Trust than their distribution amount then yes that would be treated as being a loan and would be a breach of the 13.22C & D requirements.
Perhaps a better approach would have been to treat the excess amount taken as a return of capital if the trust deed allowed it.
If a loan has occurred and the SIS regulations have been breached this makes the investment in the trust an in-house asset and the exemptions under SIS regulations 13.22C & D cease to apply.
The Fund should get professional advice as to whether the unit trust has made a "loan" and what the implications are.
If other members have a view please let the forum know.
Thanks
SMSF AAA