Issue
Whether a contravention of section 67 of the Superannuation Industry (Supervision) Act 1993 (SISA) has occurred where the self managed superannuation fund (SMSF) received an excess distribution from a related unit trust?
Decision
A contravention of section 67 of the SISA has occurred as the SMSF borrowed money from a related unit trust when the trustee accepted an excess trust distribution.
Facts
The SMSF owned units in a related unit trust.
The SMSF's unit holding entitled it to a distribution of income from the unit trust.
During the course of two financial years the SMSF received distributions from the unit trust greater than its unit holding would entitle it to.
The excess distribution payment did not result from mistake but was intended as a form of credit or financial accommodation.
The excess distribution was not a return of capital.
Reasons for Decision
Section 67 of the SISA prohibits the trustee of a regulated superannuation fund from borrowing money or maintaining an existing borrowing of money. There are limited exceptions under this section for the purposes of paying a benefit, paying a surcharge liability, or covering the settlement of securities transactions
A loan made to an SMSF will involve a borrowing by the SMSF. Subsection 10(1) of the SISA defines 'loan' to include the provision of credit or any other form of financial accommodation whether or not enforceable, or intended to be enforceable, by legal proceedings.
The trustees received a distribution from a related unit trust that was in excess of the amount it was entitled to receive as a consequence of its unit holding in the unit trust. This arrangement will constitute a borrowing by the SMSF and therefore a contravention of section 67 of the SISA where it was intended that the SMSF should receive an amount in excess of the amount to which it was entitled. The additional amount has the character of 'credit' or some other form of 'financial accommodation' and constitutes a prohibited borrowing by the SMSF under section 67 of the SISA.