Many SMSF investors have listed and unlisted exposure to commercial property in their portfolios and much of that is retail exposure so I was looking for some up to-date guidance on the Australian retail property sector specifically for a client and decided to share this article that I found from APN Funds Management This is neither a recommendation nor a paid advertisement from APN, just me passing on what I felt was a good analysis of the current state of play in Australian retail property. So here goes:
Everyone shops on the Internet these days, don’t they? That’s why Armageddon looms for retailers and therefore investors in retail property.
If you’re looking for a reason why the share price of Retail AREITs in the ASX 300 are down 2.3% over the last two years, there’s your answer. You may also think these falls are justified. If so, we’d suggest you do three things.
The first is to take heed of the last 12 months performance. The retail sector is up 14% (even outperforming the overall AREIT market) as investors realise the value that has been created by the over selling of the sector.
The second is to visit your local super regional shopping centre, maybe Chadstone in Melbourne, Bondi Junction in Sydney or Carindale in Brisbane. On arrival, take a look around. It’s busy isn’t it? And how about those families, maybe three generations wide, engaging in an activity that is as much social as it is commercial?
These small groups are simply doing something together in a clean, convenient, climate controlled, secure and accessible environment. For them, shopping is not a chore. This is not something they want to substitute for online shopping, huddling around a mobile phone, looking at pictures of shoes.
Both activities might lead to a sale but there is a world of difference in the social activity and environment that precedes it.
The third suggestion is to consider the view of experienced investors that study shopping centre assets for a living and get their take on retail Armageddon.
Yes, there are such people, and APN Property employs quite a few of them. Between us, we have 84 years of commercial property investing experience.
We dig deep into the demand and supply dynamics that drive local retail property markets, analysing everything from personal income growth, population data and economic growth indicators to individual shopping centre performance, vacancy rates and rental growth.
For us, this is the only way to establish the attractiveness or otherwise of a retail property. If, for example, a particular property market has excess supply, low population growth, weak “buying power” (lower income levels) and low economic growth – it is best avoided.
It is our view that not only is Armageddon highly unlikely, the prevalence of the belief that it is, offers an opportunity.
Let me explain why. Our AREIT valuation process includes a property-by-property risk analysis, drawing on pertinent local market data, ABS and Census data for specific areas and property specific information. We also seek to understand Australia’s high level retail property market dynamics.
This approach delivers a very different picture from the narrative seeping into the mainstream media, foretelling empty shopping centres, declining retail brands and the end of shopping as a social activity.
This is what our research tells us about Australia’s current retail property markets:
The Melbourne regional shopping centre market is typified by low per capita supply, driven by the strongest population growth and Gross State Product (GSP). It is also enjoying below average new supply across all retail sectors. This is an attractive market ripe with investment opportunities.
The same cannot be said of south east Queensland, a market typified by an excess supply of all categories of retail property, especially in the vulnerable sub-regional centre category. The region also suffers from below average GSP and only average population growth. The current supply phase is well in excess of national averages across most sectors and will likely compound return weakness in the region.
In Perth, a large pipeline of new retail space is in development, a “catch up” following years of oppressive town planning restrictions and retail trading laws stifling the market. As a consequence, a number of existing centres are experiencing major extensions, including Mandurah Forum, Westfield Carousel, Midland Gate Shopping Centre, Booragoon and Karinyup. This new supply looks excessive but being aware of the historic context makes us more comfortable.
In Sydney, the market has elevated levels of new Neighbourhood and Large Format space being built. But compared with the rest of Australia there appears to be less of the weak sub-regional shopping centre space and less new supply looming. And Sydney’s higher than average regional space provision appears consistent with the population’s superior spending power.
It hardly sounds like Armageddon, does it? In Australian retail property, overall growth is broadly positive, current supply is not excessive (in an absolute sense – relative to other developed, comparable markets around the world) and neither is new supply excessive.
South east Queensland has some challenges and Melbourne is fundamentally strong but overall Australia’s retail property market is well positioned for slow and steady growth. Armageddon appears unlikely.
Retail property is not dead. We are, however, witnessing a cyclical slowdown. Different to past cycles, it has been confused by less experienced investors as a structural issue.
It’s this kind of measured, fact-based analysis that you won’t read about in the media. Instead, Amazon’s arrival has led to a kind of scaremongering that defies reality. Professional investors like us enjoy and aim to profit from the disparity, as we hope will investors in APN’s AREIT Fund. The headlines point one way, the facts quite another. Personally, I prefer facts.
This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance,
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I recently did a co-presentation with Louise Biti from Aged Care Steps for the Self Managed Superannuation Fund Association on how SMSF Trustees can plan for incapacity or just that time when they no longer wish to run their fund. The response was great and the questions from the floor really brought it home to us that people are very concerned about how they pass control of their wealth and well-being to others. A copy of the presentation slides are available here . As part of my preparation I developed a simple checklist of issues that SMSF trustees should use when they consider their options. This list is not exhaustive so please add your own tips or suggestions in the comments section below.
When planning for the management of your funds in your SMSF you must first read the Deed!
You do have an Original copy of the Deed or a Certified copy don’t you?
Who do you want to manage your fund if you die or are incapacitated?
On death for Corporate Trustees you leave the shares in the trustee company via your will to the person(s) so they have a right to be a director of the trustee company.
For incapacity you provide an Enduring Power of Attorney (EPOA) and when required you resign as a director and they are appointed in your place. If it is your spouse and they are the only other member then they become Sole Director.
On death for Individual Trustees your Executor will usually have a right to be a trustee of the fund.
For incapacity you provide an Enduring Power of Attorney and when required you resign as a trustee and they are appointed in your place. If it is your spouse and they are the only other member then they need to find a second person to act as a trustee or move to a sole director company trustee.
What to consider in the choice of an EPOA/Executor
Are they good with money and making decisions?
Will they be willing to seek advice from specialists if necessary?
Will there be conflict between beneficiaries – Sibling rivalry? Blended families?
Should you consider 2 or more EPOAs/Executors for safety or support
a power of attorney (or POA) can either become effective immediately, or upon the occurrence of a future event (such as your mental incapacity).
A power of attorney can have specific clauses with instructions for the operation of the power.
If you have a spouse or dependant you may want to include Dependants Clauses to ensure your funds can be used for their needs.
You may want to consider a Conflict of Interest clause to allow a EPOA to make decisions that may suit them as well as you but to the detriment of other possible beneficiaries.
Who do you want to receive your SMSF account balance?
For Spouse / Dependants you should consider using a Reversionary Pension election or Non-Lapsing Binding Death Benefit Nomination direct to beneficiaries or via your will using Non-lapsing Binding Death Nomination to your Legal Personal Representative with option in your will to set up a Testamentary Trust. Normal BDBNs lapse after 3 years.
For Adult children you can use Non-Lapsing Binding Death Benefit Nomination direct to beneficiary or via your will using non-lapsing binding nomination to Legal Personal Representative with option in your will to set up a Testamentary Trust
For your parents, your siblings or non-family via your will using Non-lapsing Binding Death Benefit Nomination to your Legal Personal Representative with option in your will to set up a Testamentary Trust
Do any of the beneficiaries in your Will have special needs? For disabled beneficiaries consider a Special Disability Trust. For those poor with money or in a highly litigious career or in possible bankruptcy then a Testamentary Trust should be considered.
Who do you want to manage your care options if you are incapacitated?
Ensure you have an Enduring Power of Guardianship in place so that your lifestyle and medical treatment decisions can be made by a trusted family member or friend in the event that you become mentally incapable?
Do you have an Advanced Healthcare Directive in place in the event that you become terminally ill and are unable to articulate your wishes?
Have you spoken to your chosen Enduring Guardian so they are clear on your wishes and preferences, explained why you have made those decisions so that they can discuss these with any family members who have cause to question your wishes.
What to consider in the choice of an Enduring Guardian
Are they good with making personal decisions under pressure?
Will there be conflict with other family that they can handle– Sibling rivalry? Blended families?
Should you consider 2 or more EGs for safety or support
Information your Attorneys/Executors will need
Bank Accounts and Investments:
The BSB and account numbers for any accounts or credit cards you have.
The HIN, SRN of any Personal or SMSF shareholdings and
Account IDs for Share Brokers, Online Banking and Managed Fund holdings
Location of property deeds and contact details for Property manager
Insurance:
Details of policies such as the policy number and type of insurance.
Life and TPD cover, Motor vehicles, House Insurance, Private Medical Insurance and Funeral Plans
Advisers:
If you have an accountant, financial planner, lawyer or other professional advisor include their contact details.
Business Records:
If you have a business include details of where the company records are kept and the computer the ASIC Corporate Key is on.
Your secret place:
If important documents such as certificates of property title, jewellery and other valuables or personal items are being held in safe custody elsewhere or stashed in the attic then you should identify the location.
Your digital life:
Include all your email login in details and loyalty scheme account details. This includes your membership to social media and cloud data sites so your executors and family may be able to access your on-line data, including books or music files.
Appoint a Legacy Contact if you use Facebook.
Instructions on what is and isn’t to be shared with family
Direct Debits:
If you have any direct debits in place you should include details so that they can be cancelled pending a grant of probate.
Superannuation:
Do you have other superannuation accounts. Your most recent superannuation statement(s) should also be included. If it is self-managed super the financial statements should be included.
IMPORTANT POINT: Talk regularly to your Executors and Powers of Attorney and Enduring Guardian
Discuss your wishes in terms of lifestyle, healthcare and treatment options with your chosen Attorney and Guardian and if possible with the broader family and make sure that they understand your wishes. Australian’s are very reluctant to talk about illness or death but it is essential to ensure your wishes are followed and to avoid family conflict.
As I mentioned at the start this list is not exhaustive so please add your own tips or suggestions in the comments section below.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
It always amazes me that very often when I take an SMSF under my advice that I find that the estate planning and use of Binding Death Benefit Nominations has been haphazard, lacking in essential detail, ignorant of the SMSF deed requirements or just missing. People spend their lives amazing a nestegg only to be lax in ensuring it goes to who they want when they die.
A recent decision has clarified three issues regarding the validity of binding death benefit nominations. I have relied on the following summary from Townsend Law’s Michael Hallinan for interpretation of the decision.
A recent decision of the South Australian Court of Appeal (Cantor Management Services Pty Ltd v Booth [2017]) has passed important comment on no less than three different issues regarding the validity of a binding death benefit nomination (BDBN).
The critical issue was whether a BDBN was valid. If valid, then the death benefit was payable to the estate of the deceased member. If invalid, then the trustee would decide the allocation of the benefit.
The validity turned upon the issue of whether the BDBN had been served on the corporate trustee. The BDBN had been signed by the member and then left in the possession of the accountants of the SMSF at their office which was also the registered office of the corporate trustee.
Issue No 1
The sole director of the corporate trustee had argued that as the BDBN had not been provided to the director nor had the accountants been expressly authorised to accept and hold the BDBN on behalf of the corporate trustee, then the BDBN had not been properly served on the corporate trustee.
The Court did not accept the argument put by the corporate trustee. The Chief Justice held that it was sufficient to constitute service on the corporate trustee for the BDBN to be held by the accountants of the SMSF at the registered office of the corporate trustee. The other justices agreed with the Chief Justice.
Issue No 2
The second issue was that the Court opined that the accountants had a duty to keep the BDBN safe and also had a duty to bring to the attention of the trustee of the SMSF that they held the BDBN. If the Court had held that service had not been properly effected, the defendant may have been able to sue the accountants for their negligence in failing to advise the trustee that they were holding the BDBN. Luckily for them the Court said that service was good anyway.
Issue No 3
The third issue was that Court agreed with the decision of Munro v Munro, which held that SIS regulation 6.17A does not apply to SMSFs (unless the trust deed of the SMSF explicitly or implicitly incorporates the regulation). It is surprising that a few industry die-hards still argue that reg 6.17A might still apply to SMSFs despite the number of times the courts have said otherwise.
The original article by Michael Hallinan of Townsends Business & Corporate Lawyers can be found here and you can contact them on (02) 8296 6222. I highly recommend signing up for their newsletter.
Make sure to check your with your own current death benefit arrangements or contact us for a review.
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Your superannuation trust deed along with the superannuation laws form the governing rules that self managed super funds (SMSFs) needs to operate by. The introduction of the $1.6 million transfer balance cap (TBC) and new transition to retirement income stream (TRIS) rules are a ‘game changer’ for SMSFs when discussing benefit payments and estate planning. With the new super rules in effect as of 1 July 2017, now is the right time to review if your trust deed needs to be enhanced or amended to deal with the new approaches and strategies you may need to implement.
Read the deed
The first step in reviewing your superannuation trust deed will be to read it. Trust deeds are legal documents which can be complex to read, so you may want help from an advisor with this.
It is likely that most deeds will not result in a breach of any superannuation laws and would provide the trustee with powers to comply with relevant tax and superannuation laws as they change over time.
The next step would be to review the deed in consideration with your own circumstances.
For example, a common scenario may be a restrictive deed that only provides the trustee with a discretion to pay death benefits. Therefore, if a member of that SMSF wanted to create a binding death benefit nomination, it would be irrelevant due to the deed’s governing rules.
In any event, deeds which are clearly out of date will need to be amended as soon as possible.
Deeds post 1 July 2017
Post 1 July 2017, there are many approaches and strategies that will differ from the past and it is essential to ensure that your SMSF deed does not restrict you in anyway. We note the following areas should be considered:
Paying death benefits
The $1.6 million TBC now restricts the amount of money that can be kept in super on the death of a member. This is crucially important as when a member dies, their TBC dies with them. SMSF members should review their estate planning and further review their trust deed for the following:
Does it allow for binding death benefit nominations (BDBN)?
Do BDBNs lapse every 3 years in accordance with the trust deed when the legislation does not prescribe it?
Does it consider the appropriate solution when there is a conflict between a reversionary pension and a BDBN and which will take precedence?
Reversionary pensions
Reversionary pensions are pensions which continue being paid to a dependant after your death. Under the TBC, reversionary pensions will not count towards a member’s TBC until 12 months after the date of the original recipient’s death. Importantly, the transfer of the pension from the deceased to the new recipient will count towards the TBC. The value of the credit to the TBC will be the value of the pension at the date of death, not the value after 12 months. This increases the complexity of reversionary pensions prompting a review of trust deeds to consider:
Does it allow for a reversionary pension to be added to an existing pension or are there restrictions?
Should it automatically ensure that a pension is reversionary so that it is paid to a surviving spouse?
Pensions
The TBC also has implications for strategies in commencing pensions and making benefit payments. Trust deeds may need to be reviewed for:
Ensuring that commutations are able to be moved into accumulation phase rather than being forced as lump sums out of superannuation.
Are there any specific provisions relating to the TBC? There may be value in ensuring that the deed restricts pensions from being commenced with a value greater than the TBC.
Are there provisions which detail where commutations must be sourced from first?
Are there restrictive pension provisions that the trustees must comply with?
Transition to retirement income streams
Tax concessions for TRISs where the recipient does not have unrestricted access to their superannuation savings (known as meeting a condition of release with a nil chasing restriction) have also been removed. Trust deeds may need to be reviewed for:
Does the deed allow for the 10% maximum benefit payment to fall away once a nil condition of release is met?
Does the deed deal with a TRIS’s character when a nil condition of release? (Does it convert into an account based pension?)
How can we help?
SMSF Specialist Advisors can help you understand how the new laws may impact you and partner with a lawyer/Deed provider to review and amend your trust deed as required. Please feel free to give me a call to arrange a time to meet so that we can discuss your particular requirements, especially in regards to issues that may arise out of the latest super laws, in more detail.
For further educational information please subscribe to this blog and also visit the SMSF Association’s Trustee Knowledge Centre (http://trustees.smsfassociation.com/) to keep on top of the latest changes and information to reach your retirement goals and get the most out of your self managed super fund.
Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this the year to get organised or it will be 2028 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
With all the talk about Total Super Balance caps and where people will invest money going forward if they can’t get it in to superannuation, the spotlight is being shone on “trusts” at present. This has also brought with it the claims of tax avoidance or tax minimisation, so what exactly are trusts and are there differences between Family Trusts, Units Trusts, Discretionary Trusts and Testamentary Trusts to name a few.
Trusts are a common strategy and this article aims to aid a better understanding of how a trust works, the role and obligations of a trustee, the accounting and income tax implications and some of the advantages and pitfalls. Of course, there is no substitute for specialist legal, tax and accounting advice when a specific trust issue arises and the general information in this article needs to be understood within that context.
Introduction
Trusts are a fundamental element in the planning of business, investment and family financial affairs. There are many examples of how trusts figure in everyday transactions:
Cash management trusts and property trusts are used by many people for investment purposes
Joint ventures are frequently conducted via unit trusts
Money held in accounts for children may involve trust arrangements
Superannuation funds are trusts
Many businesses are operated through a trust structure
Executors of deceased estates act as trustees
There are charitable trusts, research trusts and trusts for animal welfare
Solicitors, real estate agents and accountants operate trust accounts
There are trustees in bankruptcy and trustees for debenture holders
Trusts are frequently used in family situations to protect assets and assist in tax planning.
Although trusts are common, they are often poorly understood.
What is a trust?
A frequently held, but erroneous view, is that a trust is a legal entity or person, like a company or an individual. But this is not true and is possibly the most misunderstood aspect of trusts.
A trust is not a separate legal entity. It is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. Not all countries recognise the concept of a trust, which is an English invention. While the trust concept can trace its roots back centuries in England, many European countries have no natural concept of a trust, however, as a result of trade with countries which do recognise trusts their legal systems have had to devise ways of recognising them.
The nature of the relationship is critical to an understanding of the trust concept. In English law the common law courts recognised only the legal owner and their property, however, the equity courts were willing to recognise the rights of persons for whose benefit the legal holder may be holding the property.
Put simply, then, a trust is a relationship which exists where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.
The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.
The nature of the trustee’s duty is often misunderstood in the context of family trusts where the trustees and beneficiaries are not at arm’s length. For instance, one or more of the parents may be trustees and the children beneficiaries. The children have rights under the trust which can be enforced at law, although it is rare for this to occur.
Types of trusts
In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:
Fixed trusts
Unit trusts
Discretionary trusts – Family Trusts
Bare trusts
Hybrid trusts
Testamentary trusts
Superannuation trusts
Special Disability Trusts
Charitable Trusts
Trusts for Accommodation – Life Interests and Rights of Residence
A common issue with all trusts is access to income and capital. Depending on the type of trust that is used, a beneficiary may have different rights to income and capital. In a discretionary trust the rights to income and capital are usually completely at the discretion of the trustee who may decide to give one beneficiary capital and another income. This means that the beneficiary of such a trust cannot simply demand payment of income or capital. In a fixed trust the beneficiary may have fixed rights to income, capital or both.
Fixed trusts
In essence these are trusts where the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such a case the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.
Unit trusts
These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company.
The beneficiaries are usually called unitholders. It is common for property, investment trusts (eg managed funds) and joint ventures to be structured as unit trusts. Beneficiaries can transfer their interests in the trust by transferring their units to a buyer.
There are no limits in terms of trust law on the number of units/unitholders, however, for tax purposes the tax treatment can vary depending on the size and activities of the trust.
Discretionary trusts – Family Trusts
These are often called “family trusts” because they are usually associated with tax planning and asset protection for a family group. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether anyone will receive income and/or capital and, if so, how much.
For the purposes of trust law, a trustee of a discretionary trust could theoretically decide not to distribute any income or capital to a beneficiary, however, there are tax reasons why this course of action is usually not taken.
The attraction of a discretionary trust is that the trustee has greater control and flexibility over the disposition of assets and income since the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.
Bare trusts
A bare trust exists when there is only one trustee, one legally competent beneficiary, no specified obligations and the beneficiary has complete control of the trustee (or “nominee”). A common example of a bare trust is used within a self-managed fund to hold assets under a limited recourse borrowing arrangement.
Hybrid trusts
These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the trustee has power to issue.
Testamentary trusts
As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often used when the testator wishes to provide for their children who have yet to reach adulthood or are handicapped.
Superannuation trusts
All superannuation funds in Australia operate as trusts. This includes self-managed superannuation funds.
The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.
The Federal Government has legislated to establish certain standards that all complying superannuation funds must meet. For instance, the “preservation” conditions, under which a member’s benefit cannot be paid until a certain qualification has been reached (such as reaching age 65), are a notable example.
Special Disability Trusts
Special Disability Trusts allow a person to plan for the future care and accommodation needs of a loved one with a severe disability. Find out more in this Q & A about Special Disability Trusts.
Charitable Trusts
You may wish to provide long term income benefit to a charity by providing tax free income from your estate, rather than giving an immediate gift. This type of trust is effective if large amounts of money are involved and the purpose of the gift suits a long term benefit e.g. scholarships or medical research.
Trusts for Accommodation – Life Interests and Right of Residence
A Life Interest or Right of Residence can be set up to provide for accommodation for your beneficiary. They are often used so that a family member can have the right to live in the family home for as long as they wish. These trusts can be restrictive so it is particularly important to get professional advice in deciding whether such a trust is right for your situation.
Establishing a trust
Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement. The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.
The person who transfers the property in a settlement is said to “settle” the property on the trustee and is called the “settlor”.
In practical terms, the original amount used to establish the trust is relatively small, often only $10 or so. More substantial assets or amounts of money are transferred or loaned to the trust after it has been established. The reason for this is to minimise stamp duty which is usually payable on the value of the property initially affected by the establishing deed.
The identity of the settlor is critical from a tax point of view and it should not generally be a person who is able to benefit under the trust, nor be a parent of a young beneficiary. Special rules in the tax law can affect such situations.
Also critical to the efficient operation of a trust is the role of the “appointor”. This role allows the named person or entity to appoint (and usually remove) the trustee, and for that reason, they are seen as the real controller of the trust. This role is generally unnecessary for small superannuation funds (those with fewer than five members) since legislation generally ensures that all members have to be trustees.
The trust fund
In principle, the trust fund can include any property at all – from cash to a huge factory, from shares to one contract, from operating a business to a single debt. Trust deeds usually have wide powers of investment, however, some deeds may prohibit certain forms of investment.
The critical point is that whatever the nature of the underlying assets, the trustee must deal with the assets having regard to the best interests of the beneficiaries. Failure to act in the best interests of the beneficiaries would result in a breach of trust which can give rise to an award of damages against the trustee.
A trustee must keep trust assets separate from the trustee’s own assets.
The trustee’s liabilities
A trustee is personally liable for the debts of the trust as the trust assets and liabilities are legally those of the trustee. For this reason if there are significant liabilities that could arise a limited liability (private) company is often used as trustee.
However, the trustee is entitled to use the trust assets to satisfy those liabilities as the trustee has a right of indemnity and a lien over them for this purpose.
This explains why the balance sheet of a corporate trustee will show the trust liabilities on the credit side and the right of indemnity as a company asset on the debit side. In the case of a discretionary trust it is usually thought that the trust liabilities cannot generally be pursued against the beneficiaries’ personal assets, but this may not be the case with a fixed or unit trust.
Powers and duties of a trustee
A trustee must act in the best interests of beneficiaries and must avoid conflicts of interest. The trustee deed will set out in detail what the trustee can invest in, the businesses the trustee can carry on and so on. The trustee must exercise powers in accordance with the deed and this is why deeds tend to be lengthy and complex so that the trustee has maximum flexibility.
Who can be a trustee?
Any legally competent person, including a company, can act as a trustee. Two or more entities can be trustees of the same trust.
A company can act as trustee (provided that its constitution allows it) and can therefore assist with limited liability, perpetual succession (the company does not “die”) and other advantages. The company’s directors control the activities of the trust. Trustees’ decisions should be the subject of formal minutes, especially in the case of important matters such as beneficiaries’ entitlements under a discretionary trust.
Trust legislation
All states and territories of Australia have their own legislation which provides for the basic powers and responsibilities of trustees. This legislation does not apply to complying superannuation funds (since the Federal legislation overrides state legislation in that area), nor will it apply to any other trust to the extent the trust deed is intended to exclude the operation of that legislation. It will usually apply to bare trusts, for example, since there is no trust deed, and it will apply where a trust deed is silent on specific matters which are relevant to the trust – for example, the legislation will prescribe certain investment powers and limits for the trustee if the deed does not exclude them.
Income tax and capital gains tax issues
Because a trust is not a person, its income is not taxed like that of an individual or company unless it is a corporate, public or trading trusts as defined in the Income Tax Assessment Act 1936. In essence the tax treatment of the trust income depends on who is and is not entitled to the income as at midnight on 30 June each year.
If all or part of the trust’s net income for tax purposes is paid or belongs to an ordinary beneficiary, it will be taxed in their hands like any other income. If a beneficiary who is entitled to the net income is under a “legal disability” (such as an infant), the income will be taxed to the trustee at the relevant individual rates.
Income to which no beneficiary is “presently entitled” will generally be taxed at highest marginal tax rate and for this reason it is important to ensure that the relevant decisions are made as soon as possible after 30 June each year and certainly within 2 months of the end of the year. The two month “period of grace” is particularly relevant for trusts which operate businesses as they will not have finalised their accounts by 30 June. In the case of discretionary trusts, if this is done the overall amount of tax can be minimised by allocating income to beneficiaries who pay a relatively low rate of tax.
The concept of “present entitlement” involves the idea that the beneficiary could demand immediate payment of their entitlement.
It is important to note that a company which is a trustee of a trust is not subject to company tax on the trust income it has responsibility for administering.
In relation to capital gains tax (CGT), a trust which holds an asset for at least 12 months is generally eligible for the 50% capital gains tax concession on capital gains that are made. This discount effectively “flows” through to beneficiaries who are individuals. A corporate beneficiary does not get the benefit of the 50% discount. Trusts that are used in a business rather than an investment context may also be entitled to additional tax concessions under the small business CGT concessions.
Since the late 1990s discretionary trusts and small unit trusts have been affected by a number of highly technical measures which affect the treatment of franking credits and tax losses. This is an area where specialist tax advice is essential.
Why a trust and which kind?
Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.
A trust can give some protection from creditors and is able to accommodate an employer/employee relationship. In family matters, the flexibility, control and limited liability aspects combined with potential tax savings, make discretionary trusts very popular.
In arm’s length commercial ventures, however, the parties prefer fixed proportions to flexibility and generally opt for a unit trust structure, but the possible loss of limited liability through this structure commonly warrants the use of a corporate entity as unitholder ie a company or a corporate trustee of a discretionary trust.
There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.
Trusts which incur losses
One of the most fundamental things to understand about trusts is that losses are “trapped” in the trust. This means that the trust cannot distribute the loss to a beneficiary to use at a personal level. This is an important issue for businesses operated through discretionary or unit trusts.
Establishment procedures
The following procedures apply to a trust established by settlement (the most common form of trust):
Decide on Appointors and back-up Appointors as they are the ultimate controllers of the trust. They appoint and change Trustees.
Settlor determined to establish a trust (should never be anyone who could become a beneficiary)
Select the trustee. If the trustee is a company, form the company.
Settlor makes a gift of money or other property to the trustee and executes the trust deed. (Pin $10 to the front of the register is the most common way of doing this)
Apply for ABN and TFN to allow you open a trust bank account
Establish books of account and statutory records and comply with relevant stamp duty requirements (Hint: Get your Accountant to do this)
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Not only do SMSF members need to have an up-to-date will but everyone who is a member of an SMSF needs to also put into place an enduring power of attorney.
The Australian Law Reform Commission’s (ALRC) recommendations in its final report titled “Elder Abuse – A National Legal Response” are positive steps towards helping mitigate the risks that could face ageing self-managed super fund (SMSF) members.
It involves changes to the superannuation laws to ensure that trustees consider planning for the loss of capacity of an SMSF member and estate planning as part of a fund’s investment strategy, and for the ATO to be told when an individual becomes a trustee of an SMSF because of an enduring power of attorney (EPOA).
TRUSTING SOMEONE TO DEAL WITH YOUR FINANCIAL MATTERS IF YOU CAN’T
An enduring power of attorney (EPOA) deals with your finances if you lose capacity or are unable to attend to financial matters personally and/or as a trustee of your SMSF. Your attorney is able to deal with your assets in the same way that you deal with them (subject to any directions or limitations and being appointed as a director of the SMSF Corporate Trustee). This includes signing tax returns and financial statements of the fund, buying and selling real estate or shares, accessing bank accounts and spending money on behalf of yourself personally and on your behalf as trustee of your SMSF.
For an EPOA to take your place as Trustee you must resign and they are appointed in your place. They cannot manage affairs of the SMSF using the EPOA alone, they must be made a trustee or a trustee director.
This is because if a member loses their mental capacity, perhaps through having a stroke or suffering onset of dementia, they will no longer be able to be a trustee of their fund, or a director of the corporate trustee, putting at risk the complying status of the fund.
Another occasion may be if a member departs overseas indefinitely. In this case their enduring attorney in Australia can become the trustee or director of the trustee in their place to avoid fund residency issues under subsection 295-95(2) of the Income Tax Assessment Act 1997.
Scenario we handled: Judith’s father was in the UK and had a fall. She flew back to check he was ok but found it was worse than expected and that he would need multiple surgeries and rehab over a protracted period and she would need to be there most of the time to manage the process and care for him. Her son, James, was her EPOA so she resigned as Director of the Trustee Company and James used the Enduring Power of Attorney to allow him to be appointed as director with her 2nd husband for the 3 year period she was away.
If you do not address the situation within the six-month period of grace allowed under section s17A(4) of the Superannuation Industry (Supervision) Act 1993 (SISA), the consequences for the fund and your retirement savings could be very serious indeed and attract severe penalties.
Unlike a general power of attorney, an EPOA continues to operate in the event that you lose capacity.
WHY SHOULD YOU HAVE A TRUSTED ENDURING POWER OF ATTORNEY?
It is important to have an EPOA in place for each fund member because without it, in the event that you lose capacity, your next of kin would have to make an application to the NSW Civil and Administrative Tribunal (or relevant government body in your state) to obtain a financial management order to deal with your assets. This lengthy (often more than the 6 month grace period allowed under the SIS Act) and costly process can be avoided if you have the foresight to establish your EPOA in advance. It can also lead to major friction in the family and especially with blended families and outcomes you did not expect or wish for under any circumstances!
EPOA SHOULD BE SOMEONE YOU TRUST AND CONSIDER APPOINTING SUBSTITUTE ATTORNEYS
We recommend that you seek legal advice and arrange for an EPOA to be prepared covering your personal finances and SMSF role. You may like to appoint your spouse, adult child, accountant, lawyer, business partner or close friend as your attorney in the first instance. Our legal advisers also suggest appointing substitute attorneys in case your primary attorney is unwilling or unable to act. We had one case where father had dementia but son who was EPOA was on secondment to PNG so could not take up the power of attorney
Your nominated attorney should be someone whom you trust and believe would make decisions in your best interests. I often recommend that you leave written details of your preferences for dealing with asset sales, buy backs, dividend reinvestment plans, term deposit maturities, minimum pensions and add clear instructions if they should work with trusted advisers like Financial planners, accountants and auditors before making major decisions.
You should of course consider having reversionary pensions or non-lapsing binding death nominations to ensure as much as possible that your wishes are carried out.
So when next reviewing your wills and powers of attorney just ask your solicitor if they are confident that the EPOA would also cover Superannuation matters or if that should be specifically mentioned.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I found this excellent article on LinkedIn and and re-blogging it here for your guidance.
By now, many of us would be aware, that from 1 July 2017, earnings generated by Transition to Retirement (TtR) pensions are taxed at accumulation rates. Indeed, we are questioning what to do with an existing TtR pension, whether to roll it back to accumulation or maintain it post 30 June 2017?
Estate planning dynamics of Transition to Retirement (TtR) pensions
Through this post, I hope to share with you an estate planning consideration in situations involving TtR pensions, especially in light of typical TtR range clients (preservation age but less than 65) contributing $540,000 before 1 July 2017.
For some clients, this estate planning benefit of TtR pensions could provide sufficient benefits to maintain TtR pensions or deal with new ones in a specific way.
Hopefully, the example can highlight the role of the proportioning rules in ITAA 1997 307-125 at play and its use in estate planning context.
What about TtR clients contributing $540,000 before 30 June 2017 or $300,000 after 1 July 2017?
Julie (56) has an existing accumulation phase balance of $600,000 (all taxable component). A TtR pension on the existing $600,000 balance wasn’t recommended in the first place because:
i. her cashflow is in surplus, not needing the income from a TtR pension to use the concessional contributions cap of $35,000 (in 2016-17)
ii. given the balance is entirely taxable component, the 4% minimum pension payment were surplus to her needs and cost her more in personal income tax (despite the 15% rebate on the pension payments). The rise in personal income tax was more than the benefit of tax-free earnings of a TtR pension
So that’s just setting the scene around current state of play with Julie’s superannuation savings.
With advice, Julie contributes $540,000 to superannuation before 30 June 2017 under the bring-forward provisions (the concept applies equally to TtR range clients contributing $300,000 post 30 June 2017).
Unfortunately, Julie recently became widowed. She has no other SIS dependents other than adult children. She has nominated her financially independent adult children as her beneficiaries under a binding death benefit nomination.
One initial question is where to contribute the $540,000? Into her existing accumulation fund of $600,000 or a separate accumulation account/fund?
Focusing on public offer funds, there is a chain of thought that perhaps Julie might consider contributing the $540,000 non-concessional contribution into a separate super account to the existing one and immediately soon after starting a TtR pension.
The benefit of contributing to a separate retail fund plan / account:
At the heart of the issue, TtR pensions despite not being classed as retirement phase income streams from a tax perspective (and therefore paying accumulation phase tax rate) are still pensions under SIS standards. It is this classification of it being pension under SIS that allows a favourable proportioning rule compared to accumulation phase.
Earnings in accumulation phase are added to the taxable component whereas earnings in pension phase are recorded in the same proportion of tax components as at commencement.
If a pension is commenced with 100% tax-free component, then this pension during its existence will consist of 100% tax-free component, irrespective of earnings and pension payments.
Had the $540,000 contribution added to existing accumulation balance of $600,000, then any pension commencement soon after, will have tax-free component of 47% (540,000 / 1,140,000)
So if Julie contributes to a separate super fund or a separate super account and starts a TtR pension immediately soon after, her $540,000 TtR pension will start with $540,000 tax-free component. If it grows to $600,000 in a year’s time or two, the balance will still be 100% tax-free component.
To flesh out the benefit of proportioning rules, imagine if she passed away in 8 years time. The $540,000 has grown nicely by $100,000 with the TtR pension balance standing at $640,000 (all tax-free component).
Had she left the funds in accumulation, the $100,000 growth would be recorded against the taxable component.
The benefit to her adult children is to the tune of $17,000.
As can be seen, starting a TtR pension means that adult children benefited by an additional $17,000 and shows the differing mechanics of earnings in accumulation and TtR pensions. The larger the growth, the bigger the death benefit tax saving when comparing funds sitting in accumulation or TtR pension phase.
But the TtR pension does come with a downside doesn’t it? While the pension payments are tax-free as the TtR pension consists entirely of non-concessional contributions and therefore tax-free component, there is leakage of 4%, being the minimum pension payment requirement of the TtR. For some clients, this may be a significant hurdle, not wanting leakage from superannuation, as it is getting much harder to make non-concessional contributions. For others, this could be overcome where non-concessional cap space is available (or refreshed once the bring-forward period expires) in their own name or in a spouse’s account.
Going back to Julie, she may be okay with the 4% leakage as her total superannuation balance is well below $1.6 million for the moment. The 4% minimum pension payments are accumulated in her bank account and contributed when the 3 year bring forward period is refreshed on 1 July 2019. On 1 July 2019, assuming her total superannuation balance is less than $1.4 million, she could easily contribute up to $300,000 non-concessional contributions under the bring-forward provisions at that time.
It is this favourable aspect of the superannuation income stream proportioning rules which could offer estate planning benefits for TtR pensions. I have seen the proportioning rules as they apply to TtR pensions mentioned by some but not by many as the focus has been the loss of exempt status on the earnings. As demonstrated by Julie’s example, for some of our clients, when relevant, the proportioning rule may be something to look out for as we look to add value to our client’s situation.
Other estate planning issues around pensions (including TtRs)
1. What if Julie was retired and over 60? Has an existing standard account based pension of $600,000 (all taxable component) with $540,000 non-concessional contribution earmarked to be in pension phase?
Would you have one pension or two separate pensions?
There is a chain of thought that two separate pensions, keeping the 100% tax-free component one separate, allows more planning options with drawdown and may assist with minimising death benefit tax. If Julie’s requirements are more than the minimum level (4%), then stick to minimum from the one that is 100% tax-free component and draw down as much as needed from the one that has the higher proportion in taxable component.
Two separate pensions can dilute the taxable component at the point of death whereas one loses such planning option involving drawdown where a decision is made to consolidate pensions.
2. What if Julie was partnered?
Naturally, there are many variables but the concept of separate pensions and proportioning continues from an estate planning perspective.
The impact of $1.6 million transfer balance cap upon death for some clients may show the attractiveness of separating pensions where possible for tax component reasoning.
Say Julie had $800,000 in one pension (all taxable component) and $700,000 in another pension (all tax-free component). To illustrate the issue simplistically, if the hubby only has a defined benefit pension using up $900,000 of the transfer balance cap, then having maintained separate pensions has meant that he possibly may look to retain the $700,000 (all tax free component) death benefit pension and cash out the $800,000 pension outside super upon Julie’s death.
This way the $700,000 account based pension (and whatever it grows to in the future) could be paid out tax-free to the beneficiaries down the track.
Had Julie’s pensions been merged at the outset, the proportion of components would have been 53% taxable (800,000 / 1.5 million) and 47% tax-free. Her husband would have inherited those components. Any subsequent death benefit upon the hubby’s death passed onto the adult children would have incurred up to 17% tax on 53% of the death benefit.
The example hopefully shows the power of separate pensions in managing estate planning issues.
3. Going back to Julie. What if she was over 60 and under 65, still working and intending to work for the next 6-7 years? Has no funds to contribute to super but has accumulation phase of $600,000
You could consider having a TtR pension simply for taking 10% of account balance out as a pension payment and re-contributing it back as a non-concessional contribution assuming Julie has non-concessional contribution space available.
To ensure the re-contribution strategy dilutes as much of taxable component, there may be a need for separate pensions though. For example:
1. $600,000 TtR pension on 1 July 2017. 10% pension payment ($60,000) taken out closer to the end of FY
2. $60,000 contributed to a separate accumulation interest before in 17-18 and separate TtR pension commenced with $60,000. At this point, Julie has two pensions. One with $60,000 and the other with say $540,000.
3. Next FY in 18-19, 10% taken from both pensions and the amount contributed to a separate accumulation interest and a TtR pension commenced. The smaller TtR pension balance are consolidated (with all tax-free component) and similar process is repeated Julie turns 65 at which time she could do a cash-out and recontribution if she has non-concessional space, including the application of bring-forward provisions.
Slightly different application to SMSFs
While the concepts regarding proportioning of tax components and multiple pension interests remain the same in SMSFs, the steps taken to plan and organise multiple pension interests is different to public offer funds. In public offer funds, it is typically straightforward to establish a separate superannuation account. In SMSF’s, the planning around such things requires further steps.
Relevant to SMSFs, the ATO’s interpretation is that a SMSF can only have one accumulation interest but is permitted to have multiple pension interests.
Here is the ATO link with detail on this concept of single accumulation interest and multiple pension interest for SMSFs.
Conclusion
No doubt, there are many other things to consider with many variables leading to different considerations.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
The changes to the superannuation system, announced by the Australian Government in the 2016–17 Budget, have now received royal assent and the finer details of how to implement them have been released. While the government claim these changes were designed to improve the sustainability, flexibility and integrity of Australia’s superannuation system, they did not work with industry or the ATO before announcing them and as such it has been a nightmare to try to get your head around what the actual changes are and how strategies need to be implemented to manage them.
As a result we are getting last-minute guidance from the ATO and software providers as well as SMSF, Industry and Retail Super providers. The government have back-flipped on some measures, amended others because of collateral damage and tightened other measures for obscure reasons. With most of these changes commencing from 1 July 2017 I have tried to put some useful links together.
A short video overview of the changes is provided below. I have provided more detailed information links and will update these as they are progressively published to help you understand the changes, how they may affect you, and what you may need to know and do now, or in the future as a trustee of a self-managed super fund (SMSF). Even more detailed information is available to help you understand the changes, including for some topics, law companion guidelines (see below) to provide certainty about how the changes will be administered.
For those who wish to dive in to the detail please view the Law Companion Guides below. A law companion guideline is a type of public ruling. It gives the ATO view on how recently enacted law applies. It is usually developed at the same time as the drafting of the Bill.
The ATO normally release a law companion guideline in draft form for comment when the Bill is introduced into Parliament. It is finalised after the Bill receives Royal Assent. It provides early certainty in the application of the new law. Please make sure to look for updates before relying on this information.
The ATO have also released access to answers to some frequently asked questions and they can be found in this document Super Changes Q & As
Example: Q. How are my pensions and annuities valued for transfer balance cap purposes?
ANSWER : You need to contact your fund about the value of your pensions and annuities.
The value of your pension or annuity will generally be the value of your pension account for an account-based pension.
Special rules apply to calculate the value of: • lifetime pensions • lifetime annuities that existed on 30 June 2017, and • life expectancy and market linked pensions and annuities where the income stream existed on 30 June 2017
Lifetime pension and annuities These are valued by multiplying the annual entitlement by a factor of 16.This provides a simple valuation rule based on general actuarial considerations. Your annual entitlement to a superannuation income stream is worked out by reference to the first payment entitlement for the year. The first payment is annualised based on the number of days in the period to which the payment refers. (I.e. the first payment divided by the number of days the payment relates to multiplied by 365).
This means that a lifetime pension that pays $100,000 per annum will have a special value of $1.6 million which counts towards your transfer balance cap in the 2017-18 financial year.
For a lifetime pension or annuity already being paid on 1 July 2017, the special value will be based on annualising the first payment in the 2017-18 financial year. This may include indexation, so may be slightly higher than your current annual lifetime pension payments.
Life expectancy and market linked pensions and annuities being paid on or before 30 June 2017 are valued by multiplying the annual entitlement by the number of years remaining on the term of the product (rounded up to the nearest year).
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
In the following weeks I will review the effects of Government Superannuation Reforms for SMSF Trustees. To start, we will review the use of re-contribution strategies because for some SMSF members, action will be required before 1 July 2017 to maximise benefits. Seek personal advice before implementing any strategy.
What has changed
The re-contribution strategy has been popular from both a retirement and estate planning perspective to manage tax outcomes for retired members under 60 and beneficiaries on death of a member. The net benefit of re-contribution has usually been determined against any value that could alternatively be derived from any anti-detriment payment to eligible beneficiaries.
The benefit of the re-contribution strategy should now be reassessed as a result of some of the reforms which take effect on 1 July 2017:
• reducing the Non Concessional Contribution (NCCs) cap to $100,000 ($300,000 using 3 year bring forward rule.
• implementation the new $1.6m ‘total super balance’ rule to determine eligibility to make NCCs
• introduction of the new $1.6m transfer cap applicable to existing and new pensions.
• the abolition of anti-detriment payment (sigh of relief from many professionals!), and
For some SMSF members the reduction to the annual NCC cap may reduce the maximum benefit available under the re-contribution strategy. However, a number of other changes may actually increase the benefit of re-contribution strategies.
The basic re-contribution strategy
The re-contribution strategy involves withdrawing an amount from an SMSF member’s balance and making a non-concessional contribution (NCC) back in to the SMSF in the same or another member’s name. This effectively enables any taxable component of the lump sum withdrawn to be converted into tax-free component paying nil tax.
Before you can use the strategy, the SMSF member needs to have met a full condition of release to be eligible to make lump sum withdrawals. The person must also be eligible to make NCCs from both work test perspective and contribution cap limit to allow a re-contribution of the funds.
We normally suggest using this strategy after reaching age 60 and before age 65 because if this strategy is implemented by a person who is 60 or over, any withdrawal is received tax free and not included in income.
If the SMSF member is aged between preservation age and age 59, withdrawals from the tax-free component are tax-free, while any taxable component within the low rate cap (LRC), currently $195,000 for 2016/17, is effectively taxed at 0%. Amounts above the LRC are taxed at 15% plus Medicare Levy. These tax concessions are integral to the overall dollar benefit of the strategy.
The re-contribution strategy may help to:
generate a more tax-effective retirement income stream for people aged under 60, by increasing the tax-free component of superannuation pension payments, and/or
reduce the tax to be paid by non-tax dependant beneficiaries (usually financially independent adult children) on any death benefit lump sum after the member passes away.
Case Study Example
Michael, a widower, (aged 58) has $700,000 in SMSF account. The tax components of his account are split 50:50, meaning that $350,000 of the account is taxable and $350,000 is tax-free. He has fully retired and therefore has complete access to his super benefits.
Michael has two adult children, his daughter Carmel and son Sebastian (neither of whom are financial dependents). Michael has a valid non-lapsing binding death benefit nomination in place in favour of them equally.
If Michael passed away today, $350,000 of his super benefit which is attributable to the taxable component would be subject to tax at a maximum rate of 15% plus Medicare Levy as Carmel and Sebastian are not tax dependants.
Michael could use the re-contribution strategy which may give a better outcome for the kids from a tax perspective saving up to $59,500 ($350,000 x 17%). In addition, assuming Michael has other taxable passive investment income outside super, if Michael was to start an account based pension, a re-contribution strategy could also help him to reduce tax payable on his income stream from the SMSF pension payments until he reaches age 60.
Super reforms from the 2016 Budget
Non-concessional contributions NCC cap
From 1 July 2017 the lowering of the annual NCC cap from $180,000 to $100,000 reduces the maximum benefit which may be derived from the re-contribution strategy by limiting the amount that a member can re-contribute to their SMSF. Further, the reduction of the annual cap means that the maximum contribution available under the bring-forward will reduce to $300,000.
Prior to 1 July 2017
A member who is eligible to trigger the bring-forward in 2016/17, or who triggered it in the 2015/16 financial year, can contribute up to the full $540,000 by 30 June 2017. However, a person who does not fully utilise their available balance of $540,000 by this date will be constrained from 1 July 2017 in respect of their ability to make further NCCs, by the new ‘transitional’ NCC rules. Where the re-contribution strategy is appropriate, SMSF members should consider implementing and finalising the strategy before 1 July 2017 to maximise the benefit of the strategy.
Maximum account balance for additional contributions
From 1 July 2017, a person will not be eligible to make NCCs if their total super balance at the prior 30 June is equal to or greater than $1.6m. If the total super balance is less than $1.6m but greater than $1.4m, the person may be eligible to contribute NCCs but cannot fully utilise the 3 year bring-forward of $300,000. In relation to the re-contribution strategy, this means that:
members with large cumulative super and pension balances for whom a re-contribution strategy is appropriate, may need to complete the re-contribution prior to 1 July 2017 should they wish to fully utilise the $540,000 cap, and
re-contributions whereby one member of a couple makes a withdrawal from their SMSF account and contributes into their spouses member account may become attractive to the extent that it would enable them both to maintain a member account balance of less than $1.6m, potentially preserving future eligibility to make NCCs.
$1.6m Pension transfer balance cap
From 1 July 2017, a transfer balance cap of $1.6m (indexed) will be introduced to limit the maximum amount that an individual can transfer into the retirement phase of superannuation. Any amount in excess of the transfer balance cap needs to
remain in accumulation, or
for existing pensions, be commuted back to the member’s SMSF accumulation account or withdrawn from the SMSF prior to 1 July 2017.
A re-contribution strategy where one spouse makes a lump sum withdrawal and contributes the amount into their spouse’s account may also allow the couple to collectively hold more of their wealth in tax-effective superannuation pensions. Ordinarily one spouse with a large amount held in an account based pension would otherwise be required to commute the excess amount to accumulation phase or cash it out of superannuation.
The Traps and interaction with Centrelink strategies
When deciding whether to use a re-contribution strategy, it’s important to consider each member’s personal circumstances, as well as any implications the re-contribution strategy may have on their broader situation.
Government benefits and payments
Withdrawing money from the taxable component before age 60 will increase the member’s taxable income, even though no tax will be payable on taxable amounts up to the LRC (which is $195,000 in 2016/17). This is because even through the effective tax rate on an amount withdrawn from the taxable component up to the LRC is nil, the amount is still included as income on the individual’s tax return.
It is via the application of a tax offset that the tax payable on the withdrawal within the LRC is reduced to nil.
This means that a lump sum withdrawal made as part of the re-contribution strategy could impact Government benefits and payments where entitlement is based on:
assessable income, such as Government Co-contributions and spouse contribution tax offsets, and
taxable income, such as the low-income tax offset, Medicare levy and surcharge and Family Tax Benefit.
Moving Funds to a Spouse under Age Pension age
A popular Centrelink strategy involves a person who is of Age Pension age cashing out some of his/her super and having the money contributed in the SMSF member account of their spouse who is below Age Pension age. This strategy can enable the older spouse to get more Age Pension, as super in the accumulation phase is not means tested when held in the name of a person under Age Pension age. It can also enable taxable money to be converted into tax-free money and may result in a Government co-contribution or spouse tax offset.
Pensions before age 60
If the aim is to make pension income more tax-effective before age 60, it is essential to consider whether any tax would actually be payable on the pension payments without re-contributing.
Between preservation age up to age 59, it is possible to receive taxable income payments from a superannuation pension of around $49,750 (in 2016/17) without paying any tax, when the 15% pension tax offset and low-income tax offset is taken into account. This assumes the payments are made from a taxed super fund and no other taxable income is received. This would ensure that a member does not utilise their NCC cap and available bring-forward unnecessarily.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
In it latest quarterly review of the SMSF sector Class have indicated that Platform use is actually rising a little among SMSF Trustees from 55% to 58%. However there is some change in the guard in terms of which platforms are seeing inflows. From the media release on the report:
Investment platforms have maintained their share of self-managed super funds in the past two years but the market share of the providers has shifted in favour of the non-aligned in the latest Class SMSF Benchmark Report.
The September quarter Report, based on an analysis of 120,000 SMSFs, shows that slightly less than 1 in 5 SMSFs use platforms and this has remained relatively stable for the past two years. However, the proportion of assets these funds hold on the platform has actually increased since 2014, from 55% to 58%, suggesting that predictions of the imminent demise of platforms in the SMSF market are premature. However, the market share of different platform types has shifted significantly over the same period.
While all platforms increased the value of SMSF assets they held, most institutional platform providers lost ground compared to their non-aligned peers, especially Praemium, HUB24 and netwealth. The notable exception among the institutions was BT, which was able to build on its leading position and grow from 41% to 46% of all platform assets. Excluding BT, institutional platforms saw their share of platform assets drop from 47% to 40%.
I don’t find this a surprise as BT has launched its new generation BT Panorama platform which works especially well for SMSF investors. You can access Cash, very competitive Term Deposits from BT, Westpac and St George as well as shares, hybrids, ETFs, managed funds and managed accounts all on the one reporting platform as well as include external assets in the report. We have started using this platform for new clients as it is keenly priced with no administration charge for cash or term deposits and competitive admin fees for shares and managed funds.
Platform users more likely to use Managed Funds
Again the report also shows a higher use of managed funds by those using Platforms which no doubt is due somewhat to the preference for platforms by many SMSF advisers and also that many trustees use platforms to access sectors or managers they can’t get direct/retail. Again from the report:
The Report also found that SMSFs that use a platform allocate their assets differently to those that don’t. SMSFs that use platforms hold less cash and direct property but almost three times the percentage of managed funds as other SMSFs.
While the two categories of SMSFs have a similar direct exposure to shares, those that use platforms appear to be increasingly holding their equities off the platform, such as through a broker.
You can access the full Class Benchmark report and previous release here
I found the table of the Top 20 investment holdings in each class very insightful as it shows the increase in use of ETFs in SMSF portfolios. Hear is a summary of the top 5 ETFs from the data:
1 IVV Ishares S&P 500 ETF – Chess Depositary Interests 1:1 IshS&P500
2 IOO Ishares Global 100 ETF – Chess Depositary Interests 1:1 Ishglb100
3 STW SPDR S&P/ASX 200 Fund – Exchange Traded Fund Units Fully Paid
4 VTS Vanguard Us Total Market Shares Index ETF – Chess Depositary Interests 1:1
5 VEU Vanguard All-World Ex-Us Shares Index ETF – Chess Depositary Interests 1:1
Likewise the top 5 Managed funds
1 PLA0002AU Platinum International Fund
2 MGE0001AU Magellan Global Fund
3 PLA0004AU Platinum Asia Fund
4 FID0008AU Fidelity Australian Equities Fund
5 MAQ0482AU Winton Global Alpha Fund
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Like every strategy we discuss with clients we stress that have to look at the exit strategies up front rather than scramble to react if something happens that changes the financial position of the members or of the fund.
While a self managed superannuation fund can increase its assets and leverage the potential growth by borrowing to purchase a property, that borrowing can also cause financial distress if a fund member dies or becomes disabled. The lack of liquidity and cash flow could force the trustee to:
Sell the property in a difficult or dropping market
Realise capital gains or losses before expected i.e. before the members are in pension phase
Have to deal with increased transaction costs.
Since August 2012 Trustees of an SMSF have been required to consider insurance for members and we would say that is very sensible when debt is involved.
SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 – REG 4.09 (2)(e)
The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
for a self managed superannuation fund – whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund
In the past strategies like Cross insurance on each member of superannuation fund was often used to reduce the impact that the sudden death or disability of a member may have on a fund however the ATO have ruled out many of these strategies including using the SMSF to fund Buy-Sell Agreements between business partners.
SMSF mortgage repayment solutions on death
If there is life insurance on the member that dies then any proceeds are added to their account balance and can be paid as a lump sum out of the fund to beneficiaries but that may leave a fund a debt still to be paid off and with less contributions going in as one member is deceased and the fund may not have the free cash-flow to fund the full balance pay out without selling the property.
The strategies outlined below are those now available as to manage the cash-flow liquidity issues and death benefit payment requirements that have arisen when a fund member dies suddenly, whilst the fund still has a Limited Recourse Loan Arrangement in place.
Payment of insurance benefits as an income stream to spouse
If it is 2 spouses or defacto’s that have set up an SMSF and borrowed to purchase an investment property, life insurance is often used to extinguish the debt. The reason for this is that generally the disability or death will eliminate or reduce the level of contributions that are made for the member, from which the loan repayments have been sourced.
Where the members of a fund are spouses then death benefits can be paid as an income stream. This means that even if a fund has borrowed to purchase a property, the property does not need to be disposed of to pay out the death benefit. This is even more important if your business is run out of the property.
In this case the life/TPD cover can be held by the member covered by the insurance and the premium can be paid from that members account. These arrangements comply with the SIS Regs, and the policy can be held through the self managed fund.
If the member dies or becomes disabled, the proceeds will be credited to the affected member’s account and loan will be repaid. Following the repayment of the loan a pension will commence to be paid to the member in the event of TPD or to the spouse in the event of death. If under 65 they can take as little as 4% per annum to keep as much in the fund as possible.
Example: Tax Dependants like spouses
Jack and Diane are married and members of Mellencamp Family Super Fund (“SMSF”)
Account Balances:
Jack – $100,000
Diane – $100,000
SMSF took out a loan of $300,000 to acquire property valued at $500,000
Jack dies after getting a bad knock playing football ( for the younger readers get the full story here
anyway thank you for indulging me and now back to the example:
SMSF Cash flow after Jack’s death
The loan is paid out.
Diane starts a minimum 4% annual death benefit pension. Only one member left contributing now but no interest to pay.
Rent
$17,500
Concessional contributions
$5,000
Total inflows
$22,500
Interest
$0
Operating costs
($2,000)
Life premiums
$0
Pension
($16,000)
Total outflows
($18,000)
Tax
($675)
Net cash flow (surplus)
$3,825
what are the tax implications of the pension
Age at Death
Type of Super Death Benefit
Age of Recipient- DEPENDANT
Taxation Treatment of Taxed Element
Any age
Lump Sum
Any age
Tax free
60 & above
Income stream
Any age
Tax free
Below 60
Income stream
60 & above
Tax free
Below 60
Income stream
Below 60
Marginal rate of tax less 15% tax offset
To implement the strategy, the following factors, need to be considered:
The funds trust deed must permit the fund to hold the insurance and to pay the TPD or death benefits as an income stream
The fund’s investment strategy should state that the trustees have considered the needs of the individual members and determined to take out life insurance for the fund members in order to repay any outstanding mortgage under an LRBA
Whether the fund’s cash flow allows for the taking out of the insurance policies. The premiums will normally be deductible in this circumstance as the benefits can be paid as a pension. For younger trustees you should consider Level Premiums and reviewing the cover as the loan is paid down.
Funding benefits from a reserve
If a fund is not able to pay a death or disability benefit in the form of a pension because they don’t have a spouse or the fund trust deed does not permit the payment of a benefit as a pension, then it may need to consider the use of a reserve strategy.
This strategy involves the fund trustee taking sufficient TPD and death cover over the lives of the fund members to enable the repayment of a loan and the payment of benefits as a lump sum.
The fact that the insurance policies are paid from the fund’s reserve and the insurance proceeds in the event of an insured event are credited to the reserve, means that the insurance benefit can remain in the fund. The fact that the insurance proceeds can remain in the fund means that insurance liabilities can be met and the loan repaid without the asset purchased under the borrowing arrangement needing to be sold.
In order to implement the strategy effectively, insurance policies premiums for each of the fund members will need to be paid from the reserve. The fact that the premium is paid from the reserve will then require any insurance proceeds after an insured event to be credited to the reserve.
Example 2 – Non- Tax Dependants – 2 brothers in a business
So sadly Brad dies …big ahhhh!
SMSF Cash flow after Brad’s death
Death benefits are held in a Reserve.
The loan is paid out but the value is held in the reserve account
Results in large reserve ($400,000)
allocate back to Brian < 5% of his balance p.a. or
allocate up to $25,000 p.a. this year and $25,000pa going forward to Brian’s account depending on other concessional contributions in year
Rent
$17,500
Concessional contributions
$10,000
Total inflows
$27,500
Interest
($18,000)
Operating costs
($2,000)
Life premiums
($1,500)*
Pension
$0
Total outflows
($21,500)
Tax
($900)
Net cash flow (surplus)
$5,100
* Deducted from general fund expenses
Other Issues to consider
There are a number of other issues that fund trustees will need to consider when implementing this strategy:
If the members of the fund are business partners rather than spouses, the spouse of the deceased member may feel that the business partners are benefiting from the death of their spouse. It is really important to discuss these strategies upfront with family so they know they are provided for but that the business needs stability too.
When the insurance proceeds are credited to a reserve, it may be difficult to transfer that reserve back to fund members without exceeding the excessive concessional contributions cap.
The insurance premiums are not tax-deductible under Section 295-465 of the ITAA 97 because the policy is not held for the purpose of providing a fund member with a death or disability benefit.
The cost of the insurance premiums could be very high so seek advice on all possible solutions.
The cost of the insurance premiums may limit the trustee’s capacity to take out other insurance cover for members
By the Way – one other reason to cover your exit strategies
What happens if a trustee fails to address insurance in their SMSF?
The trustees could be fined 100 penalty units ($21,000) for each trustee – Section 34 SIS Act; Section 4AA Crimes Act 1911
and if someone else has been affected by the loss as a result:
A person who suffers loss or damage …may recover … against that other person or against any person involved in the contravention. – Section 55(3) SIS Act
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net
I keep hammering it in to my small business clients that while they may be passionate about their business and absolutely certain it will succeed, that they need to have a Plan B. Things can and do go wrong no matter how hard you work.
Superannuation is that Plan B in many cases. By putting away a portion of your profits each year to super you can minimise your tax obligations, save for retirement and protect some of your hard-earned wealth from unforeseen circumstances like a business collapse.
I always give an example of the client who had a very successful software business that was making decent money every year who listened to me and put funds away in superannuation yearly despite not wholly trusting the system. 6 years ago a dodgy overseas firm copied and made minor changes to his software and sold it for 10% of his price, thereby decimating his profits. He could lose everything as the ensuing defence of his patents in court cases is wiping out his personal and the company’s finances. Even if he wins, they could just keep their assets overseas and he has no chance of recovering costs and damages. The one thing protected is his Superannuation which will provide a decent if not a bit less comfortable retirement than expected.
Background Ms Morris became bankrupt 3-4 months after her husband, Mr Foreman, died. Mr Foreman held two policies with two different superannuation funds: AustSafe Super and Plum Super.
After becoming bankrupt, Ms Morris received three separate payments. Plum Super made a life insurance payment of $311,865.95 to Mrs Foreman, which is not controversial as section 116(2)(d)(ii) of the Act provides that divisible property does not extend to life assurance policy proceeds of a bankrupt—or their spouse—received on or after the date of bankruptcy. SAFE
What was ‘controversial’ was AustSafe Super’s payment of $45,392.48 and Plum Super’s payment of $67,240.27. Those funds made these payments to the bankrupt under discretionary powers, as Mr Foreman had not nominated any dependents or beneficiaries.
Mrs Morris’s bankruptcy trustees applied to court in respect of these payments arguing that the superannuation monies received by the bankrupt were after-acquired property that vested in them (as bankruptcy trustees) and was therefore divisible among the bankrupt estate’s creditors. Uh Oh trouble!
I am not lawyer so I will not go in to details of the argument but I am happy point you to a good lawyer for the detail of the argument and some interpretation of the decision in a good blog by Bryce Figot of DBA Lawyers – See more at here and the actual case decision here
In summary
Justice Logan held that prior to the superannuation fund trustees’ exercising their discretion in favour of Ms Morris, she had no interest in either fund; however, upon this favourable decision, an interest was then created in the superannuation funds, and therefore these payments (totalling $112,632.75) made to Ms Morris (after bankruptcy) were held to be captured by s116(2)(d)(iii) and s116(2)(d)(iv) of the Act. Consequently, the bankruptcy trustees were unsuccessful with their application.
So superannuation death benefits received by the bankrupt were protected from Bankruptcy Trustees
I have not seen any previous guidance or authorities about the meaning and effect of the above sections of the Act, however the decision seems to be consistent with the intention of legislation to protect and preserve benefits in respect of retirement for both members of funds as well as their spouses and dependents.
If you or your spouse are in business or a highly litigious profession or high risk investors that could lose all if investments go wrong then come and talk to us about Your Plan B
I hope this guidance has been helpful and please comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
On the home page of this blog I outline the Benefits of a Self Managed Super Fund – SMSF in some detail. Well, when looking at any investment structure I always like to assess the alternative options and eventual exit strategies. While many of you will know of the Retail and Industry superannuation fund options, you may not be as familiar with a close relation to the SMSF known as a Small APRA fund (SAF). So let’s look at little closer at this option.
What is an Small APRA Fund (SAF)?
An SAF is similar to an SMSF but instead of the client(s) being the trustee(s), a professional licensed trustee is responsible for all of the administrative, compliance and legislative responsibilities of running the superannuation fund.
SAFs offer an alternative for clients looking for the increased flexibility of an SMSF but without the burden of being a trustee and the associated compliance risk. They are also an effective solution for clients who are non-residents or bankrupt and therefore unable to be trustees of an SMSF.
I always warn new clients that if your career or business relies on you being a director then you must take the decision to set up an SMSF very carefully and be ready to put the time and effort in or choose SMSF specialist advisors to ensure your fund remains compliant so that you don’t lose your ability to be a director of any company because of breaching SMSF legislation.
SAFs provide all of the legislative advantages afforded to SMSFs, without the risks associated with breaching legislative compliance requirements.
Let be very honest up front and say this is not a suitable option for small balances as you are incurring an extra layer of trustee fees. However for those with larger balances the option can be very cost-effective especially when you consider the ability to relieve yourself of the trustee responsibilities.
Main benefits of the SAF structure
1. Offloading the Compliance risk
The main advantage of running an SAF is that the compliance risk is borne by the professional licensed trustee whose core responsibility is the provision of trustee services. If an SAF is in breach of the rules, the members of the fund will not be liable for the compliance mistakes of the professional trustee. In an SMSF, all members must be a trustee or director of a corporate trustee which means all members bear the compliance liability. You cannot claim your spouse was solely responsible for running the fund. One case clearly shows the risk of being a “silent trustee”where the verdict found the former wife, in her role as a trustee of the fund, was personally liable when it became non-complying after her former husband stripped out most of the assets and headed overseas. See Shail Superannuation Fund and Commissioner of Tax[2011] AATA 940
2. Administration of the fund
A professional licensed trustee in charge of an SAF typically appoints professional organisations to carry out the administration of the fund or is skilled and experienced enough to avoid common breaches of legislative requirements. As the professional licensed trustee administers all information and transactions, record keeping is typically timely and accurate. In SMSFs, the trustees are typically responsible for collating all the documentation and reports so their chosen administration service can prepare the financials of their fund (Not so hard as it sounds nowadays but when your busy?…paperwork suffers)
3. Travelling overseas for extended periods
SAFs are more flexible for people who may go overseas for an indefinite period compared to SMSFs which are strictly regulated in that circumstance. Members of an SMSF who relocate for an extended period of time have to fulfil two requirements – the central management and control of an SMSF needs to be in Australia, and the active member test needs to be fulfilled . If any of these requirements are breached, the SMSF loses its residency status, is deemed non-compliant and will face exorbitant penalty taxes of up to 46.5%. An SAF however can have offshore members – as long as they are Australian residents for tax purposes.
4. Protection and access to Superannuation Complaints Tribunal
In the case of fraudulent conduct or theft, SAFs have more readily available redress options including a grant of financial assistance as statutory compensation and access to the Superannuation Complaints Tribunal which deals with complaints about the decisions and conduct of APRA-regulated fund trustees and other decision makers. Conversely, no compensation scheme exists for SMSFs and they instead have to rely on courts to resolve disputes or look to the Corporations Law to take action against a financial adviser, accountant or administrator for losses they believe are due to misconduct, negligence or inappropriate action.
5. Disqualified persons – Bankruptcy or Criminal record
Individuals are not allowed to be trustees of an SMSF or directors of a corporate trustee if they have committed a crime involving dishonesty such as fraud, theft or embezzlement or if they have been declared bankrupt. The Tax Office will ban individuals from taking on positions of responsibility in an SMSF if it believes the person has breached the superannuation laws either very seriously or persistently or it believes the person is not a fit or proper person and hence should be disqualified. There are no issues with a disqualified person becoming a member of an SAF as they are not required to fill the role of trustee and it is in fact an often preferred solution for those with an SMSF who find themselves in that unenviable position with assets that aren’t liquid.
6. Responsibility concerns due to ageing or onset of mental illness
Some older people may prefer to use an SAF because they have reached an age where they are no longer able, or may not want to, make effective management and operational decisions. SAFs still allow investors to be in charge of the asset allocation – subject to trustee approval (but they are becoming a lot more flexible) – and to maintain or acquire a similarly broad range of assets and avail of strategies available to SMSF investors. Problems often arise in an SMSF when an older trustee loses the capacity to function and participate in the fund’s inner workings whereas in an SAF, the professional licensed trustee will continue to manage the fund for the benefit of its members.
7. Estate planning
There are a number of estate planning scenarios where an SAF being a better alternative to an SMSF. In an SMSF, the death of a fund trustee changes the composition of the trustees and may provide potential for disputes especially in blended families. In an SAF, the licensed trustee is an independent and unbiased party with no family relationship issues that we often see arise with estates. In an SMSF, it is possible to try to include safeguards into the trust documentation; however, if one of several feuding beneficiaries has the cheque book, it may take the remaining beneficiaries considerable time and expense to track down the person and the money. As one colleague said:
“a remaining trustee with a cheque book can do a lot of damage to an SMSF balance while family fight for control in the courts”
8. Taking care of vulnerable beneficiaries
SAFs can provide very tax effective death benefit income streams to intellectually disabled adult children. The hurdle of the person with a disability or their legal personal representative needing to be a trustee is removed because, unlike an SMSF, an SAF has a professional trustee. The use of the professional trustee also ensures that ongoing services can continue to be provided to a disabled person is over 18 and once the parents have died or lost capacity. There is the ability to pay a death benefit income stream to the disabled child and then have any capital remaining return to the parent’s estate on death.
9. Employer – Employee Fund
In an SMSF, a trustee cannot be an employee of another member – unless they are family. In an SAF however, a member can be an employee of another member. Further, since SAFs have a professional licensed trustee, the related-party issues that crop up in an SMSF are not an issue in an SAF.
In summary while an SMSF may be ideal for people who want to be fully in control of their investment decisions and retirement savings, an SAF is ideal for those who would like to actively participate in investment decisions but retain a low-level of compliance and legislative responsibilities. It is possible to switch from an SMSF to an SAF or vice versa without incurring capital gains tax as all they have to do is retire as trustees themselves and appoint a professional licensed trustee to govern their SAF.
So why may a SAF be a better option than a Retail or Industry Fund?
Moving to a SAF is Not a CGT event whereas it would be if you moved to a retail or industry fund
Likely to be able to keep assets such as direct shares, bullion, collectables and residential and commercial property subject to rules.
The member can still direct investments within the approved list
Member directed death benefit nominations are still possible and in fact often more achievable as the trustee can follow your wishes.
No issues with single member funds
Retains privacy for those in high-profile positions
I would like to acknowledge that much of my information in this area has been gathered from articles and presentations by Julie Steed of Australian Executor Trustees who are very experienced in running SAFs and working as a team with clients and their financial planners.
I hope this guidance has been helpful and please comment below. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want additional information on switching fund structures.We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Source: FPA Dare to Dream national research report conducted by McCrindle Research, August 2016
So do you or a family member or friend talk about your future dreams of an early retirement or what you plan to do in retirement but then give a big sigh and say it is “Just a dream” or “a pipe dream” or maybe put it in the “to hard basket” to try and achieve those goals. Realistic goals are achievable with good planning and some of the whackier ones just take a little more effort or courage!
Did you know that this week is Financial Planning Week? Every year, the Financial Planning Association (FPA) holds Financial Planning Week, to remind Australians about the importance of financial planning.
The theme for this year is “Dare to Dream” and I think it’s a great reminder of why we need a plan in place to realise our biggest dreams. After all, financial planning is not just about numbers – it’s about deciding what we want out of life, then putting in steps to achieve it. It’s also a nice reminder about the importance of financial independence – whatever life stage we find ourselves at.
This short video featuring Jane Caro sets the scene to the dare to dream challenge:
So are you ready to read a bit more? Something you might find particularly interesting, is the Dare to Dream research report which has some eye opening insights about how Australians feel about their financial future. The report highlights that whilst one in two Australians dream more about the future now than five years ago, a massive 63% have made “no plans” or “very loose plans” to practically achieve those dreams. Just click the link Dare to Dream research report
The report also shows that property is still a big part of the ‘Great Australian Dream’ (surprisingly even for Gen Y), and that the biggest financial regret in life for Australians is a lack of saving (a huge 47% stated this!). The report is well worth a read.
The FPA has also developed a fun online quiz, to help you discover what kind of financial personality you are. I encourage you to take the quiz and share it on Facebook with your family and friends. You can access this quiz here at Dreamer Profiles
Oh in case you want to know I got “Mover and Shaker” as my financial personality ….my dreams have already been put in to an Action Plan…what about yours?
I hope this guidance has been helpful and please take the time to comment or at least let me know what your personality result was! Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options and achieving those dreams. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
In my earlier blog Get Super Scheme Smart – ATO warns on dangers of retirement planning schemes I went through the ATO guidance and their push to educate trustees about early release schemes and fraud attempts. In a recent case they showed that they will enforce the penalty regime where a trustee has deliberately flouted the rules. The penalty, $40,000 and loss of right to be a trustee in future.
The case of Deputy Commissioner of Taxation v Rodriguez resulted in significant penalties being imposed following a large number of unauthorised withdrawals by an SMSF trustee.
In this case, the fund trustee fabricated a loan arrangement, made cash withdrawals to purchase gold bars (later selling them and depositing the proceeds of sale into his own bank account), as well as making a number of other unauthorised withdrawals for his own personal benefit over a number of years.
The court considered that there had been the following contraventions of the SIS Act:
− in making the loans and giving financial assistance the trustee failed to ensure that the fund was maintained solely for one or more of the purposes prescribed in section 62(1)
− in making the loans and giving financial assistance, the trustee failed to ensure that the fund did not lend money or give any other financial assistance using the resources of the fund to a member, contravening section 65(1)
− the trustee failed to prepare a written plan specifying: the amount by which the in-house assets of the fund exceeded the market value ratio of 5% at the end of each income year; and the steps by which the trustee proposed to dispose of the in-house assets equal to or greater than the excess amount, contravening s 82.
In imposing the penalties, the court took into account the trustee’s cooperativeness with the ATO, investigating officers, solicitors and the court process. The court also accepted that the trustee was contrite and apologetic, and was a person of good character. It was also apparent from the material before the court that the trustee was a troubled person at the time of the contraventions.
It should also be noted that some attempt had also been made to repay amounts withdrawn (including an interest component).
In addition to a monetary penalty of $40,000, the trustee was barred from acting as a trustee.
This should be taken as a strong warning to small business owners and company directors who may also endanger their ability to control their business or be a company director in their business life because of issues caused by managing their Self Managed Superannuation Fund poorly.
For those who feel the additional risk of running an SMSF may expose their career to unacceptable risk then they should consider a retail or industry fund or if you have assets that are unable to be held via one of those, like a property, art or bullion, then you should consider moving the Trustee responsibilities to a professional trustee via a Small APRA fund. I will deal with this option in a future blog.
If you are in a position of financial hardship or want to do a complex investment then why not contact us to se if there is a legal way to achieve the same goal without getting yourself in trouble.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
Verante Financial Knowledge Centre
We understand that the financial industry is full of jargon and concepts that can be difficult for people to get their head around or remember. So to learn more about money and finance at our Financial Knowledge Centre is a great place to start.
Verante Financial Knowledge Centre
We understand that the financial industry is full of jargon and concepts that can be difficult for people to get their head around or remember. So to learn more about money and finance at our Financial Knowledge Centre is a great place to start.
Verante Financial Knowledge Centre
We understand that the financial industry is full of jargon and concepts that can be difficult for people to get their head around or remember. So to learn more about money and finance at our Financial Knowledge Centre is a great place to start.