An SMSF receiving an overpaid present entitlement (OPE) must take specific action to prevent it being treated as a borrowing, while practitioners should be questioning the circumstances around how the entitlement was received, according to an audit firm.
ASF Audits head of education Shelley Banton said an SMSF receiving an OPE from a related unit trust must not have specific documents surrounding the entitlement, but should be addressing its receipt into the fund.
“Ideally, the fund records the OPE as a credit in the financials without any intention to repay it,” Banton said in a recent ASF Audits update.
She added the fund should not have any loan agreements, interest calculations to be paid by the fund or a contractual agreement the fund has to repay the credit in relation to the OPE.
To address the receipt of the OPE, she said: “Classifying the liability as an OPE and not as a loan will help reduce the number of queries from SMSF auditors.
“At the end of the year, the fund’s beneficiary account is expected to reduce as its present entitlement to current distributions accrues.”
She said SMSF trustees had to be sure to limit any further action around an OPE as any arrangement not described as a borrowing that ends up showing the characteristics of a borrowing will result in a contravention of section 67.1 of the Superannuation Industry (Supervision) Act.
“A good example is where no intention of a loan or borrowing develops into one because of later choices made by the trustees, such as repaying the credit or not reducing the overpayment by the present entitlements,” she said.
“There is a lot at stake because the [maximum] penalty for a breach of section 67.1 is 60 penalty units or $16,500 per trustee from 1 January 2023.”
She said questions should be raised around the receipt of an OPE and what may be occurring within the SMSF, such as whether the overpayment was because the fund had cash-flow issues and was unable to pay expenses or a minimum pension.
“An overpayment made as a one-off payment should trigger alarm bells and invite greater scrutiny of the fund’s OPE and activities,” she said.
“Several conditions must be in place for an SMSF to receive a complying OPE that is not a borrowing: it is generally paid annually, distributed proportionately to all unitholders and netted off against present entitlements each year.
“SMSF professionals should be aware of the pitfalls of how an overpaid present entitlement can quickly turn to compliance custard and carefully monitor their SMSF clients’ situation in each subsequent year.”
