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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?