Changes ahead for SMSFs with public trading trust investments

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Changes ahead for SMSFs with public trading trust investments

In April this year draft legislation was released that will change the rules for public trading trusts.  This will have an impact on Self Managed Superannuation Funds (SMSFs) which have unit trust investments caught up in the regime.  It is proposed that from 1 July 2016, the public trading trust rules will no longer apply to unit trusts where superannuation funds own at least 20% of the units.  This means that accountants and advisers who have SMSF clients with public trading trusts will need to watch the development of the law over the 2015/16 year with the chief concern being what will happen to undistributed franking credits when the new law starts.

What are public trading trusts?

A public trading trust is a unit trust taxed as a company rather than the standard unit trust taxation system.   At present, some SMSFs are impacted by these rules because the public trading trust law is applied where a unit trust is a ‘trading trust’ and superannuation funds own at least 20% of the units in the unit trust.

A trading trust is a unit trust whose operations are more than just passive investment.  A unit trust that invests predominately in property deriving rent or other passive investment such as shares, unit trusts/managed funds and interest bearing assets will not be considered a public trading trust.  However where the unit trust runs a trading business or if the primary operation is property development, the unit trust would be considered a public trading trust.

What do practitioners need to watch out for?

The draft legislation basically removes the law that imposes public trading trust rules on trading trusts which have at least 20% ownership held by superannuation funds

Therefore any SMSFs with unit trust investments currently being taxed as companies may now be taxed as a unit trust from 1 July 2016.  These unit trusts will need to review any undistributed franking credits as at 30 June 2016 given the ability to distribute those credits on 1 July 2016 may be lost.  At present it is unknown whether there will be any transitional rules put in place for any undistributed franking credits.  Given there is a risk of not being able to utilise franking credits due to the transfer to the new system, we recommend practitioners that have SMSF clients with public trading trust investments watch the progress of this legislation over the coming year.  If you are unsure as to whether the current public trading trust rules apply to a particular SMSF unit trust investment, please call the team at Aquila Super to discuss your situation.