Tim Miller, head of technical and education for Smarter SMSF, said on a recent webinar for SuperGuardian that the lack of understanding around discretionary trusts is creating a “world of hurt” from a tax point of view.
“The ATO statistics show there is a significant portion of self-managed super fund investments, about a quarter of them, that are in some way, shape or form, linked to trust investments,” Miller said.
“That’s excluding your other managed investments, at 6.1 per cent and other assets at 8.4 per cent, so it could be upward, or close enough, to a third of all investments having some link to trust or trust structures. This means they are pretty critical when it comes to fund administration, and can certainly be problematic when it comes to fund compliance.”
Miller said there are many positives that can be taken out of various trust investments if they are done correctly but this relies heavily on ensuring the administration is correct.
“It’s at the compliance level with the instructions that are provided to trustees, with how to act, but certainly from an administrative point of view and from accountants preparing financial statements for trust, it’s critical that we use the right wording in certain areas,” he said.
“Things like paid trust distributions and referencing words, innocuous words like loan, which have a far deeper meaning in the superannuation space than perhaps they do in the accounting realms of preparing financial statements for unit trusts.”
Miller continued that according to the ATO statistics, 16 per cent of all compliance breaches in SMSF are linked to in-house assets and the mistakes made in relation to unit trusts are part of the problem.
“We know that with in-house assets, we’re generally talking about 5 per cent of the fund investments, so how does that represent 25 per cent of the valuable breaches, if it’s such a small investment number?” he said.
“A lot of these unit trusts are probably the root cause for increasing that so it is a significant area for us to be mindful of in this space.”
He said there is about $114 billion invested in unit trusts in the SMSF space and a lot of them are unlisted trusts that are professionally run.
“We’re not really having to delve into whether the trustees are doing the right thing in that regard, but you want to make sure that the investing parties are doing the right thing, and that it is the appropriate structure,” Miller said.
“The use of trusts is a good way of effectively, collectively investing on behalf of clients, as long as you structurally get the process right, with regards to widely held trust definitions, managed investment schemes.”
Furthermore, Miller said, trusts do get legislatively favourable treatment if they are structured and managed correctly, but if they aren’t it creates a “massive problem”.
“If you get your trust structures wrong inside self-managed super funds, then you’re going to have issues with regards to the arm’s-length nature of transactions with the in-house asset rule breaches with non-arm’s length income situations, and there’s no way of fixing that other than redeeming and getting out of the investment,” he said.
“You really want to be mindful of ensuring that all parties associated with the transaction understand how the rules work and dealing with it appropriately.”
