A technical specialist has warned practitioners not to allow their SMSF clients to invest in a discretionary trust through the super fund as it will trigger the non-arm’s-length income (NALI) rules and nullify any tax concessions usually enjoyed in the retirement savings environment.
“If you have a discretionary trust and you make an allocation to the self-managed super fund, it’s game over from a tax point of view for that fund because that income will be taxed at 45 per cent,” Smarter SMSF education and technical manager Tim Miller told attendees of a webinar hosted by SuperGuardian.
“So just avoid it from a conceptual point of view.”
Miller pointed out the treatment of SMSF income in the form of a distribution from a discretionary trust is stipulated in section 295-550 (4) of the Income Tax Assessment Act 1997 (ITAA).
This excerpt of the legislation states: “Income derived by the entity as beneficiary of a trust other than because of holding a fixed entitlement to the income, is non-arm’s-length income of the entity.”
Further, Miller recommended SMSF members to be very cautious about holding a fixed investment in a unit trust as there is a high probability it will be caught by the NALI provisions as well.
“This fixed investment in a unit trust has then income associated with the investment of the trust and will be distributed on a unit basis to the unitholders,” he said.
“That’s okay, but if there is discretionary income that comes in through that unit trust and is distributed to the self-managed superannuation fund, [it will be treated as] non-arm’s-length income.”
According to Miller, SMSF trustees who are looking to make a fixed investment in a unit trust must consider whether that vehicle derives any income from other trusts structures before committing to that action.
He cited ITAA section 295-550 (5) (a) as the relevant piece of legislation covering these types of arrangements.
“So we’ve just got to be careful with that,” he noted.