SMSFs cautioned on breaches with unpaid trust distributions
SMSFs that invest in non-geared unit trusts have been warned on the importance of paying trust distributions in a timely manner, as failure to do so could result in a potential breach for the trust.
One of the key issues that can arise for SMSF clients who invest in said 13.22 C trusts or non-geared unit trusts, Miller Super Solutions founder Tim Miller explained, is where an unpaid trust distribution is continually carried forward.
“The issue that the ATO has identified is that this in itself could be considered to be a loan,” Mr Miller told delegates at the Chartered Accountants Australia and New Zealand SMSF Day 2019 Workshop.
Given that regulation 13.22D of the SISR prevents the trust from making loans to other entities, this could be a breach of the events outlined under regulation 13.22 D, he warned, which could tarnish the fund.
“So, it’s very important that when we’re dealing with these 13.22 C structures that our distributions are paid in a timely manner,” he said.
Mr Miller also clarified that there is a big difference between the late payment of an unpaid trust distribution and the non-payment of an unpaid trust distribution.
“It’s not so much about it being paid in the next financial year, because if the accounts are prepared quite late, that distribution might not be paid until the following financial year. It’s about continually carrying forward the unpaid trust distribution,” he explained.
“It’s also very important that if the accountant that is preparing the financials of the unit trust that they understand what terminology to use.”
Mr Miller said he has come across some financial statements which state “loan to beneficiary” rather than “distribution”.
“This needs to be [addressed] very quickly, and the financial statements reproduced with the correct reference of what it actually is, which is a distribution, because just having the word loan puts the fear into everybody,” he said.