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.
The capacity for red tape and bureaucracy to create jobs should never be underestimated. Can you imagine the number of tax agents, lawyers, accountants, financial planners, brokers and the like who would be standing around in dole queues if the government got serious about simplifying our tax and related regulatory system! I think the Pty Ltd comment (Mr Abbott) is correct albeit, it raises capital gains tax implications regarding Pty Ltd’s disposing of non-discountable capital assets. Labor’s attempt to smash franking credits, in SMSF’s, is a good example of some of the risks of Pty Ltd’s here. Back to loan accounts in unit trusts and the madness that goes with, “be warned of regulation 13.22D’. What about capital allowances. Unit trust has a $1 million building and claims $40,000 a year in capital allowances. Rents, being as pitiful as they are these days, after some other claims for depreciation, accounting, real estate managers and lawyers’ fees, the trust has always been on life support in its ongoing struggle to book a profit. As a result, at the end of each year there is another, say $35,000, sitting in the bank. How do you distribute that? One assumes an analysis of the trust deed and a detailed review of the definition of trust as opposed to taxable income will resolve the issue of what constitutes a loan. As I said in my opening, red tape means, jobs, jobs jobs.
Couldn’t you distribute it as a return of capital or a buyback of units?
Yes but I think this article is referring to related trusts where the SMSF has an investment, if it was set up as a company it would be an IHA issue.
Two important issues on this not discussed. Firstly trust distribution minutes need to be in place prior to 30 June for ALL trusts. Failure to do so results in the trust being subject to tax at a rate of 45%. Secondly and more importantly, as this vehicle is wholly owned by the SMSF generally it is better to use a company rather than a trust. With a company the unpaid distribution issue disappears as the Board does not have to distribute but when it does it will be franked dividends enabling them to be allocated in income years when the Fund’s tax rate is high or when a refund is needed if the tax is low. 13.22C company always before a trust in my view.