Lag in trust entitlements receipt risky

SMSF trust entitlements

SMSFs should ensure they receive any entitlement from a trust before the end of the financial year to avoid in-house asset breaches and trust failures.

An SMSF that is due to receive any entitlements from a unit trust for this financial year must ensure it is collected by 30 June to prevent it being considered an in-house asset and damaging the status of the trust, an SMSF legal expert has warned.

DBA Lawyers principal Dan Butler said a distribution from a unit trust, including related or private trusts, is considered an unpaid present entitlement (UPE) and needs to be recognised in a specific financial year even though they can be received many months after the end of that income year.

“SMSF advisers need to be on top of UPEs from trusts coming into SMSFs as at 30 June and brought to account for the current financial year,” Butler said during a recent webinar.

“It is getting close to 30 June and for clients with an SMSF which has entitlements from a trust, they need to be able to ensure that UPE has been collected by 30 June.

“In fact, the ATO’s position in Self Managed Superannuation Funds Ruling 2009/3 is that the UPE should be paid across to the fund prior to the finalisation of the accounts for that unit trust.

“So this is very timely and now is the time to go back and look at UPEs from unit trusts from the last year and check if they have been fully collected.

“If UPEs are not fully collected, they will go on the 30 June balance sheet and can give rise to a potential loan as the SMSF will be seen as having lent money to the trust.”

He said this was the case as the superannuation and tax laws had extensions to the concept of what was considered a loan or financial accommodation and in the case of SMSFs and trusts it could create negative consequences for both entities.

“It is worthwhile checking that UPEs from 2021 have been fully collected otherwise your clients could be in for a real problem, particularly with non-geared unit trusts, because if they are seen as getting a loan from the fund, it could blow up the unit trust and the units will be treated as in-house assets, so be very careful about that one,” he said.

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