Difference between SMSF and Trust

The terms "SMSF" and "trust" refer to specific financial structures, each with its own unique features and purposes. Here is an overview of the differences between a Self-Managed Superannuation Fund (SMSF) and a trust:

Self-Managed Superannuation Fund (SMSF)

1. Purpose:
   • An SMSF is a private superannuation fund that you manage yourself, primarily aimed at saving for retirement.
2. Regulation:
   • SMSFs are regulated by the Australian Taxation Office (ATO).
3. Members:
   • An SMSF can have up to six members, all of whom are typically trustees (or directors of the corporate trustee) of the fund.
4. Control:
   • Members have full control over investment decisions, within the constraints of superannuation laws and regulations.
5. Taxation:
   • Earnings within the fund are generally taxed at a concessional rate of 15%, though there are strict compliance requirements.
6. Legal Structure:
   • An SMSF is a trust, specifically designed for superannuation purposes. The trustees hold the assets in trust for the members' retirement benefits.

Trust

1. Purpose:
   • A trust is a legal arrangement where one party (the trustee) holds and manages assets for the benefit of another party (the beneficiaries). Trusts can be set up for various purposes, including estate planning, asset protection, and tax planning.
2. Regulation:
   • Trusts are regulated by state laws and the terms outlined in the trust deed, with oversight by courts if necessary.
3. Beneficiaries:
   • Trusts can have multiple beneficiaries, who may have fixed entitlements or discretionary interests.
4. Control:
   • The trustee has control over the management of the trust’s assets, but must act in accordance with the trust deed and in the best interests of the beneficiaries.
5. Taxation:
   • Trusts are generally not taxed as separate entities; instead, income is distributed to beneficiaries, who are then taxed at their individual rates. However, the trustee might be taxed in certain situations, such as when income is not distributed.
6. Types of Trusts:
   • There are various types of trusts, such as discretionary (family) trusts, unit trusts, and testamentary trusts, each serving different purposes and having distinct characteristics.

Key Differences

1. Primary Objective:
   • An SMSF is specifically for retirement savings, whereas a trust can be created for various purposes, including investment, asset protection, and estate planning.
2. Regulatory Framework:
   • SMSFs are regulated by the ATO and subject to superannuation legislation, while other trusts are governed by state trust laws and common law principles.
3. Membership vs. Beneficiaries:
   • SMSFs have members who are also trustees, while trusts have beneficiaries who receive benefits from the trust and trustees who manage the trust.
4. Tax Treatment:
   • SMSFs receive specific tax concessions for superannuation funds, while the tax treatment of a trust depends on its structure and the distribution of income to beneficiaries.
5. Control and Management:
   • In an SMSF, members have direct control over the fund’s investments. In a typical trust, the trustee has control over the assets, albeit under the obligation to act in the best interests of the beneficiaries.

Understanding these differences helps in choosing the appropriate structure based on the intended purpose, regulatory requirements, and desired control over assets and investments.

Please be advised this is general information only, and is not to be taken as legal advice. If you would like more information, or have a legal query, please contact Abbott & Mourly directly.
Published: 06/06/2024