At the end of last week, opposition leader Bill Shorten outlined a proposal to introduce a minimum 30 per cent tax rate for discretionary trust distributions to adults.
Under the current law, DBA Lawyers director Daniel Butler said unit trusts that are wholly owned by an SMSF pay no tax as the unit trust distributes its net income to the SMSF as the unitholder, which pays a maximum of 15 per cent tax on such distributions.
“An SMSF would only pay 10 per cent tax on a distribution of a net capital gain from a unit trust after allowing for the one third CGT discount where the asset was held for greater than 12 months,” he explained.
“An SMSF in pension phase does not pay any tax from such trust distributions subject to each member’s transfer balance cap limit.”
While the policy statement from Mr Shorten states that the new minimum 30 per cent tax will not apply to fixed trusts, Mr Butler said fixed trusts are a very limited category of unit trust, with the vast majority of SMSFs investing in non-fixed trusts.
“Broadly, trusts are divided for tax purposes into fixed and non-fixed trusts for trust loss purposes under schedule 2F of the Income Tax Assessment Act 1936 and given the strict criteria on what is a fixed trust under this test. Most other trusts fall into the broad category of a non-fixed trust and these trusts are broadly treated as discretionary trusts for tax purposes,” said Mr Butler.
“The ATO do not currently administer the law in this strict manner but without clarity on the Labor proposal, I suspect the test that will be adopted by Labor would be that in schedule 2F of the ITAA 1936 or a similar test.”
Labor could therefore tax SMSF at a minimum of 30 per cent on trust distributions received from many unit trusts that are considered a discretionary or non-fixed trust.
This would have a significant impact on the net after tax returns that these trusts derive after June 2019 if this new tax proposed by Labor is introduced, he said.
“Labor’s policy is still very uncertain on how it will apply if this proposal is successful in its introduction. For example, will the general CGT discount apply, will any tax offset apply like a franking offset in respect of a dividend from a company, and what types of trusts will be considered fixed and non-fixed?” said Mr Butler.
“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.”