The hidden danger – Why some superannuation funds with units in private unit trusts will be taxed at 46.5%

Following the High Court decision in Bamford, we have reviewed a lot of unit trust deeds and have seen many unit trusts with superannuation funds as unitholders.

The danger is that when a superannuation fund holds units in a typical unit trust, there is a significant risk the ATO will argue that the income distributed from the unit trust to the trustee of the superannuation fund is “non arms length” income – in which case the fund will be taxed at the top marginal rate of 46.5%.

Income distributed to the trustee of the super fund from a unit trust will be non-arms length income if:

• the super fund does not have a “fixed entitlement” to the income and capital of the unit trust (as required by section 295-550(4) of the 1997 Tax Act; or
• the dealings between the trustees of the unit trust and super fund are not on an arms length basis.

There are a number of ways in which clients can avoid the trustee of the super fund being taxed at the top marginal tax rate.  These include ensuring that:

• the unit trust is a “fixed trust”; and
• all dealings between the trustees of the unit trust and the super fund are on arms-length terms.

The ATO has made it clear that, in its view, most private unit trusts do not qualify as fixed trusts.  For example, the ATO considers that a unit trust will not be a fixed trust if:

• units can be issued or redeemed at a value that is not determined in accordance with applicable accounting standards;
• the trust deed allows for different classes of units;
• the trustee has power to make gifts; or
• the trust deed can be amended without the unanimous consent of all unit holders.

All trust deeds for unit trusts that have superannuation funds as unitholders should be reviewed and amended as necessary.