SMSF has been warned that if Unit Trusts overpay distributions to SMSF Unitholders, this may in some cases be considered borrowing.
In a recent DBA webinar, Shaun Backhaus, Senior Associate at DBA Lawyers, explained that sometimes unit trusts overestimate their annual distributions and overpay, resulting in a situation where SMSF unit holders will receive more income than entitlement.
Determining whether this means that the SMSF has borrowed from the unit trust and therefore violated Section 67 in this situation depends on a variety of factors, Mr Backhouse explained.
While there’s not always a simple answer, Backhaus said SMSF experts could help examine the commissioner’s interpretation of the loan to determine if it’s actually a loan. I said yes.
“In SMSFR 2009/2, the Commissioner talks about what a loan is. “This includes the provision of monetary easing in the form of
“It goes through a fair amount of broad and considerable case law. They say it works.”
Backhouse said practitioners and clients in this situation should check what is written in the unit owner’s contract or unit trust deed.
“Has the overpayment been a CGT event and reduced the cost base? Is it something that has to be paid in time to be a loan?” he said.
“Could you make a resolution stating that you have no intention of repaying? What happened in the past? It shows and is probably a loan.”
Backhouse said it would likely be considered a loan if an associated trust was involved.
“It’s not always the case, but when there’s an associated trust that brings the issue to the forefront.”