HOW DO FAMILY TRUSTS WORK COMPARED WITH SMSFs?
Both family discretionary trusts and SMSFs are established in Australia by deed and controlled by trustee/s according to the rules laid down in the trust deed. SMSFs are also subject to the rules in superannuation laws. Why would you choose one over another?
Government policy has successfully spawned the growth of the superannuation industry since Paul Keating was Treasurer. The philosophy of the system is that we need to create a system to self fund our retirements because Australia has a burgeoning old age population which will otherwise overburden the public purse's ability to pay old age pensions as was previously the experience. SMSFs have been developed in this country to allow for concessional contributions to be made by individuals up to a certain age and by their employers. Whilst you are working, the whole fund is "locked up" until you reach a certain age - so as to operate as a source of income in retirement. Flexibility remains as to the investment decisions of the fund (subject to legislative restrictions) and, once the age thresholds have been met, discretionary allocations may be made to fund members.
Discretionary trusts or family trusts derive from the law of equity and describe a situation where a family member shares wealth with other famliy members of a family group usually including grandparents, parents, children, grandchildren and their children. Other beneficiaries may also be included in the deed. Discretionary trusts have great flexibility, no contribution limits and no restrictions on the nature of the trust's investments (unless limited by the deed) and no borrowing limits. They also are effective as asset protection for an individual and small business - they can be beyond the reach of creditors. Perhaps their greatest advantage is the ability to "stream" distributions of income and realised capital profits in a tax effective way away from the main income earner of the family to lower-taxed beneficiaries. The main condition applying to distributions is that all trust income and realised profits for the year must be distributed otherwise the trust faces tax at the top personal rate of 45% plus 1.5% medicare levy. Assistant Treasurer Bill Shorten has said recently that the Commonwealth Government is going to make an announcement regarding the tax treatment of discretionary trusts arising from the decision of the Federal Court in the Bamford case. Hopefully this will provide tax advisers with clarity.
If you desire asset protection and think you might need to access your assets before retirement then there are arguments in favour of a discretionary trust structure for your investments. Similarly, the timing of receipt of your (high) income in relation to your age may be a factor given the contributions caps which apply to SMSFs ie if you receive large amounts of income into your 60s and 70s.
There may be pitfalls in using trusts and care and professional advice should always be sought.
