Leading superannuation law firm Townsends Business and Corporate Lawyers is encouraging SMSF trustees and advisers to review any arrangements where the fund is using a unit trust as an investment vehicle in light of coming legislative amendments.
Currently, a unit trust can be treated as a company for tax purposes if an SMSF holds more than 20 per cent of the units in the trust as long as it is not investing in real estate predominantly to generate rental income.
Specifically, this type of unit trust is defined as a public trading trust under the Income Tax Assessment Act 1936 and allows it to be taxed at company rates.
In turn it means the SMSF can claim franking credits from the tax paid by the trust to offset part of the fund’s tax liability.
However, changes to the law coming into effect on 1 July will see no weight given to units held by SMSFs in a trust in the determination as to whether a public trading trust exists.
“So, for example, if the trust was wholly owned by the SMSF who was carrying out a property development using the trust vehicle, the trust is no longer a trading trust and no longer taxed as a company, so the fund is no longer entitled to franked distributions and the ability to amass franking credits,” Townsends explained.
The legislative change is contained in the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and gives trusts affected by the variation until 1 July 2018 to use any surpluses contained in their franking accounts.
The bill stipulates the allowance for transition only applies to franking credits arising from tax paid before 1 July 2018 in respect to income years before 1 July 2016.
“While the legislation has not been passed yet, it is important to be aware of the changes so proper planning can take place so that franking credits are not lost,” Townsends said.
“If your fund is using a unit trust as an investment vehicle, you should review the terms of the trust deed to ensure that the trust can efficiently make the transition from a trust taxed as a company to a trust taxed as a trust.
“Particular attention should be paid to the super fund’s ability to access the franking credits before the 2018 deadline.”