The most valuable planning happens before 1 July 2027 — and the single best lever, equalising balances between spouses, closes the moment one of them dies. What follows is general information for advisers and trustees, not advice on any particular fund.
Equalise balances while both spouses are alive
Division 296 measures each member as an individual, not the couple as a unit. A couple each holding $2.5 million sits entirely below the threshold. The same $5 million held by one spouse, with the other on nothing, exposes around $2 million to the extra tax for no reason other than how the money is split. While both spouses are alive and both can still receive contributions, that split is movable: contribution splitting of concessional contributions to the lower-balance spouse, recontribution after a withdrawal, directing future contributions toward the spouse with room, and the spouse contribution all push the balances toward the middle.
The hard deadline is the first death. When a spouse dies, their balance must leave the super system or convert to a death benefit pension for the survivor — it cannot be split back to even the couple out. A death benefit pension counts toward the survivor’s own balance, so a survivor who inherits a large benefit can be carried well above $3 million with no mechanism left to unwind it. Equalisation is the cheapest Division 296 strategy on the table, and it has an expiry date nobody can forecast. Treat it as the first conversation, not the last.
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Move capital to the next generation
A parent who has met a condition of release can take money out of super entirely, lend it to adult children, and have the children recontribute it as non-concessional contributions. The capital shifts into balances sitting far below any Division 296 threshold while staying inside the family. Document the loans as loans: written agreements, terms stated, repayable on demand or on the parent’s death. Pair that with a non-lapsing binding death benefit nomination directing the child’s remaining super to their estate, and a will that controls where it lands (loan can be repaid to parent’s), so the capital stays in the bloodline rather than leaking to a child’s former partner.
The numbers reward acting across the indexation step. Take a parent with $4 million and two adult children. Before 30 June 2026, the parent withdraws $240,000 and each child contributes $120,000 as a non-concessional contribution under the 2025/26 cap. Once the cap indexes to $130,000 on 1 July 2026, the parent withdraws a further $1,050,000: each child contributes $130,000 in 2026/27, then triggers the bring-forward in 2027/28 to contribute $390,000 — three years at the indexed $130,000 cap. That is $640,000 into each child, $1.28 million across the two, with the children’s balances needing to be under the relevant total super balance threshold of $2.1 million for the full bring-forward to be available. The parent’s balance falls from about $4 million to roughly $2.71 million by the 30 June 2027 measurement date — under the threshold for the transitional first year, so no Division 296 reaches them for 2026/27 at all.
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Commute and recontribute to reset components and protect the survivor
Pension commutation paired with recontribution does two jobs in one move. Withdrawing a taxable-heavy benefit and recontributing it as a non-concessional contribution lifts the tax-free proportion of the balance, which matters most for the death benefits tax a non-dependant child would otherwise wear. Run across a couple, the same mechanic feeds the equalisation work above: commute from the higher-balance spouse, recontribute to the lower, and the components improve while the balances even out. The window is the period while both members are alive and both can still receive contributions. Once a member can no longer contribute, the lever is gone, so the sequencing of commutations against age and contribution eligibility needs to be mapped years ahead, not in the final return.
Direct death benefits out of super
The default outcome — a death benefit pension to the surviving spouse — is exactly the thing that compounds a survivor’s balance toward Division 296. The alternative is to direct the death benefit out of the super system to the estate, through a binding nomination, and have a testamentary trust receive it. The capital then sits outside super entirely, the survivor’s own balance keeps compounding only on its own earnings, and the testamentary trust can stream income to beneficiaries on favourable terms, including to minor children at adult marginal rates.
The trade-off is real and has to be priced. Money paid to the estate loses the concessional super earnings rate and any tax-free pension treatment it would have carried inside super. So this suits couples whose survivor is already near or above the threshold, where the saving on future Division 296 outweighs the earnings tax given up — not couples with room to spare, who are better off keeping the benefit in the concessionally taxed environment. The decision turns on the survivor’s projected balance, not a general preference for keeping money in super.
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Use the cost base election deliberately, and watch the loss trap
SMSFs get a one-off election to reset the cost base of fund assets to market value as at 30 June 2026 for Division 296 purposes. For a fund sitting on large unrealised gains, resetting lifts the starting point so that future realised earnings — and the Division 296 they attract — are measured from the higher base. The catch is that the election is all or nothing across the fund’s assets, and that is where it bites. A fund holding some assets above cost and others below cost cannot cherry-pick the winners. Electing to reset also locks in the lower market value on the loss-position assets, raising the future taxable gain on those when they recover. Model the whole portfolio before electing, not the assets in profit alone, and check the lodgement deadline — the election is made by the due date of the 2026–27 return and cannot be reversed once in.
Manage realised earnings and asset location above $3 million
Once a balance sits well above $3 million and equalisation has run out of room, the question becomes when earnings are realised and where the assets are held. Division 296 taxes realised earnings, which makes the timing of asset sales a tax decision rather than purely an investment one. Deferring a realisation defers the liability, and bunching gains into a year a balance happens to sit below the threshold can sidestep it altogether. Asset location is the other half of the answer: high-growth, frequently traded assets inside a large super balance manufacture the realised earnings Division 296 feeds on, while the same assets held outside super — in the member’s own name, a family trust, or an investment bond — stay out of the calculation entirely.
This is where the transfer balance cap and Division 296 pull against each other. The transfer balance cap, now $2.1 million, rewards moving as much as possible into the tax-free pension phase to minimise earnings tax. But every dollar in pension phase still counts toward the $3 million Division 296 balance. A member who maxes their pension transfer to cut earnings tax can find that same balance sitting squarely inside Division 296’s reach. The two caps are not reconciled with each other; you choose which one to optimise, fund by fund, member by member.
None of these levers stay open forever. The cost base election closes with the 2026–27 return, the indexation step is a one-time uplift you either use or lose, and equalisation ends at the first death. The cost of waiting is not theoretical — it is a balance that has hardened above the threshold with nothing left to move it.
Are you looking for advisors that will keep you up to date and provide guidance and tips like in this blog? then why not contact us at our Castle Hill or Windsor office in North West Sydney to arrange a one-on-one consultation, just click the Schedule Now button up on the left to find the appointment options.
Please consider passing on this article to family or friends. Pay it forward!
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223
Important information
This article is general information only and does not constitute personal financial, legal, or taxation advice. The rules governing self-managed superannuation funds are complex and fact-specific. Individual circumstances vary significantly, and the application of the rules described in this guide depends on facts that can only be properly assessed by a qualified professional. Before establishing or participating in a structure of this type, seek advice from a licensed SMSF adviser and an experienced tax lawyer. Past tax outcomes are not a guide to future tax treatment.
⚖️ General Advice Disclaimer This article is general information only and does not constitute personal financial, legal or tax advice. The rules governing SMSFs are complex and individual circumstances vary significantly. You should obtain advice from a licensed financial adviser before acting on anything in this article. The author holds AFSL authorisation through Sonas Wealth Pty Ltd, corporate authorised representative of Viridian Advisory 476223.
SuperStream Contributions v3.0 is a major upgrade to how superannuation data and money move across Australia. Starting 1 July 2026, these changes are mandatory to support Payday Super, where employers must pay super on the same day they pay your salary, rather than every three months.
Key Changes: What’s New?
The upgrade focuses on speed and accuracy to ensure your super reaches your fund within 7 business days of your payday.
Near-Instant Payments: All SMSFs must be able to receive contributions via the New Payments Platform (NPP). This is the same system that powers “Osko” or “Fast Payments” in your personal banking.
The 24-Hour “Check”: A new service called the Member Verification Request (MVR) allows employers to check if your fund is “ready” before they send money. Your SMSF system must respond to these within 24 hours.
Stricter Error Handling: If any data (like a TFN or ABN) is slightly wrong, the system will reject the payment immediately with a specific error message so it can be fixed fast.
Step-by-Step Preparation Guide
If you receive super from an employer who is not a related party (e.g., your own family business), follow these steps:
Check Your Bank Account: Contact your bank and ask: “Is my SMSF account NPP-enabled to receive fast payments?” If it isn’t, you may need to open a modern business account that supports it.
Verify Your Digital Address (ESA): Your Electronic Service Address (ESA) is like a digital mailbox for your fund. Contact your SMSF administrator (like BGL, Class, or Heffron) to ensure your ESA is updated to v3.0 standards.
Audit Member Details: Ensure the name, Tax File Number (TFN), and date of birth held by the ATO match exactly what your employer has in their payroll system.
Confirm “Complying” Status: Check Super Fund Lookup. If your fund’s status is “Tax office has not been able to provide a regulation status,” employers cannot pay you. This usually happens if you are behind on your annual tax returns.
Update Your Employer: Once your NPP account and ESA are confirmed, provide the updated details to your employer’s payroll department immediately.
Potential Hurdles & Solutions
Hurdle
Solution
Old Bank Accounts: Many older SMSF accounts don’t support the NPP/Osko “fast” transfers.
Switch to a modern bank account. Most major Australian banks now offer NPP-ready accounts for SMSFs.
Outdated ESA: Some free or older ESA providers may not upgrade to v3.0.
If your provider isn’t ready, switch to a modern SMSF software provider that handles MVRs and SuperStream v3.0 automatically.
Late Tax Returns: If your SMSF return is late, the ATO may strip your “Complying” status.
Lodge any overdue annual returns immediately to stay on the Super Fund Lookup “green list.”
The 24-Hour Rule: Trustees can’t personally monitor 24/7 for MVR requests.
Ensure you use an automated administration service or software that responds to these requests on your behalf.
Are you currently using an administration platform like Class or BGL, or do you manage the fund’s paperwork yourself?
Note: If you only receive contributions from a related party employer (e.g., you are the director of the company paying your super), you are generally exempt from SuperStream rules, but keeping your systems modern is still highly recommended.
Thinking About an SMSF or have one but feel lost — or Want a Second Opinion? If you’d like a no-obligation conversation about whether an SMSF is right for your situation — or you want a straight-talking second opinion on an offer you’ve received — reach out. That’s what The SMSF Coach is here for. www.smsfcoach.com.au | Sonas Wealth, Sydney www.sonaswealth.com.au
Always make sure that you’re your strategy complies with relevant superannuation and tax regulations before implementation
Need Help Getting Started?
I did some checking for you too on the most frequently used SMSF Bank Accounts (see below) and NPP enabling:
Macquarie CMA As most are using Macquarie CMA I asked!! and “Yes, the Macquarie Cash Management Account (CMA) is NPP-enabled, allowing users to send and receive real-time payments. Clients can make near-instant transfers to other NPP-enabled institutions and receive funds instantly using their BSB and account number.
ANZ V2 Plus – Good as well!! Yes, the ANZ V2 Plus account is capable of receiving near real-time payments, as it supports inbound New Payments Platform (NPP) receipts. Key details regarding V2 Plus and NPP functionality:
Inbound Payments: The account can accept real-time payments, allowing faster access to funds.
PayTo Compatibility: ANZ V2+ Broking accounts allow PayTo payment agreements to replace existing direct debits, utilizing the NPP for processing. Transactional Capability: The account is designed to allow customers to make and receive payments on demand, supporting the settlement of trades.
Yes, NAB SMSF accounts, specifically the NAB Cash Manager, are New Payments Platform (NPP) enabled.
Here are the key details regarding NPP capabilities for NAB SMSF accounts:
Faster Payments: The NAB Cash Manager account supports NPP, allowing for near-instant receipt and transfer of funds, 24/7. Osko and PayID: The account allows you to use Osko for fast payments and set up a PayID to receive funds almost instantly.
Existing vs. New Accounts: While newer NAB Cash Manager accounts are NPP enabled, it is important to ensure your account is specifically set up for these features.
Yes, CommBank (CBA) SMSF accounts, specifically the CDIA (Cash Deposit Investment Account) used for SMSFs, are NPP enabled.
Key details regarding CBA SMSF accounts and the NPP:
Real-time Capabilities: The NPP allows for near real-time payments, including Osko and PayID functionality.
SuperStream Compliance: While CBA provides the bank account, you must ensure you have an Electronic Service Address (ESA) for your SMSF to receive contributions data, as the bank itself does not act as the SMSF messaging service provider.
Westpac Cash Accounts Yes, Westpac SMSF cash accounts (often referred to as Westpac DIY Super Accounts) are generally NPP (New Payments Platform) enabled.
Key NPP Features for Westpac SMSF Accounts: Osko® Payments: Allows for faster, near real-time payments to other participating financial institutions. PayID: You can set up a PayID (like an ABN or email) to receive real-time payments to your SMSF account.
Are you looking for advisors that will keep you up to date and provide guidance and tips like in this blog? then why not contact us at our Castle Hill or Windsor office in North West Sydney to arrange a one-on-one consultation, just click the Schedule Now button up on the left to find the appointment options.
Please consider passing on this article to family or friends. Pay it forward!
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223
Important information
This article is general information only and does not constitute personal financial, legal, or taxation advice. The rules governing self-managed superannuation funds are complex and fact-specific. Individual circumstances vary significantly, and the application of the rules described in this guide depends on facts that can only be properly assessed by a qualified professional. Before establishing or participating in a structure of this type, seek advice from a licensed SMSF adviser and an experienced tax lawyer. Past tax outcomes are not a guide to future tax treatment.
⚖️ General Advice Disclaimer This article is general information only and does not constitute personal financial, legal or tax advice. The rules governing SMSFs are complex and individual circumstances vary significantly. You should obtain advice from a licensed financial adviser before acting on anything in this article. The author holds AFSL authorisation through Sonas Wealth Pty Ltd, corporate authorised representative of Viridian Advisory 476223.
Here is a little-known strategy where an SMSF can be involved in owning a business or property through an unrelated unit trust or company structure. This is often ideal for an early-stage business expected to grow rapidly over time where income and growth can be captured tax effectively in the SMSF. Most suited to those who do not need access to the capital and profits until retirement or where you want some in the SMSF and some personally but your shared ownership, between your related parties, does not exceed 50%.
When two unrelated SMSFs co-invest in a trading company, the result can be a genuinely tax-efficient, asset-protected business structure — but it comes with a set of compliance obligations that every trustee needs to understand before proceeding. This guide explains how the structure works, the critical questions to ask, and the key risks to manage. In many cases three unrelated parties can make it a lot less risky in terms of potential SIS law breaches.
The critical first question: is the company a “related party”?
This is the most important compliance question in the entire structure, and the answer determines almost everything else.
Under the SIS Act, a “related party” of your SMSF includes the fund’s members, their relatives, their business partners, and companies or trusts they control. Control means holding the ability to determine more than 50% of the voting rights, or being entitled to more than 50% of dividends or capital. I have a complete article on Related Parties here
With a genuine 50/50 split between two unrelated SMSFs, neither fund’s members control the company outright. Neither party can determine outcomes alone. Accordingly, the company is generally not a related party of either SMSF — and this single fact unlocks the structure. So you can see that 3 unrelated entities will roughly even ownership would make this safer as less chance of one exceeding 50%.
Thinking About an SMSF — or Want a Second Opinion? If you’d like a no-obligation conversation about whether an SMSF is right for your situation — or you want a straight-talking second opinion on an offer you’ve received — reach out. That’s what The SMSF Coach is here for. http://www.smsfcoach.com.au | Sonas Wealth, Sydney www.sonaswealth.com.au
In-house assets — does the 5% rule apply?
SMSF trustees are familiar with the rule that no more than 5% of a fund’s total assets can be “in-house assets” — generally, investments in or loans to related parties. Because the trading company is not a related party (as established above), the shares your SMSF holds do not count as in-house assets based on the ownership relationship alone.
One important note: Regulation 13.22C provides a separate exclusion from the in-house asset definition for investments in certain closely held entities — but that exclusion is only available if the entity does not conduct a business. Since we are dealing with an actively trading company, Reg 13.22C is irrelevant here. The correct answer is that the company is simply not a related party, so the in-house asset classification does not arise in the first place. Here is a great white paper from Leigh Mansell of Heffron’s on In-house Assets
Tax treatment — where the real advantage lives
This structure can be exceptionally tax-efficient, particularly for SMSF members approaching or in retirement phase.
At the company level: A small trading company with turnover below $50 million will typically qualify as a base rate entity and pay company tax at 25%. This tax gives rise to franking credits attached to any dividends paid to shareholders.
At the SMSF level — accumulation phase: Your fund’s effective tax rate on investment income is 15%. When the company pays a franked dividend, the SMSF includes the grossed-up dividend in its assessable income, pays 15% tax, and offsets that liability with the franking credit. Because the company already paid 25% tax, the franking credit typically exceeds the SMSF’s liability — producing a refund.
At the SMSF level — pension phase: If your SMSF is paying pensions and the income qualifies as exempt current pension income, the effective tax rate is 0%. The full franking credit is refunded in cash, making this one of the most tax-efficient investment structures available in Australia.
NALI and arm’s length dealings
Non-arm’s length income (NALI) is taxed in your SMSF at a flat 45%, regardless of whether you are in accumulation or pension phase. Private company dividends are a known NALI risk area, and the ATO scrutinises them carefully.
All dividends must be paid on the same terms to both SMSFs, proportionate to their respective shareholdings, with no preferential treatment flowing to one fund over the other. Arm’s length requirements also apply to any other dealings between your SMSF and the company — including director salaries, lease arrangements, and any services the company provides.
Annual valuation — a compliance obligation you cannot defer
Your SMSF’s financial statements must record all assets at their true market value as at 30 June each year. Shares in a private unlisted trading company must be independently valued by a suitably qualified person using a recognised methodology — typically earnings-based, net tangible assets, or a combination of both. This is not optional; your auditor will require appropriate evidence.
Valuation complexity increases over time, particularly if the company retains significant profits, acquires assets, or if the trading environment changes materially. Factor in the annual cost of a formal valuation — and the management time required to facilitate it — when assessing the overall economics of the structure. My guide to SMSF asset valuations is available here
Before you proceed — a practical checklist
Confirm each of the following before shares are acquired:
Both SMSFs are genuinely unrelated — members are not relatives, business partners, or Part 8 associates of each other in any way
A properly drafted shareholders agreement is executed before shares are acquired
The SMSF investment strategy is updated to specifically contemplate and justify an investment of this type, size, and risk profile
The share acquisition occurs at market value from day one — a below-market acquisition creates permanent NALI taint on all future income from those shares
Dividends will be declared on identical terms for both SMSFs from the outset
An annual independent valuation process is established and budgeted for
The company has a separate ABN, ACN, and bank account entirely independent of any member’s personal finances
Any member who is also a director or employee of the company is remunerated at genuine market rates
Legal advice has been obtained on both the company establishment and the SMSF’s acquisition of shares
Your SMSF auditor has been informed of the investment and understands the basis on which it is not classified as an in-house asset
Always make sure that you’re your strategy complies with relevant superannuation and tax regulations before implementation
Are you looking for advisors that will keep you up to date and provide guidance and tips like in this blog? then why not contact us at our Castle Hill or Windsor office in North West Sydney to arrange a one-on-one consultation, just click the Schedule Now button up on the left to find the appointment options.
Please consider passing on this article to family or friends. Pay it forward!
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223
Important information
This article is general information only and does not constitute personal financial, legal, or taxation advice. The rules governing self-managed superannuation funds are complex and fact-specific. Individual circumstances vary significantly, and the application of the rules described in this guide depends on facts that can only be properly assessed by a qualified professional. Before establishing or participating in a structure of this type, seek advice from a licensed SMSF adviser and an experienced tax lawyer. Past tax outcomes are not a guide to future tax treatment.
Here are some of the key issues we will discuss with you to get a better understanding on whether an SMSF is suitable to meet your objectives and circumstances. They have been developed to address concerns about people being pushed or rushing in to a SMSF. We want to protect access to the SMSF option for the long-term.
What do you or your family want to achieve by establishing an SMSF . This explores your reasons for investigating this strategy and if it aligns with your short, medium and long-term goals or is it something you have just felt was right for you. We will have no hesitation in suggesting you consider alternatives that may meet your true objectives. We don’t believe an SMSF is right for everyone.
Is contributing more to superannuation the right option for you at your age when we take in to account your financial commitments now and in the future as this money will be locked away until you meet a condition of release most likely in your 60’s. It may be more appropriate for your to concentrate on using excess funds for debt reduction, medium term investing in your name or an insurance bond for tax minimisation while retaining access to the capital. We develop our strategies to suit you!
Is running a strategy via an SMSF suitable for you in terms of your experience, knowledge and available time. There are many busy executives, truck drivers and small business owners that I have had to talk out of running and SMSF when they can’t even find 1 hour in their week to schedule a meeting or even engage via Skype to understand their trustee obligations.Yet they thought they run a $800,000 investment portfolio! I hesitate to mention the one who said he could do his research while driving to work on his mobile! Or the couple who felt they were “property experts” because they had 4 Queensland regional properties, having never once visited any of them or done more than a cursory Google search using the highest valuations found and ignoring recent listings. By the time we analysed the portfolio they were going nowhere, low-income and negative capital growth. On asking for Property Inspection reports we found they were also up for tens of thousands in repairs and maintenance over the coming years. It was agreed that their super was safer in their well diversified existing strategy than another “punt” on property in an SMSF until learned more about property investing from a Buyer’s Agent.
What funds do have to rollover from an existing fund(s). Are you able to move those funds? Some people are in government, military or state funds that cannot be accessed before a certain age like MSBS or Local Govt Super or maybe a Defined Benefit Scheme that’s too sweet to leave! Are you able to redirect future Super Guarantee contributions from your employer as some have a mandated fund under enterprise bargaining agreements etc. Are there high exit fees or underlying investments that are not liquid? Is it the right move for you?
Have insurance needs been adequately identified and addressed for your future protection? We have to look at the current insurances in place and do a needs analysis to see if they should be maintained, altered, replaced or cancelled.
We need to know if you are aware of and clear about trustee responsibility? This blog and other material we point you to will give you the knowledge base you require to run a fund. We may suggest you do this education before committing to setting up the SMSF. Your urgency to set up a fund does not let us abrogate our duties.
We will walk you through the costs of setting up and administering the SMSF annually as well as costs related to specific strategies you want to undertake? This includes fees associated with all related aspects of SMSFs including advice, investments, establishment, legal and administration?
We will help you with the development and management of the SMSF investment strategy and ensure it is compliant and will help achieve your objectives. We will ground you in reality (no reasonable investment will provide excessive returns long-term so we might burst a few myths.
If the SMSF is to engage in borrowing or gearing? We will guide you around what is a reasonable level of gearing in your circumstances and to achieve your retirement plans and analyse the affordability of the gearing strategy. We will provide you with a full 3 step guide on the rules, the process and the mistakes to avoid during implementation.
One last warning :
We want you to use the right strategy at the right time for your future financial security.
This may explain why from 2017 to 2025 we have been one of the most recognised among the best of the best SMSF Advisers in a number of professional awards.
With all the talk about Total Super Balance caps and where people will invest money going forward if they can’t get it in to superannuation, the spotlight is being shone on “trusts” at present. This has also brought with it the claims of tax avoidance or tax minimisation, so what exactly are trusts and are there differences between Family Trusts, Units Trusts, Discretionary Trusts and Testamentary Trusts to name a few.
Trusts are a common strategy and this article aims to aid a better understanding of how a trust works, the role and obligations of a trustee, the accounting and income tax implications and some of the advantages and pitfalls. Of course, there is no substitute for specialist legal, tax and accounting advice when a specific trust issue arises and the general information in this article needs to be understood within that context.
Introduction
Trusts are a fundamental element in the planning of business, investment and family financial affairs. There are many examples of how trusts figure in everyday transactions:
Cash management trusts and property trusts are used by many people for investment purposes
Joint ventures are frequently conducted via unit trusts
Money held in accounts for children may involve trust arrangements
Superannuation funds are trusts
Many businesses are operated through a trust structure
Executors of deceased estates act as trustees
There are charitable trusts, research trusts and trusts for animal welfare
Solicitors, real estate agents and accountants operate trust accounts
There are trustees in bankruptcy and trustees for debenture holders
Trusts are frequently used in family situations to protect assets and assist in tax planning.
Although trusts are common, they are often poorly understood.
What is a trust?
A frequently held, but erroneous view, is that a trust is a legal entity or person, like a company or an individual. But this is not true and is possibly the most misunderstood aspect of trusts.
A trust is not a separate legal entity. It is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. Not all countries recognise the concept of a trust, which is an English invention. While the trust concept can trace its roots back centuries in England, many European countries have no natural concept of a trust, however, as a result of trade with countries which do recognise trusts their legal systems have had to devise ways of recognising them.
The nature of the relationship is critical to an understanding of the trust concept. In English law the common law courts recognised only the legal owner and their property, however, the equity courts were willing to recognise the rights of persons for whose benefit the legal holder may be holding the property.
Put simply, then, a trust is a relationship which exists where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.
The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.
The nature of the trustee’s duty is often misunderstood in the context of family trusts where the trustees and beneficiaries are not at arm’s length. For instance, one or more of the parents may be trustees and the children beneficiaries. The children have rights under the trust which can be enforced at law, although it is rare for this to occur.
Types of trusts
In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:
Fixed trusts
Unit trusts
Discretionary trusts – Family Trusts
Bare trusts
Hybrid trusts
Testamentary trusts
Superannuation trusts
Special Disability Trusts
Charitable Trusts
Trusts for Accommodation – Life Interests and Rights of Residence
A common issue with all trusts is access to income and capital. Depending on the type of trust that is used, a beneficiary may have different rights to income and capital. In a discretionary trust the rights to income and capital are usually completely at the discretion of the trustee who may decide to give one beneficiary capital and another income. This means that the beneficiary of such a trust cannot simply demand payment of income or capital. In a fixed trust the beneficiary may have fixed rights to income, capital or both.
Fixed trusts
In essence these are trusts where the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such a case the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.
Unit trusts
These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company.
The beneficiaries are usually called unitholders. It is common for property, investment trusts (eg managed funds) and joint ventures to be structured as unit trusts. Beneficiaries can transfer their interests in the trust by transferring their units to a buyer.
There are no limits in terms of trust law on the number of units/unitholders, however, for tax purposes the tax treatment can vary depending on the size and activities of the trust.
Discretionary trusts – Family Trusts
These are often called “family trusts” because they are usually associated with tax planning and asset protection for a family group. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether anyone will receive income and/or capital and, if so, how much.
For the purposes of trust law, a trustee of a discretionary trust could theoretically decide not to distribute any income or capital to a beneficiary, however, there are tax reasons why this course of action is usually not taken.
The attraction of a discretionary trust is that the trustee has greater control and flexibility over the disposition of assets and income since the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.
Bare trusts
A bare trust exists when there is only one trustee, one legally competent beneficiary, no specified obligations and the beneficiary has complete control of the trustee (or “nominee”). A common example of a bare trust is used within a self-managed fund to hold assets under a limited recourse borrowing arrangement.
Hybrid trusts
These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the trustee has power to issue.
Testamentary trusts
As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often used when the testator wishes to provide for their children who have yet to reach adulthood or are handicapped.
Superannuation trusts
All superannuation funds in Australia operate as trusts. This includes self-managed superannuation funds.
The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.
The Federal Government has legislated to establish certain standards that all complying superannuation funds must meet. For instance, the “preservation” conditions, under which a member’s benefit cannot be paid until a certain qualification has been reached (such as reaching age 65), are a notable example.
Special Disability Trusts
Special Disability Trusts allow a person to plan for the future care and accommodation needs of a loved one with a severe disability. Find out more in this Q & A about Special Disability Trusts.
Charitable Trusts
You may wish to provide long term income benefit to a charity by providing tax free income from your estate, rather than giving an immediate gift. This type of trust is effective if large amounts of money are involved and the purpose of the gift suits a long term benefit e.g. scholarships or medical research.
Trusts for Accommodation – Life Interests and Right of Residence
A Life Interest or Right of Residence can be set up to provide for accommodation for your beneficiary. They are often used so that a family member can have the right to live in the family home for as long as they wish. These trusts can be restrictive so it is particularly important to get professional advice in deciding whether such a trust is right for your situation.
Establishing a trust
Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement. The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.
The person who transfers the property in a settlement is said to “settle” the property on the trustee and is called the “settlor”.
In practical terms, the original amount used to establish the trust is relatively small, often only $10 or so. More substantial assets or amounts of money are transferred or loaned to the trust after it has been established. The reason for this is to minimise stamp duty which is usually payable on the value of the property initially affected by the establishing deed.
The identity of the settlor is critical from a tax point of view and it should not generally be a person who is able to benefit under the trust, nor be a parent of a young beneficiary. Special rules in the tax law can affect such situations.
Also critical to the efficient operation of a trust is the role of the “appointor”. This role allows the named person or entity to appoint (and usually remove) the trustee, and for that reason, they are seen as the real controller of the trust. This role is generally unnecessary for small superannuation funds (those with fewer than five members) since legislation generally ensures that all members have to be trustees.
The trust fund
In principle, the trust fund can include any property at all – from cash to a huge factory, from shares to one contract, from operating a business to a single debt. Trust deeds usually have wide powers of investment, however, some deeds may prohibit certain forms of investment.
The critical point is that whatever the nature of the underlying assets, the trustee must deal with the assets having regard to the best interests of the beneficiaries. Failure to act in the best interests of the beneficiaries would result in a breach of trust which can give rise to an award of damages against the trustee.
A trustee must keep trust assets separate from the trustee’s own assets.
The trustee’s liabilities
A trustee is personally liable for the debts of the trust as the trust assets and liabilities are legally those of the trustee. For this reason if there are significant liabilities that could arise a limited liability (private) company is often used as trustee.
However, the trustee is entitled to use the trust assets to satisfy those liabilities as the trustee has a right of indemnity and a lien over them for this purpose.
This explains why the balance sheet of a corporate trustee will show the trust liabilities on the credit side and the right of indemnity as a company asset on the debit side. In the case of a discretionary trust it is usually thought that the trust liabilities cannot generally be pursued against the beneficiaries’ personal assets, but this may not be the case with a fixed or unit trust.
Powers and duties of a trustee
A trustee must act in the best interests of beneficiaries and must avoid conflicts of interest. The trustee deed will set out in detail what the trustee can invest in, the businesses the trustee can carry on and so on. The trustee must exercise powers in accordance with the deed and this is why deeds tend to be lengthy and complex so that the trustee has maximum flexibility.
Who can be a trustee?
Any legally competent person, including a company, can act as a trustee. Two or more entities can be trustees of the same trust.
A company can act as trustee (provided that its constitution allows it) and can therefore assist with limited liability, perpetual succession (the company does not “die”) and other advantages. The company’s directors control the activities of the trust. Trustees’ decisions should be the subject of formal minutes, especially in the case of important matters such as beneficiaries’ entitlements under a discretionary trust.
Trust legislation
All states and territories of Australia have their own legislation which provides for the basic powers and responsibilities of trustees. This legislation does not apply to complying superannuation funds (since the Federal legislation overrides state legislation in that area), nor will it apply to any other trust to the extent the trust deed is intended to exclude the operation of that legislation. It will usually apply to bare trusts, for example, since there is no trust deed, and it will apply where a trust deed is silent on specific matters which are relevant to the trust – for example, the legislation will prescribe certain investment powers and limits for the trustee if the deed does not exclude them.
Income tax and capital gains tax issues
Because a trust is not a person, its income is not taxed like that of an individual or company unless it is a corporate, public or trading trusts as defined in the Income Tax Assessment Act 1936. In essence the tax treatment of the trust income depends on who is and is not entitled to the income as at midnight on 30 June each year.
If all or part of the trust’s net income for tax purposes is paid or belongs to an ordinary beneficiary, it will be taxed in their hands like any other income. If a beneficiary who is entitled to the net income is under a “legal disability” (such as an infant), the income will be taxed to the trustee at the relevant individual rates.
Income to which no beneficiary is “presently entitled” will generally be taxed at highest marginal tax rate and for this reason it is important to ensure that the relevant decisions are made as soon as possible after 30 June each year and certainly within 2 months of the end of the year. The two month “period of grace” is particularly relevant for trusts which operate businesses as they will not have finalised their accounts by 30 June. In the case of discretionary trusts, if this is done the overall amount of tax can be minimised by allocating income to beneficiaries who pay a relatively low rate of tax.
The concept of “present entitlement” involves the idea that the beneficiary could demand immediate payment of their entitlement.
It is important to note that a company which is a trustee of a trust is not subject to company tax on the trust income it has responsibility for administering.
In relation to capital gains tax (CGT), a trust which holds an asset for at least 12 months is generally eligible for the 50% capital gains tax concession on capital gains that are made. This discount effectively “flows” through to beneficiaries who are individuals. A corporate beneficiary does not get the benefit of the 50% discount. Trusts that are used in a business rather than an investment context may also be entitled to additional tax concessions under the small business CGT concessions.
Since the late 1990s discretionary trusts and small unit trusts have been affected by a number of highly technical measures which affect the treatment of franking credits and tax losses. This is an area where specialist tax advice is essential.
Why a trust and which kind?
Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.
A trust can give some protection from creditors and is able to accommodate an employer/employee relationship. In family matters, the flexibility, control and limited liability aspects combined with potential tax savings, make discretionary trusts very popular.
In arm’s length commercial ventures, however, the parties prefer fixed proportions to flexibility and generally opt for a unit trust structure, but the possible loss of limited liability through this structure commonly warrants the use of a corporate entity as unitholder ie a company or a corporate trustee of a discretionary trust.
There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.
Trusts which incur losses
One of the most fundamental things to understand about trusts is that losses are “trapped” in the trust. This means that the trust cannot distribute the loss to a beneficiary to use at a personal level. This is an important issue for businesses operated through discretionary or unit trusts.
Establishment procedures
The following procedures apply to a trust established by settlement (the most common form of trust):
Decide on Appointors and back-up Appointors as they are the ultimate controllers of the trust. They appoint and change Trustees.
Settlor determined to establish a trust (should never be anyone who could become a beneficiary)
Select the trustee. If the trustee is a company, form the company.
Settlor makes a gift of money or other property to the trustee and executes the trust deed. (Pin $10 to the front of the register is the most common way of doing this)
Apply for ABN and TFN to allow you open a trust bank account
Establish books of account and statutory records and comply with relevant stamp duty requirements (Hint: Get your Accountant to do this)
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
