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Self Managed Super Fund (SMSF) Article
Family Trusts vs SMSFs
By Tony Negline.
This article may be out of date.
10th February 2007
How does super stacks up against other investment structures.
The truth is that there are lots of ways to hold assets. Some examples are – personally, in partnership with relatives or friends, discretionary trusts, hybrid trusts, unit trusts and companies.
This article will compare holding an asset in a discretionary trust and a Self Managed Superannuation Fund. A trust will be a discretionary when the trustee has complete discretion as to who will receive income and capital distributions. Most family trusts are discretionary trusts.
There are many aspects to look at when comparing these two structures:
- Control – in both a SMSF and a family trust control is held by the trustee. Some family trusts require an appointor who may have the power to appoint and remove the trustee
- Establishment – Family trusts can be quite easy to set up and technically anyone can be a beneficiary of these trusts; on the other hand SMSFs can be quite difficult to set up especially with the restrictions on who can be members of the same SMSF and in some complicated cases this can take a bit of time to sort out
- Management – SMSF and discretionary trusts must be managed in accordance with their trust deeds and other governing rules. Both Family trusts and SMSFs need to make sure they keep their structures safely within the relevant State Trustee Act. Additionally specific legislation governs, in minute detail, how SMSFs are to be run. This same legislation potentially imposes heavy penalties for breaching these explicit rules
- Distributions – Family trusts can distribute income and capital to a group of beneficiaries which can be family and non-family members. This flexibility enables a trustee to split these distributions across a group to ensure that tax is minimized.
A distribution from a family trust will hold its character. This means that a trustee could give one beneficiary franked dividends, another capital gains and a third property income. Also the 50% CGT discount is available from assets held by the trust for more than 12 months. (In reality the trustee claims the CGT discount and distributes pre-tax gains to the beneficiary who then claims the discount on their personal tax return. This enables the individual to offset capital losses that may have arisen from the disposal of other assets.)
SMSFs do not have this flexibility if a fund member is alive when a benefit is paid. The benefit must be paid to the member (or at the very least, if a trust deed permits, must be paid according to the specific directions of the member). If SMSF member has died then the trustee may have flexibility as to who the benefit is paid.
However under the government’s proposed rules super funds will have considerable flexibility as to when and how a benefit can be paid. Moreover any benefit a SMSF pays out after a member turns 60 will be tax-free.
- Investments – there are many restrictions one what SMSFs can invest in and SMSF trustees must be careful that fund members and their blood relatives as well as a trusts and companies relate to the members or their family do not use fund assets in any way unless allowed by legislation. (A good example of this is the use of business premises.) SMSFs must also be careful not to run a business. SMSF trustees must be careful to create, document and implement an investment strategy. Family trusts do not have any of these restrictions unless specifically built into their trust deed
- Protection from bankruptcy and divorce – until recently it was very common to place assets in a family trust or SMSF; the purpose was to hide the assets from one’s creditors or from the Family Court. Recent legislative amendments have made these reasons null and void for both family trusts and SMSFs
- Centrelink benefits – superannuation assets – and often the income generated from these assets – have long been counted when working out an investors’ Centrelink benefit; since May 2000 the same rules have generally applied to family trusts (however it can sometimes be difficult for Centrelink to establish who might be the real beneficiary of particular discretionary trusts)
- Taxation – super fund income is either taxed at 15% or 0% depending on what the money is being used for. A CGT discount of 33% - making an effective tax rate on capital gains of 10% - is also generally available to SMSFs. If a family trust does not fully distribute income earned or realized capital gains during a tax year then the trust will be taxed at 30% on that income
- Loan Account – If a family trust doesn’t actually pay out the income then a ‘loan account’ starts. The beneficiary is the lender and the trust is the lendor. The loan must be on commercial terms. In rare cases some family trusts get caught out when a beneficiary seeks repayment of this debt.
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