Issue
Are the distributions made from a related unit trust to a self managed superannuation fund (SMSF) special income under section 273 of the Income Tax Assessment Act 1936 (ITAA 1936) where the parties are dealing with each other at arm's length?
Decision
No. The distributions received from a related unit trust by a SMSF where they are dealing with each other at arm's length are not special income under section 273 of the ITAA 1936.
Facts
The units in the unit trust are owned by the SMSF and the member who is also a trustee of the SMSF.
The SMSF owns 85% of the units in the unit trust.
The unit trust owns a residential property.
The member is the tenant of the residential property owned by the unit trust.
The property is leased at an arm's length rate and the parties have entered into a rental lease on similar terms to arm's length commercial leases.
Reasons for Decision
Section 273 of the ITAA 1936 applies to certain income derived in a year of income by a fund or unit trust. The types of income outlined in section 273 of the ITAA 1936 will be deemed special income.
Subsection 273(7) of the ITAA 1936 states that income derived by virtue of holding fixed entitlement to the income is special income if the entity acquired the fixed entitlement, or the income was derived under an arrangement in which some or all of the parties were not dealing with each other at arm's length in relation to the arrangement, and the amount of that income is greater than might have been expected to have been derived by the entity if those parties had been dealing with each other at arm's length in relation to the arrangement.
The transaction is between the unit trust and the member of the SMSF. The transaction will be conducted and maintained on an arm's length basis. As there is no arrangement and the transaction is on an arm's length basis, the income distributed from the unit trust to the SMSF will not be deemed special income.