Self-managed superannuation funds deriving income from certain uncommercial trusts

A trust is established which is controlled by an individual or a family group. 2. An SMSF is or becomes a beneficiary of the trust. Alternatively, the SMSF holds or obtains an indirect interest in the trust, through one or more interposed entities. The trust may also have other beneficiaries, who are associated with or related to the individual or family group. 3. The income derived directly or indirectly by the SMSF from the trust is disproportionate to its investment in the trust. As such, the SMSF derives more income from the trust than it might be expected to derive from an ordinary commercial arrangement. The SMSF may consider that the trust income is subject to the same concessional rate of tax as the SMSF's other income. This is not necessarily correct. The arrangement may be achieved in a number of ways. 4. The trust deed may provide for: (a) entitlements to income which appear to be fixed, but which can be defeated by the trustee exercising a discretion to distribute income and/or capital gains to the SMSF (whether directly or indirectly). For that reason, the trust may be described as a 'hybrid trust' or 'hybrid discretionary trust' (b) the issue of units or other interests to the SMSF (or to another entity in which the SMSF holds an interest) for no consideration, or for consideration which falls short of the market value of such interests at the time of issue (c) the redemption of trust interests held by the individual or other entities for below market value or at face value. As such, the SMSF may effectively obtain a disproportionate share of the trust's income which is not commensurate with its investment. 5. The trust deed may also purport to deny the individual or other family members any interest in capital gains of the trust. Alternatively, the capital gain to which the SMSF is entitled may be disproportionately large, in comparison to the amount of trust capital which the SMSF has funded. The deed may achieve this by preventing or restricting the distribution of capital gains to the individual or other family member, or by enabling the individual or family member's interest in the trust to be redeemed at face value, or face value, adjusted for inflation. 6. As beneficiaries of the SMSF, the individual or family members may ultimately benefit from the income and capital gains distributed to the SMSF.