By Graeme Colley
Superannuation is a tax-advantaged structure. However, since 1 July 2017 super concessions have been curtailed with reduced contributions caps and a ceiling on the amount that can be transferred to retirement phase.
To offset this wind back, there are other opportunities available to SMSFs such as partnerships, companies, joint ventures – as well as investing into trusts which we’ll examine further.
There are many types of trusts, however, the two main trust structures are unit and discretionary trusts. A discretionary trust does present some problems for an SMSF, as any income the SMSF receives will be taxed at penalty rates as non-arm’s length income. A unit trust would be the better choice, as income distributed to the SMSF can continue to be taxed concessionally if it’s done correctly.
Within a unit trust, certain trust assets can be leased or rented to ‘related parties’ such as members, trustees, their relatives or related entities. This, for example, may involve the unit trust owning business property which is rented to a related party on an arm’s length basis. The benefit of this is that the unit trust receives rent from the related party which is then distributed to the super fund. The related party may be eligible for a tax deduction for any rent paid on the business premises. The difference in the tax rates on the rent received by super fund compared to the related party (such as a company or individual) that pays it, can help boost the member’s superannuation balance.
Combining an SMSF and a unit trust requires the fund to purchase units in the trust at market value. Market value can be determined in many ways, but it is usually the net realisable value of the underlying assets of the unit trust, or a nominal value when the trust has been established. The benefit of the unit trust is that it may have other unitholders who can purchase units or make loans to the unit trust.
Once the super fund is a unit holder, the trustees of the fund need to be aware of the impact of the SIS Act and Regulations so there is no breach of the rules. As a rule, units owned by a super fund in a unit trust that is ‘controlled’ by related parties, including the fund, are treated as an ‘in-house asset’ which carries restrictions.
A unit trust is controlled when related parties hold more than 50% of the units in the unit trust, or the trust deed of the unit trust authorises the related parties to appoint or dismiss the trustees. Careful drafting of the unit trust’s deed is essential to make sure there is no slip up.
If the units owned by the super fund are in-house assets, then there is a 5% restriction on the proportion of the fund that can be invested in any and all in-house assets. This is measured just before the fund purchases an in-house asset to make sure it will not exceed the 5% limit, and thereafter at the end of each financial year. If a breach occurs at the end of the financial year, the fund must put a plan in place to reduce its holdings of in-house assets to no more than 5% of the market value of the fund.
There is an exception that excludes the fund’s investment in a related unit trust from the in-house asset rules. This applies if the unit trust is not geared, which means the super fund can purchase more than 50% of the units in the unit trust without being treated as an in-house asset. However, a minor breach of the exception can end up with the investment in the unit trust being treated as an in-house asset.
The use of a unit trust as an investment of an SMSF can certainly come in handy by increasing the value of the fund where members have ‘maxed out’ their superannuation balances. However, anyone wishing to take advantage of this strategy needs to make sure there is no breach of the SIS rules otherwise the fund could be penalised and in the worst case be treated as a non-complying fund. Advice from a superannuation expert will prove invaluable.
