Unpaid trust distributions and in-house assets
Unpaid trust distributions and in-house assets
We have released two self-managed superannuation funds rulings:
- SMSFR 2009/3 - application of the Superannuation Industry (Supervision) Act 1993 to unpaid trust distributions payable to a Self Managed Super Fund
- SMSFR 2009/4 - the meaning of 'asset', 'loan', 'investment in', 'lease', and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision Act) 1993.
To avoid exceeding the 5% in-house assets limit, it is important to know what assets are defined as in-house assets.
What is considered an 'in-house asset'
An in-house asset is an asset of the fund that is a:
- loan to a related party
- an investment in a related party or a related trust
- an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund.
Our ruling SMSFR 2009/4 aims to clarify this with additional examples.
We suggest you read these two rulings together as both relate to a number of common super law provisions.
How the super laws apply to unpaid trust distributions payable to self-managed super funds
If your SMSF does not collect distributions from a related trust to which it is entitled, the trustee may be contravening the super laws.
If the trustee allows trust distributions from a related trust to remain unpaid for excessive periods, the trustee may be contravening one or more of the following:
- in-house asset rules
- the arm's length rule
- the sole purpose test.
When is an unpaid trust distribution included in the 'in-house assets' of an SMSF?
The in-house asset rules may apply to any unpaid trust distribution when the SMSF is presently entitled to a distribution from a related trust and the distribution was not paid.
Generally, the unpaid amount will be included in the in-house assets of the SMSF, where:
- the trustee of the trust in question is a related party of the SMSF
- the circumstances indicate that a loan agreement has been entered into, or that a consensual agreement for the provision of credit or other form of financial accommodation has been reached, or can be inferred, between the parties.
In addition, unpaid trust distributions may also be considered to be in-house assets if circumstances indicate that an investment in that trust has been made by way of an agreement that was entered into for the purpose of gaining interest, income, profit or gain.
Refer to our ruling SMSFR 2009/3 for more information.
Unpaid trust distribution and the transitional rules
The transitional in-house asset rules that applied to certain assets owned before the end of 11 August 1999 ended on 30 June 2009.
It is possible that an SMSF that held units in a related unit trust on or before 11 August 1999 may have accumulated unpaid trust distributions that had not yet been paid or reinvested back into the trust.
This ruling states that non payment of trust distributions from a related trust may be seen as an arrangement for the provision of credit or financial accommodation, which satisfies the extended definition of a 'loan' in a related party (meeting the basic definition of an in-house asset).
However, an opportunity existed up until the expiration of the transitional rules (on 30 June 2009) for the outstanding trust distributions to be reinvested in the unit trust. This could have been done by either:
- the issue of new units which may be exempted from the in-house assets test
- entering into a contractual agreement whereby the unpaid distributions were paid and lent back to the unit trust on arm's length terms (including interest).
If your fund took this course of action, we will consider that any previous contravention of the in-house asset rules caused by the accumulation of unpaid trust distributions has effectively been rectified and take no further action.
Note: Where a contractual agreement has been entered into, we recommend that this agreement be evidenced by a written record that indicates the terms of the loan. This may include whether the loan is at call, the amount of the loan, and the interest rate or other means of calculation of the interest.
This written record should have been prepared by 30 June 2009 but, in practice, where the loan funds were with the borrowing entity on 30 June 2009 and the actions of the parties are consistent with the existence of the agreement, we will extend the period for the formalisation of the agreement up to the due date of the 2009 annual return.
For more information, refer to In-house assets and transitional rules.
Making and maintaining investments at arm's length
SMSF investments must be made on an arm's length basis, or not be more favourable to the trustee of the unit trust than would be expected if the arrangement was conducted on an arm's length basis. Consequently, new investments made in respect of an unpaid trust distribution which are not made on arm's length terms may result in a contravention of this rule.
Where an SMSF holds an investment in a related trust, any dealings with the trustee of that trust must be undertaken in the same manner as they would if that trust was at arm's length. Decisions about whether to seek payment of trust distributions would form part of these dealings and should be done on the same basis as would be expected if the trust was not a related party. Failure to seek payment of trust distributions from a related trust in a timely manner may result in a contravention of this rule.
The sole purpose test
The trustee of an SMSF may be contravening the sole purpose test when:
- a trustee maintains a substantial proportion of the assets of the SMSF in a related trust as unpaid trust distributions
- below market rate or no interest is being paid for the unpaid trust distributions.
This could indicate that the SMSF assets are being employed as a low-cost source of capital for the related trust, especially where the SMSF is not the sole beneficiary of the related trust and where the other beneficiaries of the trust are related parties.
Where contraventions of the super laws have occurred
We will give you the opportunity to rectify any contraventions of the super laws.
We always consider all the facts and the unique circumstances of your SMSF.
However, if there is evidence you have seriously contravened, or repeatedly continue to contravene, the super laws, you risk your SMSF being made non-complying.
Last Modified: Thursday, 23 July 2009