Discretionary Trusts distributing income to a SMSF and Tax

We have seen that it can be possible for a discretionary trust to distribute income to a SMSF if the SMSF is a beneficiary of the trust. See my legal tip
http://www.structuring.com.au/terry/super/can-a-discretionary-trust-distribute-income-to-a-smsf/

But just because it can be done doesn’t mean it should be done.

Any distribution from a related discretionary trust received by a SMSF will be classed as NALI or ‘Non Arms Length Income’.

NALI income will be taxed in a SMSF at the highest marginal tax rate.

Income from Fixed Trusts to a SMSF can be taxed at normal SMSF rates, 15% generally, but only where the income is genuine non-NALI income. For example a SMSF owning units in a Fixed Unit Trust which owns a factory. Genuine rent can flow through to the SMSF and be taxed at 15%. But if a discretionary trust distributes income to the unit trust this would flow through to the SMSF but be taxed at the top marginal tax rate.

The reasons for these laws are to stop people diverting income to SMSFs to save tax.

Discuss this at https://www.propertychat.com.au/community/threads/tax-tip-196-discretionary-trusts-distributing-income-to-a-smsf.38915/

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