Unit trust intricacy a NALI issue

Unit trust NALI

SMSF investments in fixed unit trusts may not be able to avoid the non-arm’s-length income provisions due to the underlying assets involved.

An SMSF specialist has alerted advisers to take great care with their trustee clients’ investments in fixed unit trusts to ensure the underlying investments do not create a non-arm’s-length income (NALI) issue for the fund.

SuperGuardian education manager Tim Miller noted the issue he is highlighting stems from the rules regarding income received by an SMSF from a discretionary trust – rules that are absolute in the treatment of those monies.

“We need to appreciate that any discretionary trust distribution that is paid into a self-managed superannuation fund is going to be non-arm’s-length income full stop,” Miller said during a technical webinar he hosted today.

He pointed out in an effort to avoid being caught by these rules, many SMSFs invest in fixed unit trusts, but warned this strategy may not be as effective as it seems on the surface.

“Where a lot of funds can potentially get caught out is … where [they] have a fixed investment in a unit trust and that unit trust will actually receive income from another trust, potentially a family trust. [It means] the [fixed] unit trust is receiving discretionary income and that discretionary income is getting mixed in with the fixed income the [original] trust is generating and distributing to the super fund,” he noted.

“And so the whole NALI provisions will continue to work their way up to make sure that all income from the trust that is distributed to a super fund is exclusively related to the investments of that trust.

“So we just need to make sure these investments are clean.”

According to Miller, the uncompromising NALI rules were brought in to prevent individuals from transferring income from investment structures that would normally attract higher levels of tax into the concessionally taxed environment offered by superannuation funds.

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