| Sticky beak at
family trusts Many people
with do-it-yourself super funds also have family trusts, which can be used
in various ways. Family trusts are generally established to allow the
benefits that can flow from investments owned outside super to be shared
among family members of different generations. They can protect family investments from the risk of a family suffering a
major loss if a crucial individual is successfully sued or made bankrupt. Family trusts can also be useful alongside a DIY fund with significant
assets from which a pension is taken, says Daniel Butler of DBA Lawyers. If the pension income exceeds the fund members' needs and they can't
re-contribute this to the super fund because they are over 65 and no longer
working, this money can be gifted to a family trust to acquire more
investments that will earn income which can then be shared among family
members. Family trusts can be quite tax efficient. So long as the income is
distributed to beneficiaries, they pay no tax. Instead, the income is added
to the beneficiary's income and taxed at his or her personal tax rates. With
family trusts it makes sense to distribute investment income to those on
lower personal tax rates. A family trust is not as tax-efficient as a DIY fund which is
paying a pension. Not only does the fund pay no tax on investment earnings
that are supporting a super pension, but if the member is over 60 there is
also no personal tax on the pension income. This fact is recognised by a reader who, with his wife, has a DIY fund
approaching the pension phase. They also have a family trust which owns
their major asset: a 10 per cent share in a successful privately owned
company at which he still works. The private company, which has five other
individual investors, pays fully franked dividends to the family trust,
which distributes them to the trust beneficiaries who pay tax on this at
their personal tax rates. Attracted by the lure of a tax-free super investment, he notes it makes
sense to transfer or sell this holding to the DIY fund. But he says he and
his wife have been struck by conflicting advice on their ability to
undertake either a transfer or a sale of the company shares from the family
trust to the DIY fund. With the major proviso that the facts are as
outlined, Butler says there are good reasons a transfer or sale is unlikely
to be possible. |
First, a family trust is considered a related party of the
super fund - it has common members - and there are super rules that restrict
transactions between related parties. As for shares, there is a rule that
allows a DIY fund to buy shares from a related party only if they are listed
on a stock exchange. As the shares are in a private company, they don't
satisfy this requirement. There is another related-party
rule that could allow the fund to
acquire shares in the private company
if the reader and his wife control the company, which means having a
controlling say in at least 50 per cent of the shareholding. If this is the case, the fund can invest 5 per cent of its money in the
private company shares under what is known as the in-house assets exception.
For the shares to be part of an in-house asset, the company would
effectively have to be controlled by the member, his wife and enough of the
other shareholdings to give them a controlling stake. The shareholders would
have to be associated with them in a special way that gives them a
controlling influence. The 5 per cent fund limit would include the value of
the existing family trust's 10 per cent shareholding. But given the shareholders are described as individuals who appear to be
unrelated and the reader and his wife have a 10 per cent holding, this
control rule would not seem to apply. Butler says that, based on the information, the rules appear to preclude the
reader from moving
the family trust's shares into the DIY fund. But, he adds, they are complex
and getting specific advice based on the facts is still worthwhile to obtain
a conclusive opinion. It is possible not all the information has been
considered. However, he cautions against any suggestion you can get around the rules by
a strategy such as the family trust asking the company to redeem its shares
at the same time as the DIY fund approaches the company with cash and a
request to acquire shares, which it satisfies by issuing new shares. Although it might he argued
that this could be possible because it is not an
acquisition of shares from a related party, given that the family trust will
no longer be an investor Butler warns of a super rule that penalises any
attempt to get around the direct prohibition on a related-party acquisition. There are anti-avoidance rules in the super legislation designed to catch
someone who attempts such a strategy with serious penalties, including a
possible one-year jail sentence and hefty fine.
John Wasiliev - The Weekend Australian Financial Review - 5-6 February
2011 |
