SMSFs to be targeted by ATO

Anumberof self-managed superannuation funds (SMSF) may be slugged by the Australian Taxation Office (ATO) after it issued two Interpretive Decisions that target payment of distributions from the funds.

It is common practice for SMSFs to own 100 per cent of the units in a unit trust and the problem stems from the deed of some funds, which the ATO says are very discretionary in nature and may not have made the super fund’s interest in the unit trust vested and indefeasible.

In these circumstances, it appears from the rulings that the ATO will deem that payment of distributions from the unit trust will not be eligible to claim franking rebates.

“In certain situations, SMSFs may not be entitled to franking rebates on distributions received from unit trusts or may even be liable to pay punitive taxes at the top marginal rate of 48.5 per cent,” Deutsche Asset Management Australia head of technical Peter Haggstrom says.

Even if the unit trust has made a family trust election, so that the super fund can get the benefit of the franking rebates, if the super fund has not made what is known as an ‘interposed entity election’, the unit trust can be liable for tax at the top marginal rate of 48.5 per cent on any distribution to the super fund.

Because these rulings apply from October 1997, unit trust operators could find themselves being liable for the five years that their trusts have been in operation since that time for both the franking rebate as well as the tax on distributions.

The decisions by the ATO are at this stage still subject to a legal challenge.