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Megan Murphy

May 09, 2022

Unpaid present entitlement from unrelated unit trust

in SMSF Technical Forum

I have a fund with an investment in an unrelated unit trust (unitholding 8%). The unit trust usually pays out full unitholder profit entitlements in the following year, but in this year has only paid out approximately 50% (all unitholders have received distributions in proportion).

I know this is a problem if the trust is a related trust, but what is the position in an unrelated trust? Do I have sole purpose or arm's length issues here?

Thanks

2 answers0 replies

Comments (2)

Jan 25, 2023

I think here though the excess greater than last 12 months value in my view should be reallocated in the unit trust to a loan account as this is what is effectively is now, and a loan agreement should be in place with market rate of interest to meet Section 109. Not paying distributions effectively becomes a provision of credit and I think the same principles of SMSFR 2009/3 apply.

Or another option is to issue new units to clear the unpaid > 12 months amount otherwise it usually isn’t ever paid until the trust winds up as there is a liquidity issue.

I have only warned clients about this and made that suggestion to ensure Section 109 is being met. Other auditors may think that’s overkill even if technically correct - what do you think in light of those comments? Still think it is best not to worry? Maybe a management letter point the ATO could deem it a loan? Not sure there has been a test case or maybe it is something the ATO don’t concern themself with?

THE AUDITORS INSTITUTE

May 10, 2022

Hi Megan

My view is this is not an audit issue if an unrelated unit trust does not pay out the full profit entitlement in the following year. This is because in your example the trust is not a related trust / party (given the unit holding of 8%).

That is as the Fund can invest in an unrelated unit trust it can also lend money (re the unpaid distributions) to the trust.

The Unit Trust's deed should be reviewed to see if there is a requirement to pay out the profit by the end of the following year and if there is any rules in relation to distributions owing to investors.

The tax treatment of the Unit Trust itself should be considered. If a Unit Trust fails to "distribute" income it may be liable to paying tax on income at 45%. Based on what you have noted there has been a distribution it just has not been fully paid in the following year

The rules re Division 7A & the proposed changes from 1 July 2022 should also be considered. These rules are covered in TD 2022/D1:

"Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'?"

Thanks

SMSF AAA