Speaking in a recent Accurium CPD+ webinar, Seamless SMSF head of technical and training Frank La Spada explained that pre-August 1999 trusts can be “absolute gold” for SMSF clients given they are exempt from the in house asset rules.
However, Mr La Spada said it is critical that SMSF professionals are across when the units were acquired as this will determine whether there is a potential in house asset or not.
“Where units were acquired before 11 August 1999, that’s what really defines the trust as a pre-1999 unit trust,” he explained.
“There may be units that were acquired between 11 August 1999 and 1 July 2009. If units were acquired during this period, they need to meet the transitional rules.”
Where units were acquired after 30 June 2009, this is where in house asset problems will arise, he warned.
“If you have a trust that doesn’t meet the definition of an ungeared unit trust and the fund is acquiring units in this trust continually after this date, you’re going to have an in house asset,” he said.
Mr La Spada said that auditors want to see an updated unit register which shows when the units were acquired.
“That way, we can actually test whether or not the fund has an in house asset.”
“Remember, not all the unit are going to be in house assets, only the assets that don’t follow the rules.”
Mr La Spada reminded SMSF professionals that there were three rules developed as part of the transitional period.
“We’ve got our partly paid units where the acquisition was was in place before the transitional period and were then paid off during the transitional period. We’ve got reinvestment of profit, where we’re essentially using our distribution to reinvest in further units. We also have our section 71E election.”
“The 71E election allowed trustees who had large amount of debt in the trust to be able to contribute capital into the trust, acquire a large amount of the unit and that cash would be used to repay debt.”
Mr La Spada said it’s critical that SMSF clients have their unit register up to date.
“Otherwise, how is your auditor going to know whether there’s going to be an in-house asset or not?” he questioned.
“That’s one of the biggest problems we see with these trusts. Have a register and make sure you’re across how those units were purchased. Sometimes that might mean you have to go back through the archives.”
