Compliance, SMSF, Trusts

Trust overpayment can be compliant

Unit trust distribution SMSF

Appropriate accounting treatment of an overpayment of a unit trust distribution to an SMSF can prevent the situation from being a compliance breach.

An overpayment of a unit trust distribution to an SMSF does not necessarily constitute a breach of the Superannuation Industry (Supervision) (SIS) Act if the amount is classified appropriately in the fund’s financial statements, a sector specialist has said.

Accurium head of education Mark Ellem warned these types of situations can suggest the SMSF has borrowed money from the unit trust, constituting a breach of section 67(1) of the SIS Act.

Ellem pointed out practitioners should look to the ATO’s Self Managed Superannuation Funds Ruling (SMSFR) 2009/2 to understand the key elements needed to establish whether a borrowing arrangement exists.

“[There are] two characteristics we need for a borrowing – a temporary transfer of an amount of money from the lender to the borrower, so effectively from the unit trust [to the super fund], and an obligation or intention on the part of the borrower to repay that amount to the lender,” he told delegates at the recent SMSF Association Technical Summit 2023 held on the Gold Coast.

Given these components are defined in SMSFR 2009/2, he suggested a SIS Act compliance breach can be avoided, in the event an SMSF has received an overpaid unit trust distribution, if the amount in question is treated in a manner that does not establish a repayment intention.

“How are we disclosing [the overpayment] on the financial statements [of the SMSF]? Don’t show it as a loan. Show it as an overpaid distribution,” he said.

“Don’t give it the characteristic of a borrowing. Don’t accrue interest [on the amount]. Don’t pay it back to the unit trust because that [establishes] the obligation to repay it.”

To this end, he noted the most prudent way to treat the overpayment and not trigger a compliance breach of the SIS Act is to classify it as an offset to future entitlement of trust distributions that will be available to the SMSF.

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