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Stephen Chiang

Aug 29, 2022

UPE from a pre 1999 unit trust

in SMSF Technical Forum

I am auditing a fund which has all its investment in a pre 1999 unit trust, which in turn has all its investment in a managed fund platform. The fund has an asset UPE which flows through from a couple of years prior. The amount is about $52k with the fund having a gross asset of $1.6m. So it is less than 5% and more than $30k. This issue has not been reported in prior year management letter.

Given that the unit trust is exempt from being an IHA, does that mean that any UPE, regardless of it being more than 5% and/or the $30k threshold, will not be caught in the IHA rules?

How do the 5% interact with the $30k?

If the total contravention is more than 5% and yet below $30k, does this fit in with the reporting criteria, and vise versa, or is it either or?

Many thanks

3 answers0 replies

Comments (3)

Stephen Chiang

Aug 30, 2022

Thanks for your reply.

In my audit case where the amount of breach is $52k and therefore reportable. Yet the amount is less than 5% of the gross asset of the fund, not reportable.

Apart from mentioning it in the management letter, do I exercise professional judgement and make a decision as to the reporting on ACR?

THE AUDITORS INSTITUTE

Aug 30, 2022

Replying to

Hi Stephen

If the breaches are more than $30,000 you have to report it in the ACR (even if they are less than 5% of the Fund's assets).

You have to work through each test & as per the ATO's ACR instructions:

"Test 7: Financial threshold test

If the value of all contraventions of a section or regulation listed in tables 1A and 1B is more than $30,000, all identified contraventions are reported.

Any additional information needs to be reported in accordance with the auditing and assurance standards and your professional judgment."

Thanks

SMSF AAA

THE AUDITORS INSTITUTE

Aug 30, 2022

Hi Stephen

My view is that the prior years unpaid trust distributions would be treated as an in-house asset if the trust is a related party even if the trust is a pre 11 August 1999 Unit Trust. That is if a distribution is declared and not paid it is viewed as a loan and as an in-house asset.

The ATO provides guidance on unpaid trust distributions re a pre 11 August 1999 Unit Trust at:

https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-technical/Transitional-rules-and-in-house-assets/

It states:

"Unpaid trust distributions

It is possible that an SMSF that held units in a related unit trust on or before 11 August 1999 may have accumulated unpaid trust distributions that have not yet been paid or reinvested back into the trust.

If an SMSF has accumulated unpaid trust distributions relating to multiple years, these distributions may currently be in-house assets. This is consistent with the ruling SMSFR 2009/3.

This ruling states that non-payment of trust distributions from a related trust may be seen as an arrangement for the provision of credit or financial accommodation, which satisfies the extended definition of a 'loan' in a related party (meeting the basic definition of an in-house asset).

However, an opportunity existed until the expiration of the transitional rules (on 30 June 2009) for the outstanding trust distributions to be reinvested in the unit trust. This should have been done by either:

the issue of new units which may be exempted from the in-house assets test
entering into a contractual agreement whereby the unpaid distributions are paid and lent back to the unit trust on arm's length terms (including interest).

If your fund took this course of action, we will consider that any previous contravention of the in-house asset rules caused by the accumulation of unpaid trust distributions has effectively been rectified and take no further action.

Where a contractual agreement was entered into, it should be evidenced by a written record that indicated the terms of the loan. This may include whether the loan was at call, the amount of the loan and the interest rate or other means of calculation of the interest.

This written record should have been prepared by 30 June 2009 but, in practice, where the loan funds were with the borrowing entity as at 30 June 2009 and the actions of the parties were consistent with the existence of the agreement, we would extend the period for the formalisation of the agreement up to the due date for lodgment of the 2009 annual return."

In relation to the auditor contravention report if the value of contraventions are more than 5% of the fund's total assets then the breach has to be reported in the ACR. A separate requirement is that if the value of all breaches are greater than $30,000 the breaches have to be reported. That is they are 2 different tests as to if breaches are reported in the ACR.

Thanks

SMSF AAA