Tim Miller, head of education and technical for Smarter SMSF, said in a SuperGuardian webinar these five categories include the widely held trust, LRBA trust, ungeared trust, pre-99 trust and unrelated trust.
“For the LBA trusts, or a holding trust, it’s critical to understand that it is conceptually, from a legislative point of view, a trust in a virtual sense, because it’s not a reporting trust,” Miller noted.
“You’re not providing financial statements or reporting on that trust itself, other than being an asset of the super fund. Further, pre-99 trusts, the doyen of SMSF investments, are still very much a favorably treated investment inside the super environment, as long as you stick within the guidelines provided.”
He added that unrelated trusts provide a bit more flexibility than an ungeared trust, a pre-99 or an LRBA, but you potentially lose a lot of control in the scheme of that investment.
“The LRBA, ungeared trust and the pre-99 trust are all exposed to the in-house asset rules in the sense that there are potential points in time or transaction-based events that will result in these investments becoming in-house assets,” he said.
“You need to be mindful of how the exceptions work around them and try to make sure they are kept as clean as possible. Additionally, [use caution] in an unrelated trust because it is never too far away from being a related trust and it is one of the key issues that people need to be mindful of and when it is best to seek further legal advice where appropriate.”
He continued that the scope of what constitutes control in the environment of a trust is critical and the nature of trust, where you don’t have a majority voting interest, means you need to consider if you do have sufficient influence.
“[You need to question] whether you have these other elements that might result in it being a controlled trust, and therefore related trust,” he said.
Miller said there are two trust investments that SMSFs should “steer clear of at all costs”, including the discretionary trust and a fixed trust discretionary income.
“The cost is basically you lose half the the investments in the fund through the tax liability of non-arm’s length income,” he said.
“In a discretionary trust there’s things of which to be mindful. For example, the family trust where you want to distribute the income. You have to determine what entity [there is], what parties you have that you’re going to make company distributions too, and if you’re going to make company distributions? Definitely not. You allocate to the members.
“Allocating to a self-managed superannuation fund from a family trust will always, without question, be on arm’s-length income. If you have a discretionary trust, and you make an allocation to the self managed superannuation fund, it’s game over from a tax point of view for that fund. The income of the fund, or the income that has been distributed, will be taxed at 45 per cent.”
