When superannuation funds consider structuring through, or investing in, another private entity, the choice is generally between a company and a unit trust. When the decision is made to invest in a unit trust, it is primarily made in order to take advantage of a unit trust’s “flow-through” nature under the current tax laws. However, this flow through nature will be lost if the unit trust is deemed to be a public trading trust.
This article, which was first published in The Tax Institute’s Taxation in Australia journal, examines how a superannuation fund’s investment in a unit trust can cause it to be a public trading trust, and the consequences that arise from this. The author would like to make the following additional comments in relation to public trading trusts:
- There has been some confusion with the amendments to the public trading trust rules in 2010 and in particular the deletion of the definition of “exempt entity” in section 102M of the Income Tax Assessment Act 1936 (Cth). That old definition specifically included the trustees of superannuation fund as exempt entities, whereas the definition in section 995-1 of the Income Tax Assessment Act 1997 (Cth) does not. However, section 102MD of the Income Tax Assessment Act 1936 (Cth) deems a complying superannuation fund to be an exempt entity for the purpose of the public trading trust rules and therefore investments by superannuation funds in unit trusts will be counted for those rules.
- The capital gains tax discount is available for public trading trusts as public trading trusts are not expressly deemed to be treated as a company for the capital gains tax rules (the ATO has accepted this in ATO ID 2003/652 (Withdrawn)). Although this will reduce the tax payable by the public trading trust, the resulting non-taxed gain will most likely be paid out as an unfranked dividend and therefore will be taxable in the hands of the unit holding superannuation fund (unless it’s in pension phase).
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