Trust distributions can create asset breach

trust distributions in-house asset

SMSFs holding a unit trust may breach the inhouse asset rules by incorrect treatment of trust distributions.

SMSFs using a 13.22c unit trust need to be aware they can inadvertently acquire an asset through the incorrect treatment of trust distributions and breach in-house assets rules, according to an SMSF technical expert.

SuperGuardian education manager Tim Miller said SMSFs working with a 13.22 unit trust, or a pre-99 unit trust or related trust, could fall into the trap of ‘acquisition by stealth’ by not tracking the receipt of unpaid present entitlements.

“SMSFs are often presented with unpaid present entitlements when the related trust dictates or determines what the distribution is and then that distribution often takes a bit of time to go into the fund,” Miller said during a recent online briefing.

“The reality is that income should be declared at the end of the financial year, but it’s often not worked out until some part into the next year.

“Once it is worked out, the income should be accommodated for at that point in time otherwise that unpaid trust distribution could be deemed as a loan because the fund was providing financial accommodation to the trust and the loan would be viewed as an in-house asset.”

He said if the distribution was reinvested incorrectly, it may be considered an in-house asset, but if it is incorrectly accounted for and viewed as a loan, it would definitely become an in-house asset.

“If you are working with a 13.22c unit trust, then a redistribution would be acceptable because it is meeting all the required conditions, but if it triggers over and becomes a loan, then the SMSF has got issues to contemplate,” he said.

“There are these traps we need to be mindful of when dealing with unit trusts inside an SMSF because if there is anything unpaid, that will trigger other events occurring from an acquisition point of view and that is not always a known entity because you might inadvertently acquire something by not acting on the distributions from the trust.”

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