New draft guidelines changing the ATO’s interpretation of what constitutes a fixed trust may help the tax treatment of trust distribution income for SMSFs, according to a specialist law firm.
“The new guidelines provide some assurance that the commissioner will provide practical accommodation to treat unit trusts as fixed trusts,” Townsends Business and Corporate Lawyers said.
“For example, a power to issue new units will not disqualify a unit trust as a fixed trust if the new units can only be issued at net market value.
“A power to redeem units (without the consent of the unitholder) will not disqualify the unit trust as a fixed trust if the redemption occurs at net market value and is in the best interests of the unitholders.”
To date, the tax laws have applied a very strict definition of what can be categorised as a fixed trust, resulting in unfavourable tax treatment for SMSF income derived from unit trust distributions.
“Essentially, every beneficiary must have fixed entitlement to the income and capital of the trust, and that fixed entitlement must not be able to be defeated, removed or adversely affected by actions of the trustee or any third party,” Townsends said.
The legal firm added the use of that restrictive definition meant just about all unit trusts would be disqualified from being treated as a fixed trust.
Further, if an SMSF received distributions from a trust in which it had invested, and that trust was not a fixed trust, there was no guarantee that income would be taxed at the concessional superannuation fund rate of 15 per cent, and instead might be taxed at 47 per cent, it pointed out.
While the new draft guidelines will make it easier for unit trusts to qualify for fixed trust status, Townsends suggested the most prudent course of action for trustees would be to know the difference between the two types of structures and ensure the trust their SMSF was invested in was a fixed trust.
“If an investor is likely to be a superannuation fund, then the terms of the trust deed must be carefully drafted to minimise the risk that the unit trust is not a fixed trust and to reduce the need to rely on the commissioner favourably exercising his discretion,” it noted.
