SMSFs that have invested in a unit trust where they have not received distributions should check on why that has occurred as it may cause the fund to breach a number of super and tax laws, including the non-arm’s-length income (NALI) provisions, Heffron head of education and content Lyn Formica has noted.
Speaking during an online briefing today, Formica addressed the issue where a number of SMSFs had invested in a unit trust and distributions from it were being retained and accrued as a unitholder loan, creating problems for each of the super funds.
“There is usually a time delay between when the unit trust trustee declares a distribution for the year and when it’s paid across,” she said.
“I’m assuming [in this case] we are well beyond that acceptable delay, which brings us to the question: Is this really a loan?
“Would this be construed the SMSFs have lent that money back to the unit trust trustee because if that was a loan, and we’ve got a related trust, then we’re going to have an in-house asset.”
She noted the 5 per cent in-house asset limit rules could apply to prevent a breach and the question of whether it was truly a loan was still open for debate pending a final ruling in the case of Commissioner of Taxation v Bendel [2025] FCAFC 15, but other super laws may still be breached.
“There are other implications. Do we have a breach of the sole purpose test? Is it a breach of the arm’s-length rules in Section 109 [of the Superannuation Industry (Supervision) Act 1993]? Why are these amounts not being cash flowed through to the unitholders?” she said.
“The answers to those questions often lead us to a tax problem and the trustee is leaving the money inside the trust to pay down other debt or to make further investments.
“You have got to ask then: Are the assets of the SMSFs being used as a source of low-cost finance for the unit trust? Because then we’ve got a NALI risk.
“Are future distributions from this trust going to be higher than they would if the parties had been dealing at arm’s length because if they are, the distributions and capital gains from the trust are going to be taxed as NALI at the 45 per cent rate.
“From a safety perspective, think about capitalising the unpaid amounts and turning them into units. It is not going to solve the NALI problem, but it may put you in a better light if the ATO were to review the unit trust at some stage in the future.”
