Relaxed fixed trust view to assist SMSFs

Nodrog · 16th Jan, 2017

Relaxed fixed trust view to assist SMSFs
16 Jan 2017
By Darin Tyson-Chan

New draft guidelines changing the ATO’s interpretation of what constitutes a fixed trust may help the tax treatment of trust distribution income for SMSFs, according to a specialist law firm.

“The new guidelines provide some assurance that the commissioner will provide practical accommodation to treat unit trusts as fixed trusts,” Townsends Business and Corporate Lawyers said.

“For example, a power to issue new units will not disqualify a unit trust as a fixed trust if the new units can only be issued at net market value.

“A power to redeem units (without the consent of the unitholder) will not disqualify the unit trust as a fixed trust if the redemption occurs at net market value and is in the best interests of the unitholders.”

To date, the tax laws have applied a very strict definition of what can be categorised as a fixed trust, resulting in unfavourable tax treatment for SMSF income derived from unit trust distributions.

“Essentially, every beneficiary must have fixed entitlement to the income and capital of the trust, and that fixed entitlement must not be able to be defeated, removed or adversely affected by actions of the trustee or any third party,” Townsends said.

The legal firm added the use of that restrictive definition meant just about all unit trusts would be disqualified from being treated as a fixed trust.

Further, if an SMSF received distributions from a trust in which it had invested, and that trust was not a fixed trust, there was no guarantee that income would be taxed at the concessional superannuation fund rate of 15 per cent, and instead might be taxed at 47 per cent, it pointed out.

While the new draft guidelines will make it easier for unit trusts to qualify for fixed trust status, Townsends suggested the most prudent course of action for trustees would be to know the difference between the two types of structures and ensure the trust their SMSF was invested in was a fixed trust.

“If an investor is likely to be a superannuation fund, then the terms of the trust deed must be carefully drafted to minimise the risk that the unit trust is not a fixed trust and to reduce the need to rely on the commissioner favourably exercising his discretion,” it noted.

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Paul@PAS · 17th Jan, 2017

This wont help for the NSW land tax purposes at all and poses a SMSF risk especially where the deed contains the ability for a trustee to utilise any form of discretion (eg in determining unit value or redemption rights and even rights to alter the trust terms)

This is also not going to assist a SIS Reg 13.22 fixed trust either since the ATO has no ability to interpret and issue ruling in respect of non tax law. As SMSF regulator the ATO would be bound by SIS Reg 13.22 which can also be more restrictive that mere reference to fixed entitlements.

Why not just ensure that the unit trust IS a fixed trust ? Then the trust must be diligently maintained as a fixed trust also.

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Relaxed fixed trust view to assist SMSFs

Nodrog Well-Known Member

Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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Relaxed fixed trust view to assist SMSFs

Nodrog Well-Known Member

Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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