SMSF Related Unit Trusts: What Happens if Money Is Paid to a Member by Mistake?

Related unit trusts are commonly used in SMSF structures, particularly where business premises or property investments are involved. While these arrangements can work well, trustees need to be careful when money moves between the trust, the SMSF, and members personally.

Why Related Unit Trusts Matter in an SMSF

When an SMSF invests in a related unit trust, the trust is usually required to remain “ungeared”. In simple terms, this means the trust generally cannot borrow money or provide financial accommodation.

If the trust breaches these rules, the SMSF’s investment can become an in-house asset. In many cases, once a trust is “tainted”, the issue cannot be reversed.

Because of this, even temporary payments or loan arrangements involving members should be handled carefully.

The First Question: Is It a Pre-11 August 1999 Unit Trust?

The available options depend heavily on whether the trust qualifies as a grandfathered pre-11 August 1999 unit trust.

Older trusts that meet the grandfathering requirements may have more flexibility available when fixing transaction errors.

If the Trust Is a Pre-1999 Unit Trust

Where the trust qualifies under the old rules, the mistaken payment may potentially be treated as a short-term loan.

One approach may involve:

• the member personally repaying the amount back to the unit trust; and
• ensuring the money flows through the member’s own bank account rather than directly between the SMSF and the trust.

Proper documentation is important, including trustee resolutions and clear accounting records.

Problems With Non-Grandfathered Unit Trusts

If the trust is not a pre-11 August 1999 trust, the situation becomes much more serious.

A payment to a member that effectively creates a loan or financial accommodation arrangement may breach the ungeared trust rules. This can permanently taint the trust for SMSF purposes.

Once tainted, the SMSF’s investment may be treated as an in-house asset indefinitely, which can create ongoing compliance issues and potentially require restructuring.

Possible Solutions

The best solution depends on the ownership structure of the unit trust.

Member Sells Personally Held Units

If the member personally owns units in the trust, a cleaner approach may be for the member to sell some of those units and receive the sale proceeds personally.

This may avoid creating a loan arrangement within the trust itself.

SMSF Sells Some Units

If the member does not personally hold units, another option may be for the SMSF to dispose of some of its units in the trust.

Any sale should be properly documented and completed on commercial terms, with market value support where appropriate.

Getting Advice Early Is Important

SMSF related unit trusts are highly technical, and small transaction errors can have long-term consequences.

Before reversing payments or recording transactions differently, trustees should obtain advice from their SMSF accountant or adviser. Early action may help prevent a temporary mistake from becoming a permanent compliance problem.

If you have concerns about a related unit trust, in-house asset rules, or SMSF compliance issues, contact iCare Super for professional advice and assistance.

Disclaimer

This article contains general information only and does not constitute financial, taxation, legal, or SMSF advice. The information is intended for educational purposes and may not be suitable for your personal circumstances. Trustees should seek professional advice before taking any action in relation to their SMSF or related party structures.