A senior technical manager has warned practitioners not to be under the impression a trust distribution cannot be questioned from a compliance perspective as long as it is paid to unit-holding SMSFs before 30 June of the relevant income year.
Accurium head of education Mark Ellem told delegates at the recent SMSF Association Technical Summit 2023 held on the Gold Coast that trust distributions to SMSFs should be paid as soon as practicable once the amount to which the fund is entitled has been established.
To this end, Ellem pointed out if the amount of the distribution is known in October, it should be paid to the SMSF long before June of the following year.
“What if [the SMSF accountant or administrator] knew in October how much they’d be entitled to, but didn’t collect until May next year? I would be asking the question why. Why are you taking so long to collect it? Are you making a financial accommodation for the unit trust?” he said.
“[Additional questions would be:] does [the trust] need to hold onto the cash? Why can’t it pay [the SMSF]? Doesn’t it have the cash to pay [the fund]? Have we gone into a form of [the SMSF] making a loan?
“So I believe that the interpretation that as long as you collect the trust distribution by the following 30 June [is okay, is flawed] … and if I know what the distribution is at one time, I really need to go about doing what I possibly can to recover that distribution as quickly as possible and not let it sit [in the unit trust].
“The longer we let it sit there, the more questions are going to be raised about [issues such as] in-house assets, section 109 [of the Superannuation Industry (Supervision) Act] and the sole purpose test.”
According to Ellem, the misunderstanding over the timing of unit trust distributions stems from one of the examples contained in the ATO’s SMSF Ruling 2009/3.
“If you read the example, it talks about the distribution being known at the end of March and it’s paid by the end of May – so within a couple of months. Now I think from that many believe that as long as it’s paid prior to 30 June of the next year, that’s fine,” he noted.