Investing through a trust

This question is in relation to the planning considerations for an investment combination of an SMSF and Discretionary Trust.

Under the hypothetical situation where a couple could potentially accumulate $2.6m by retirement at age 65, would it be better to target $1.6m for the SMSF (to be within the cap), and $1m for the Trust?

The basis of this question is to understand the planning considerations and analysis required to develop this strategy (noting particularly the transfer balance cap rules for super). Part of the decision making is probably related to a perspective on the risk of having all assets “tied up” in super – the Trust would provide an alternate, that is more at the discretion of the trustees. The question is how to determine the right balance between the funds in the SMSF vs the Trust, particularly from a tax perspective. For example, should the SMSF target $2m, and the Trust target $600k (what are the advantages / disadvantages of this?).

Any insights into the planning and strategy considerations appreciated. Thanks!

A: Thanks for the question.

Tax implications of investing through a trust are probably best addressed by your accountant.

That said, let me make some general observations:

  1. a) Firstly, the super limits are per person – not per couple. It is currently set at $1.6m per person in the pension phase. Potentially, a couple could have $3.2m in total;
  2. b) You can have more than $1.6m in super. The amount in pension phase can only be $1.6m. Monies in the accumulation phase are only taxed at 15% on their earnings. This all said, once your total superannuation balance reaches $1.6m, you cannot make personal (non-concessional) contributions;
  3. c)  Trust distributions of income are taxed in the hands of their beneficiaries at the beneficiary’s marginal tax rate. This means that a trust beneficiary could potentially be paying a very high rate of tax. So, they are only tax advantageous to the extent that you can distribute the investment income to low rate or zero rate tax payers (ie potentially a minor, or to yourself up to the tax free threshold of $18,200).

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