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Risk of contravention with overpayment of trust distributions

shaun backhaus ta
By Miranda Brownlee
12 August 2022 — 1 minute read

SMSFs have been warned that where a unit trust has overpaid a distribution to an SMSF unit holder that this can, in some instances, be considered a borrowing

Speaking in a recent DBA webinar, DBA Lawyers senior associate Shaun Backhaus said sometimes situations will arise where a unit trust overestimates its distributions for the year and over pays, resulting in the SMSF unit holder receiving more income than its entitlement.

Determining whether this means the SMSF has borrowed from the unit trust and therefore contravened section 67 in this situation will depend on a range of factors, explained Mr Backhaus.


While there isn’t always a simple answer, Mr Backhaus said SMSF professionals looking at what the Commissioner’s interpretation of a loan is may help them to determine if it is in fact a borrowing.

“In SMSFR 2009/2, the Commissioner talks about what a loan is. It includes the provision of credit or any other form of financial accommodation whether or not enforceable, or intended to be enforceable, by legal proceedings,” he noted.

“It's pretty broad and also goes through a fair bit of case law. It states that there are a few necessary features including a temporary transfer of an asset from a lender to a borrower and an obligation or intention to return the temporarily transferred asset to the lender.”

Mr Backhaus said practitioners and clients in this situation should look at what the unit holders agreement or unit trust deed says.

“Is the overpayment a CGT event and you’ve reduced your cost base? Is it something that has to be paid within a time limit that would probably make it a loan?” he said

“Could you make resolutions to show that there’s not an intention to repay it? What’s happened in the past? If there’s been unpaid present entitlements in the past and they’ve been repaid each time then that probably shows an intention to repay it and it is probably a loan.”

Mr Backhaus said where it is a related trust that’s involved it's more likely to be considered a loan.

“That’s not necessarily the case, but where you’ve got a related trust that does bring issues to the forefront."


Risk of contravention with overpayment of trust distributions
shaun backhaus ta
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