Investments, Tax, Trusts

Unpaid entitlements still an issue

unpaid present entitlements

SMSF trustees may face significant compliance issues if present entitlements due to the fund from investments in a unit trust are not paid out.

An SMSF expert has reminded advisers and trustees unpaid present entitlements due to a fund from its investment in a unit trust remains a significant compliance issue.

SuperGuardian education manager Tim Miller pointed out the issue of present entitlements from a trust not being paid to an SMSF in a timely manner was addressed by the ATO’s SMSF Ruling 2009/4 and the classification the regulator provided is what may lead to compliance problems.

“The ATO addressed [unpaid present entitlements] under this ruling to say: ‘Well if you’re not actually paying these distributions and if you haven’t made the payment out of the unit trust to the superannuation fund, then we need to consider that as either an investment in the unit trust, so to make that distribution a reinvestment and [issue] more units, or we need to treat it as a loan,’” Miller said during a technical webinar he hosted last week.

He noted either action will mean the SMSF will have to deal with the in-house asset provisions.

Further, he warned unpaid present entitlements will have a significant effect on two structures that are popular with SMSF trustees, being Superannuation Industry (Supervision) (SIS) regulation 13.22C unit trusts and pre-1999 unit trusts.

“It’s largely relevant for 13.22C [unit trust] investments because if that 13.22C trust has an unpaid present entitlement and we’re then treating it as a loan that has gone unpaid, then we’ve triggered a [SIS regulation] 13.22D event [that will override the trust’s treatment under 13.22C] and we’re going to have to unwind that transaction,” he said.

“Similarly if we’ve got a pre-1999 unit trust, well then we’re not going to have a problem with the pre-1999 investments, but the new investments [being the new units issued in the trust] will automatically be considered to be an in-house asset.

“So we’ve got to be mindful that if we’re dealing in this unpaid present entitlement space that we ensure the trusts are paying [the entitlements] on a year-by-year basis.”

During the same presentation, he noted the intricacy of investments in a unit trust could trigger the non-arm’s-length income provisions for an SMSF.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital