One of the advantages of superannuation is that it is a tax structure, but the concessions available through that structure were restricted on 1 July 2017 when there was a reduction in superannuation contributions caps along with the amount that can be transferred to retirement phase. If you have maximised your superannuation, access to tax benefits could be limited to concessional contributions, downsizer contributions or accessing the CGT small business concessions. You may not have access to these concessions or they may be a long way off.
As a replacement for the reduction in superannuation concessions you could consider the advantages provided by different entities such as partnerships, trusts, companies or joint ventures. Let’s look at the combination of trusts and an SMSF to see how you could use both structures effectively. There are many types of trusts, however, the main trust structures are as a unit trust or discretionary trust. A discretionary trust does present some problems for an SMSF as any income it receives will always 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.
When investing in a unit trust, it is possible for it to own certain assets that 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 superannuation fund. The related party may be eligible for a tax deduction for any rent paid on the business premises and the members can increase their superannuation balance irrespective of how much they have in their fund.
Combining the 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 superannuation fund is a unitholder 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 superannuation fund in a unit trust that is ‘controlled’ by related parties including the fund is treated as an ‘in-house asset’ which has restrictions applying.
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 superannuation fund are ‘in-house’ assets there is a 5% restriction on the proportion of the fund that can be invested in all in-house assets. This is measured just before the fund purchases an in-house asset to make sure the fund will not exceed the 5% limit and at the end of each financial year. If a breach occurs at the end of the financial year, the fund must put in place a plan 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 superannuation 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 a superannuation fund can certainly come in handy to assist 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.
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