Labor’s proposal that discretionary trust distributions to people aged over 18 are taxed at a minimum rate of 30 per cent from 1 July has created uncertainty for SMSF members, according to a law firm.
DBA Lawyers director Daniel Butler told an SMSF online update webinar last Friday that trusts are usually divided for tax purposes into fixed and non-fixed trusts for trust loss purposes under schedule 2F of the Income Tax Assessment Act 1936.
There are strict criteria on what is a fixed trust under this test and most other trusts fall into the broad category of non-fixed trusts, which are treated as discretionary trusts for tax purposes.
Butler warned many SMSFs invest in unit trusts that broadly fall into the category of a non-fixed trust and they risk being treated as discretionary trusts for tax purposes.
“Labor’s policy has created considerable uncertainty for investors seeking to undertake investments or enter into new business structures given the broad-brush policy announcement,” Butler said.
The federal opposition’s proposal, which was announced last week, will not apply to certain trusts, such as fixed trusts or fixed unit trusts.
Under the current law, unit trusts wholly owned by an SMSF pay no tax because the trust’s net income is distributed to the fund as the unitholder, which pays a maximum of 15 per cent tax on such distributions.
An SMSF will usually only pay 10 per cent tax on a distribution of a net capital gain from a unit trust after allowing for the one-third capital gains tax discount where the asset is held for greater than 12 months.
“While the policy statement from Labor states that the new minimum 30 per cent tax will not apply to fixed trusts, this is actually a very limited category of unit trust, with the vast majority of SMSFs investing in non-fixed trusts,” Butler said.
“It is important to consider what is meant by ‘fixed’ and what definition will apply.”
While opposition treasury spokesman Chris Bowen refuted claims SMSFs could be affected by Labor’s trust proposal, Butler warned the ATO is becoming more aggressive.
“There are a lot of instances now where unit trusts are going through very extensive, long, drawn-out audits on things such as non-arm’s-length income and in-house assets,” he said, adding these become points of contention with the ATO when his firm defends clients.
Advisers should ensure clients have unit trusts with appropriately drafted documents and the associated deeds are robust and come with a warranty, he said.