Tax Tip 196: Discretionary Trusts distributing income to a SMSF

We have seen that it can be possible for a discretionary trust to distribute income to a SMSF if the SMSF is a beneficiary of the trust. See my legal tip Legal Tip 198: Legal Tip Can a Discretionary Trust Distribute Income to a SMSF?

But just because it can be done doesn’t mean it should be done.

Any distribution from a related discretionary trust received by a SMSF will be classed as NALI or ‘Non Arms Length Income’.

NALI income will be taxed in a SMSF at the highest marginal tax rate.

Income from Fixed Trusts to a SMSF can be taxed at normal SMSF rates, 15% generally, but only where the income is genuine non-NALI income. For example a SMSF owning units in a Fixed Unit Trust which owns a factory. Genuine rent can flow through to the SMSF and be taxed at 15%. But if a discretionary trust distributes income to the unit trust this would flow through to the SMSF but be taxed at the top marginal tax rate.

The reasons for these laws are to stop people diverting income to SMSFs to save tax.

 

I recall a case with that fixed trust issue. I recall the ATO and AAT considered ALL the trust income then to be NALI and not just a portion of it. The problem with a non-complying Reg 13.22 trust is then the fund must unwind its interest.

It could also be a concessional or non-concessional contribution if its distributed through a conduit (member). One major concern can be a inspecie transfer of trust property to the SMSF. A s66 breach unless its permitted eg Business Real Property. It may be dutiable.