Speaking to SMSF Adviser, Crowe Horwath senior tax consultant Samantha Comer said there is still misunderstanding around related investments and related trusts, with some trustees failing to understand how to structure the trusts in relation to the super fund.
“Investment in a related unit trust has got to be really clean so you can only have cash and real property in it, unless of course it’s a grandfathered pre-August 1999 trust. But [what] we’re finding is [trustees] quite often unintentionally pay some personal expenses from the trust to create a loan in the trust account, which is a problem,” Ms Comer said.
“The other thing we often see happen is that they’re not able to pay the distributions out on an annual basis.”
Regarding a trust that is owned by super funds, Ms Comer said some practitioners and SMSF trustees do not realise they are required to pay that distribution out in cash to the super funds annually.
“If you fail to do so and you have what’s called an unpaid present entitlement and if that unpaid present entitlement remains unpaid for more than 12 months, it effectively becomes like a loan, from the super fund to the trust,” she said.
“So again, it can become an in-house asset issue for them.”
Ms Comer said she is also seeing issues among the grandfathered pre-August 1999 trusts.
“[While] you can have borrowings in those, we find that [trustees] have related party borrowings that aren’t on an arm’s length basis,” she said.
“If you’ve got an investment in a related trust and you get it wrong, that is an investment forever tainted. You can’t just fix it and move on. If you stuff up, you’ve basically got to sell out of the unit trust, so it’s not a quick easy fix.”