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Hi, I commented on another related thread as I did not agree fully with the reposnse which more or less said for unrelated trusts ignore unpaid distributions which are accruing and there is not breach.
https://www.smsfaaa.com.au/forum/smsf-technical-forum/unpaid-present-entitlement-from-unrelated-unit-trust/dl-440681ab-72c8-4faa-abad-0ac1922e704b?postId=6278aad9b038820016ebb153&searchTerm=unpaid+distr
In my view howver if the excess is greater than last 12 months value it 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 shoudl 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.
So it can be fixed and you don't have the in house breach issues either way but I think Seciton 109 can be breached if the accrual just sits there ongoing and building.
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. Not sure there has been a test case or maybe it is something the ATO don’t concern themself with?
Hi CV
Yes an unpaid trust distribution not paid within 12 months of the relevant year may be considered to be in effect a loan.
Most of the articles / commentary in this space is in relation to when a SMSF invests in a related party unit trust.
The ruling SMSFR 2009/3 - Self Managed Superannuation Funds Ruling - Self Managed Superannuation Funds: application of the Superannuation Industry (Supervision) Act 1993 to unpaid trust distributions payable to a Self Managed Superannuation Fund states:
"1. This Ruling considers whether a Self Managed Superannuation Fund (SMSF) contravenes certain provisions of the Superannuation Industry (Supervision) Act 1993 (SISA)1 when the SMSF is presently entitled to distributions from a related trust which are not paid to the SMSF."
That is the ruling is relating to a SMSF investing in a "related trust".
The ruling states:
"7. In addition, it is the Commissioner’s view that, when an overall consideration of the factors surrounding the non-payment of the trust distribution is seen as an arrangement for the provision of credit or financial accommodation, it will satisfy the extended definition of ‘loan’ in subsection 10(1). "
I agree section 109 requires arm's length transactions so whether the investment is with a related party unit trust or unrelated unit trust the investment must be made on an arm's length basis. As per the ruling:
"27. The Commissioner’s view is that arm’s length beneficiaries would not generally allow substantial amounts of distribution entitlements to remain in the trust without receiving an appropriate return on this amount, for example a market rate of interest."
Another issue trustees have to consider is whether trust distributions owing to a SMSF (that are not paid on a yearly basis) become NALI (non arm's length income) and the resulting provisions may then apply.
Thanks
SMSF AAA