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Discretionary investment trusts as an option for SMSF members with balances $1.6m or more

With the policies outlined in the Super reform now in full swing, it’s fair to say that the advice needs for clients have increased, but the type of strategies they require have also changed.

Liz Westover from PWC discussed this topic in depth at the recent SMSF Association conference where it was reiterated that for clients that have surplus income and may have already exhausted their bring-forward $300,000 non-concessional cap, they will need to look at alternate structures to hold their monies.

With cash rates sitting at all-time lows, the need to find an investment option that generates a healthy return using a vehicle other than super, is becoming more common.

It’s now also necessary to consider other asset holding structures if a client has reached the $1.6 million transfer balance cap to look for alternative ways to keep the client in an overall tax effective, or even tax free, environment.

The most common scenario we are seeing now is the use of discretionary trusts. Let’s consider a fund that has 2 members both in pension and have reached their $1.6 million Transfer balance cap. They also have other sizeable amounts in accumulation.

At Intello, we have recently incorporated non-SMSF portfolio reporting and we are seeing a trend that would indicate a lot of advisers have been withdrawing funds from Super for their clients (when they can) above the $1.6million Transfer balance cap and setting up a discretionary trust to run a separate portfolio. From purely a tax position this could work very well.

Take for example a trust that has two beneficiaries and the funds invested are $800,000 yielding a 5% return. The $40,000 income can be distributed to both beneficiaries, keeping them under the tax free threshold (with offsets).

Combine this with a tax free SMSF and pension, the trustees can continue to enjoy a tax free position just as they had done previously within their fund. Using this strategy could also provide further diversification of assets and also aid in Estate planning needs.

There are obviously extra accounting fees required for the trust and this would have to be weighed up against the tax saving the trust strategy would provide overall. Another element to be mindful of is Centrelink. Any changes to assets etc could have a negative impact on benefit entitlements.

  

Other scenarios when alternative strategies may be necessary include the following:

The need for segregation of assets Tax planning and CGT discounts
Removal of death benefits Flexibility with investments
Terminal illness Lack of trust in the super system
Winding up a fund Borrowing

 

Vehicles to deliver these strategies may be via the individual, trust or company, with many alternatives needing a potential tax analysis as part of the planning process. This is another reason why Advisers should be partnering with service providers that are skilled in this area so they can provide professional and timely advice.

 

Intello Team
Intello Team

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