18/08/2008
Have you run out of low tax recipients who could take income from your discretionary trust? Your superannuation fund is taxed at 15% so why shouldn’t the trustee of the discretionary trust distribute income to it? The answer is that if the fund receives a distribution like that then it is taken to receive “special income”. Special income is not taxed at 15% but at the “special” rate of 45% for the 2007-8 year! Special income is also excluded from income of the fund entitled to be treated as exempt from tax to the extent the fund is in pension phase so the 45% rate applies even then. If this income will bear that rate of tax then you are better off paying the tax and enjoying the money now rather than tying it up in superannuation.
Special income is income derived by a superannuation fund on a non-arms length basis including income from private company dividends and trusts where the fund does not have a fixed entitlement to a fixed share of the income. Severe limits are generally imposed on complying superannuation funds that prevent them from investing in non-arms length and related business entities, which should limit cases where special income is earned by funds, but an entitlement to income under a family discretionary trust can readily arise because the fund may be a named beneficiary without the fund having to make any potentially prohibited investment in the trust.
Superannuation funds will not always be prohibited under superannuation laws from investing in private companies but dividends received from an investment in a private company will always be special income even if the members of the fund have no relationship to the private company at all. Thus some care needs to be taken by fund trustees in selecting non-listed share investments, even if unrelated to the members, to ensure that the company being invested in is not considered a private company under income tax lawhat is in the budget for SMSFs?
If you would like more information, please do not hesitate to contact Townsends Business & Corporate Lawyers on (02) 8296 6222.
