SMSF trustees using trust structures should not be concerned about government plans to tax discretionary trusts, unless their fund has inadvertently invested in one, which will instead expose them to breaches of the non-arm’s-length income (NALI) rules, specialist lawyers have noted.
DBA Lawyers special counsel Bryce Figot said the only type of trust an SMSF could be involved in was a fixed unit trust and government plans to tax discretionary trusts emphasised the need to ensure any unit trust had no element of discretion.
“For an existing unit trust, the urgency is probably no greater than it ever was, but for people setting up new unit trusts now, there is now real prudence for unit trusts to be established by lawyers so they will definitely confer fixed entitlements,” Figot told selfmanagedsuper.
“You do see these weird and wonderful cheap unit trust deeds and some people say ‘it’s a unit trust, it’s a standard vanilla thing’, but that’s not the case and there are quite high water marks.”
He pointed to the case of Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16, which found a unit trust was not fixed because the deed allowed for amendments without a special resolution if 75 per cent of unitholders agreed to them, which effectively stripped away the entitlements of the remaining 25 per cent.
“If trustees want something which is not a discretionary trust, they must make sure they have a rock-solid trust deed. Just because something confers units, does not necessarily mean that it confers fixed entitlements,” he said.
SuperCentral special counsel Michael Hallinan added the danger was not that a trust inside an SMSF would be taxed at the proposed minimum 30 per cent rate, but rather it would trigger NALI and be taxed at 45 per cent.
“Unit trusts, for the most part, would not fall within the concept of a discretionary trust, but the exception are hybrid unit trusts and you could also have issues where you have a unit trust with various classes of units and the trustee has discretion as to how much income is allocated to each class,” Hallinan said.
“You can create these strange hybrid trusts and unit trust classes, but the bigger concern, from an SMSF perspective, will always be the NALI issue.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason