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.
So you or your employer have mistimed contributions or doubled up on a payment to you super. This can happen in a number of ways:
Employer paid June 2017 contribution in July last year without you knowing;
You worked out your salary sacrifice based on $25,000 less employer contributions on your salary but forgot they pay SG on bonuses too!;
Employer brought forward June 2018 contributions to ensure they got a tax deduction early;
You received a spouse contribution but did not realise this counted towards your cap;
You, your tax agent or super fund accountant has made an error in claiming tax deductions for nonconcessional contributions
Just a genuine mistake.
How do you manage the mistake?
Do nothing until the ATO issues you with a Determination that you have exceeded one of your caps. You cannot just take the funds back out of your SMSF. The ATO will issue the determination and then provide you with a Release Authority which can be processed on paper or (coming soon) via My.Gov.au/mygov
You need to approve the commutation of the excess contribution amount from your account by the ATO as soon as possible after you receive a determination. This will limit the amount of penalty interest that you will be liable to pay.
If you exceed the concessional contributions cap
If you have excess concessional contributions the ATO will issue you with an excess concessional contributions determination. The determination advises you that your excess concessional contribution amount has been included as assessable income in your tax return. It also advises what actions are required of you. The excess concessional contribution determination contains the:
amount of the excess concessional contributions
amount of the excess concessional contributions charge
period of the excess concessional contributions charge
rate of the excess concessional contributions charge.
With your determination, you will also receive an income tax return Notice of assessment/ Notice of amended assessment.
If the contribution information within the determination is incorrect, either:
contact your super fund accountant/administrator and your personal tax agent to have them re-report any incorrectly reported contributions
amend your tax return if you did not claim the correct personal super contribution deduction in your tax return, or did not claim it at the correct label.
If you exceed the non-concessional contributions cap
You now have 60 days (see details of how this has improved below) from the date of your determination, to choose one of the following options:
Option 1 – Release the excess from your super funds
You can elect to release all your excess non-concessional contributions and 85% of your associated earnings from your super funds.
The full associated earnings amount stated in your determination will be included in your assessable income and taxed at your marginal rate of tax. A non-refundable tax offset equal to 15% of your associated earnings is applied to recognise any tax paid by your super fund.
The ATO will issue a release authority to the super funds you nominate and they will pay this amount directly to the ATO.
Option 2 – Leave your excess non-concessional contributions in your super funds
If you choose not to release your excess non-concessional contributions from your super funds, you receive an excess non-concessional contributions tax assessment. The excess amount is taxed at the highest marginal tax rate. IF you have more than one account/fund then you must elect a fund to release your excess non-concessional contributions tax from.
You must select this option if your only fund is a defined benefit.
If you do nothing
The ATO will ask your super funds to release and send amounts to them. They will also amend your income tax assessment to include your associated earnings. You will pay tax on your associated earnings at your marginal tax rate. Because of the delay the tax on associated earnings will be higher.
The ATO will use the money released to pay any tax or Australian government debts and refund any remaining balance to you
If you have no money left in super for any reason, they will amend your income tax assessment to include your associated earnings amount. You will pay tax on your associated earnings at your marginal tax rate.
If your only super interest is held in a defined benefit fund or a non-commutable super income stream and the fund cannot or will not voluntarily release The ATO will send you an excess non-concessional contributions tax assessment
STOP! my head is hurting!
Finally some simplification! From 1 July 2018 the release authority process for excess contributions and Division 293 liabilities will be consistent and streamlined. The changes will apply to the following release authorities:
excess concessional contributions
excess non-concessional contributions
excess non-concessional contributions tax
division 293 due and payable
division 293 deferred debt.
The changes include:
•Standard 60 day time frame for when an individual could request to release an amount from super (previously this ranged between 21 to 60 days)
•The individual makes a request when replying to the ATO’s determination (this can be done via their myGov account), but it is the ATO that submits the release authority to the super fund. Prior to the rule change, individuals could also submit the release authority directly to the super fund
•The payment is always made to the ATO, credited to the individual’s tax liability with any residual amounts then paid to the individual
•The default election for excess non-concessional contributions is to release the contribution and 85% of the associated earnings. This prevents what is generally the more detrimental position of applying the top marginal tax rate on the excess contribution unreleased, from occurring. For example this may have occurred in the past if the individual is away on holidays when they receive the notice of determination
Temporary timeframe extension for SMSF and APRA funds to release the money.
From 1 July 2018 the Commissioner of Taxation has temporarily extended the timeframes for the return and payment of streamlined release authorities from 10 to 20 business days.
The change applies to release authorities for excess contributions and Div 293 liabilities.
This temporary extension will continue until the ATO digitises their release authority process. When they change the process from paper to being managed via SuperStream the system will return to the legislated 10 business days.
This extension was given after practitioners raised concerns over their ability to meet this legislated time frame to return their release authority statement, with a paper form being the only channel available. Yeah like we trust Australia Post to get anything back quickly!
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 recently took part in a panel discussion on Peter Switzer’s Money Talks program on Sky Business around end of year tax planning. you can view the 20 minute show below for for some tips from all the panel. What was clear from the audience questions after the show is that many people just don’t know the strategies available to them.
But its now 5 days before the end of the financial year and many people may think it is too late! But there are still strategies you can still out in place.
1.Think first. First tip is to think carefully on each strategy before implementing any of them. review the eligibility criteria and your own personal circumstances.
2. Review Your Concessional Contributions – $25K this year if under 65 and then work test applies for 65+.
Maximise contributions up to concessional contribution cap but do not exceed your Concession Limit. The sting has been taken out of Excess contributions tax but you don’t need additional paperwork to sort out the problem. So check employer contributions on normal pay and bonuses, salary sacrifice and premiums for insurance in super as they may all be included in the limit. This year for the first time for employed people, you can still top up directly to your Superfund or SMSF without having to go through your employer and salary sacrifice. Work out you available cap and make a Personal contribution now!
3. Review your Non-Concessional Contributions
Have you considered making non-concessional contributions to move investments in to super and out of your personal, company or trust name. Maybe you have proceeds from and inheritance or sale of a property sitting in cash. As shares and cash have increased in value you may find that personal tax provisions are increasing and moving some assets to super may help control your tax bill. Are you nearing 65? then consider your contribution timing strategy to take advantage of the “bring forward” provisions before turning age 65 to contribute up to the $300,000.
4. Co-Contribution
Check your eligibility for the co-contribution and if you are eligible take advantage. You can get up to $500 co-contribution from the government so it is not as attractive as previously but it is free money – grab it if you are eligible. Check here for details
To calculate the super co-contribution you could be eligible to receive based on your income and personal super contributions, use the Super co-contribution calculator.
5. Spouse Contribution
People are eligible to claim the maximum tax offset for the 2017-18 $540 if:
you contribute to the eligible super fund of your spouse, whether married or de-facto, and
your spouse’s income is $37,000 or less.
The tax offset amount will gradually reduce for income above this amount and completely phases out when your spouse’s income reaches $40,000.
6. Over 65? Do you meet the work test? (The 40 hours in any 30 days rule)
You should review your ability to make contributions as if you if you have reached age 65 you must pass the work test of 40 hours in any 30 day period during the financial year, in order to continue to make contributions to super. Check out ATO superannuation contribution guidance
7. Check any payments you may have made on behalf of the fund.
It is important that you check for amounts that may form a superannuation contribution in accordance with TR 2010/1 (ask your advisor), such as expenses paid for on behalf of the fund, debt forgiveness or in-specie contributions, insurance premiums for cover via super paid from outside the fund.
8. Notice of intent to claim a deduction for contributions
If you are planning on claiming a tax deduction for personal concessional contributions you must have a valid ‘notice of intent to claim or vary a deduction’ (NAT 71121). If you intend to start a pension this notice must be made before you commence the pension. Many like to start pension in June and avoid having to take a minimum pension but make sure you have claimed your tax deduction first.
9. Contributions Splitting
Consider splitting contributions with your spouse, especially if:
• your family has one main income earner with a substantially higher balance or
• if there is a n age difference where you can get funds into pension phase earlier or
• If you can improve your eligibility for concession cards or pension by retaining funds in superannuation in younger spouse’s name.
This is a simple no-cost strategy I recommend everyone look at especially with the Government moving on limiting the tax free balance on accounts. See my blog about this strategy here.
10. Off Market Share Transfers (selling shares from your own name to your fund)
If you want to move any personal shareholdings into super you should act early. The contract is valid once the broker receives a fully valid transfer form not before. It takes about 4 days to implement this from the brokers end so Tuesday 26th would be the cut off day for the forms to be received by your broker. YOU CAN DO IT!
11. Pension Payments
If you are in pension phase, ensure the minimum pension has been taken. For transition to retirement pensions, ensure you have not taken more than 10% of your opening account balance this financial year.
The following table shows the minimum percentage factor (indicative only) for each age group.
Age Minimum % withdrawal (in all other cases)
Under 65 4%
65-74 5%
75-79 6%
80-84 7%
85-89 9%
90-94 11%
95 or more 14%
Sacrificial Lamb
Think about having a sacrificial lamb, a second lower value pension that can sacrificed if minimum not taken. In this way if you pay only a small amount less than the minimum you only have to lose the smaller pensions concession rather than the concession on your full balance. When combined with the ATO relief discussed in the following article “What-happens-if-i-don’t-take-the-minimum-pension” you will have a buffer for mistakes.
Before reading the following:Be careful not to reset a pension that has been grandfathered under the new deeming of pension rules that came in on Jan 1st 2015 without getting advice.
12. Reversionary Pension is often the preferred option to pass funds to a spouse or dependent child.
You should review your pension documentation and check if you have nominated a reversionary pension. If not, consider your family situation and options to have a reversionary pension. This is especially important with blended families and children from previous marriages that may contest your current spouse’s rights to your assets. Also consider reversionary pensions for dependent disabled children. the reversionary pension may become more important with the application of the proposed budget measure on $1.6m Transfer limit to pension phase. If funds already in pension and reverting to another person then the beneficiary has 12 months to implement strategies to maximise how much they can retain in the superannuation system.
13. Review Capital Gains Tax Position of each investment
If you have been affected by the changes in the rules on taxation of TTR Pensions and the implementation of the $1.6m Transfer Balance Cap then you should be considering the CGT relief that may be available to your fund.
In accumulation phase review any capital gains made during the year and over the term you have held the asset and consider disposing of investments with unrealised losses to offset the gains made.
If in pension phase then consider triggering some capital gains regularly to avoid building up an unrealised gain that may be at risk to government changes in legislation like those imposed in 2017/18
14. Review and Update the Investment Strategy not forgetting to include Insurance of Members
Review your investment strategy and ensure all investments have been made in accordance with it, and the SMSF trust deed. Also, make sure your investment strategy has been updated to include consideration of insurances for members. See my article of this subject here. Don’t know what to do…..call us.
15. Collate and Document records of all asset movements and decisions
Ensure all the funds activities have been appropriately documented with minutes, and that all copies of all statements and schedules are on file for your accountant/administrator and auditor.
16. Double Dipping! June Contributions Deductible this year but can be allocated across 2 years.
For those who may have a large taxable income this year (large bonus or property sale) and are expecting a lower taxable next year you should consider a contribution allocation strategy to maximise deductions for the current financial year. This strategy is also known as a “Contributions Reserving” strategy but the ATO are not fans of Reserves so best to avoid that wording! Just call is an Allocated Contributions Holding Account.
17. Market Valuations – Now required annually
Regulations now require assets to be valued at market value each year, ensure that you have re-valued assets such as property and collectibles. Here is my article on valuations of SMSF investments in Private Trusts and Private Companies. For more information refer to ATO’s publication Valuation guidelines for SMSFs.
18. In-House Assets
If your fund has any investments in in-house assets you must make sure that at all times the market value of these investments is less than 5% of the value of the fund. Do not take this rule lightly as the new SMSF penalty powers will make it easier for the ATO to apply administrative penalties (fines) for smaller misdemeanors ranging from $820 to $10,200 per breach.
21. Check the ownership details of all SMSF Investments
Make sure the assets of the fund are held in the name of the trustees on behalf of the fund and that means all of them. Check carefully any online accounts you may have set up without checking the exact ownership details. You have to ensure all SMSF assets are kept separate from your other assets.
22. Review Estate Planning and Loss of Mental Capacity Strategies.
Review any Binding Death Benefit Nominations (BDBN) to ensure they are valid (check the wording matches that required by the Trust Deed) and still in accordance with your wishes. Also ensure you have appropriate Enduring Power of Attorney’s (EPOA) in place allow someone to step in to your place as Trustee in the event of illness, mental incapacity or death. Do you know what your Deed says on the subject? Did you know you cannot leave money to Step-Children via a BDBN if their birth-parent has pre-deceased you?
23. Review any SMSF Loans
Have you provided special terms (low or no interest rates , capitalisation of interest etc.) on a related party loan? Then you need to review your loan agreement and get advice to see if you need to amend your loan. Have you made all the payments on your internal or third-party loans, have you looked at options on prepaying interest or fixing the rates while low. Have you made sure all payments in regards to Limited Recourse Borrowing Arrangements (LRBA) for the year were made through the SMSF Trustee? If you bought a property using borrowing, has the Holding Trust been stamped by your state’s Office of State Revenue. Please review my blog on the ATO’s Safe Harbour rules for Related Party Loans here
24. Valuations for EVERYTHING
Not just for property, any unlisted investment needs to have a market valuation for 30 June. If you need assistance on how to value unlisted or unusual assets, including what evidence you’re going to need to keep the SMSF auditors happy, then contact us.
25. Collectibles
Play by the new rules that come into place on the 1st of July 2016 or get them out of your SMSF. More on these rules and what you must do in a good blog from SuperFund Partners here.
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.
I wrote an article a few years ago for MYOB’s small business blog called How much do I need to retire at 60? that certainly caused some heated debate and has been viewed over 425,000 times. The comments we got on that article were amazing and eye-opening to see how people’s vision of a “budget” and “comfortable lifestyle” is so different depending on their personal circumstances.
Some of the figures used for sample retirement budgets have been updated so I thought I would provide those figures as guidance for people facing the retirement funding conundrum and not sure where to start. I have also included figures more specific to the average SMSF member and those who want to have a much more than just “comfortable” lifestyle
The latest figures released by the Association of Superannuation Funds of Australia ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a ‘comfortable’ or ‘modest’ standard of living in retirement.
Budgets for various households and living standards for those aged around 65
(March quarter 2018, national)
Modest lifestyle
Comfortable lifestyle
Single
Couple
Single
Couple
Total per year
$27,368
$39,353
$42,764
$60,264
Budgets for various households and living standards for those aged around 85
(March quarter 2018, national)
Modest lifestyle
Comfortable lifestyle
Single
Couple
Single
Couple
Total per year
$25,841
$36,897
$40,636
$56,295
Source ASFA Retirement Standard. The figures in each case assume that the retiree(s) own their own home and relate to expenditure by the household. This can be greater than household income after income tax where there is a drawdown on capital over the period of retirement. Single calculations are based on female figures. All calculations are weekly, unless otherwise stated.
The figures in each case assume that the retiree(s) own their own home and relate to expenditure by the household. This can be greater than household income after income tax where there is a drawdown on capital over the period of retirement. Single calculations are based on female figures. All calculations are weekly, unless otherwise stated.
As you can see from the figures if you are looking at a ‘comfortable’ retirement at age 65-67 you need to consider a budget of $60,264 for a couple or $42,764 for a single person household.
In my previous article I talked about retiring at age 60 but as most people will be looking more likely at 65 as their target, I wanted to clarify what I believe you need to fund such a retirement. In my opinion a couple would need a combined superannuation and non-super investment assets balance of around $760,000 minimum and a single individual would need a balance of around $560,000. This at odds with ASFA who have increased their requirement by a whopping $130,000 but still have lower figures than mine as they believe you only need $640,000 for a couple or $545,000 as a single person.
My figures are based on No Centrelink Support. I am happy to accept ASFA are correct if you take into account some age pension but I find that many clients do not qualify for this because of non-income producing assets like holiday homes, caravans boats etc reducing their pension entitlements. Also there is an inherent risk that the now reduced Asset and Income Test limits may be reduced further in the search for more Government Budget Savings.
SMSF Members save more for a better lifestyle
So let’s get take it for granted that an SMSF member wants a bit better than just a Comfortable lifestyle. My friends at Accurium who I use to do Retirement Healthchecks for my clients came up with these figures for those looking for a better lifestyle and having at least 50% chance of sustaining it for their life expectancy. This assumes all you capital will be used in your lifetime. If you want more detail and options on having capital to pass on to your children then visit Accurium’s website to access their full report.
Spend
Level of savings needed
ASFA Comfortable ($60,000 p.a.)
$580,000
SMSF typical spend ($80,000 p.a.)
$1,100,000
SMSF aspirational spend ($100,000 p.a.)
$1,600,000
Source: Accurium – Retirement Insights Vol 7
So have a look below at what the ASFA Retirement Standard includes and then add in your own preferences to find out your ideal budget and capital requirement.
The Standard includes the cost of things such as health, communication, clothing, travel and household goods.
Comfortable lifestyle
Modest lifestyle
Age Pension
Single
$42,764 a year
$27,368 a year
$21,222 a year *
Couple
$60,254 a year
$39,353 a year
$31,995 a year *
Replace kitchen and bathroom over 20 years
No budget for home improvements. Can do repairs, but can’t replace kitchen or bathroom
No budget to fix home problems like a leaky roof
Better quality and larger number of household items and appliances and higher cost hairdressing
Limited number of household items and appliances and budget haircuts
Less frequent hair cuts or getting a friend to cut your hair
Can run air conditioning
Need to watch utility costs
Less heating in winter
Restaurant dining, good range & quality of food
Take out and occasional cheap restaurants
Only club special meals or inexpensive takeaway
Fast internet connection, big data allowance and large talk and text allowance
Limited talk and text, modest internet data allowance
Very basic phone and internet package
Good clothes
Reasonable clothes
Basic clothes
Domestic and occasional overseas holidays
One holiday in Australia or a few short breaks
Even shorter breaks or day trips in your own city
Top level private health insurance
Basic private health insurance, limited gap payments
No private health insurance
Owning a reasonable car
Owning a cheaper more basic car
No car or, if you have a car, it will be a struggle to afford repairs
Take part in a range of regular leisure activities
One leisure activity infrequently, some trips to the cinema or the like
Only taking part in no cost or very low cost leisure activities. Rare trips to the cinema
Figures from March Quarter 2018.
Most people I see in my day-to-day work advising on retirement planning have a “sugar coated view” of how they want to spend their time in retirement. Many have hobbies or interests that cost very little but others who like international travel or partaking in expensive social lifestyles of hobbies often under-estimate the costs.
Another worrying trend is people borrowing in their 50’s to fund lifestyle for fear of missing out or to keep up with the Jones! Others are helping children with home deposits and losing the vital compounding interest on their savings. Many tell me they believe they can live on the Government Age Pension in retirement. Well if you can’t manage on your current wage now without borrowing then you are in for a big shock if you plan to rely on the meagre Age Pension.
I see one industry commentator saying that the savings required to live a modest lifestyle in retirement only requires a small amount of retirement savings in addition to the age pension, however that sort of budget leaves you very vulnerable to food and utility price inflation as people will have seen with rising vegetable and electricity pricing in the last few years.
When you look at these estimates of the amount capital or assets you need to achieve the lifestyle you want in retirement, it’s still important to remember that most of these work on the average life expectancy. If your family has a history of longevity or early death, then you need to make allowances accordingly.
The bottom line: It’s never too early and hopeful not too late to start planning. So if you want to see where you stand at present based on your current savings and contributions to super, then use the Retirement Planner on the ASIC’s free Money Smart website.
Once you work out you target you should consider seeing a Financial Planner to see what strategies are available to you to boost your savings such as using a Transition to Retirement Pension and Salary Sacrifice strategy to save on personal and superannuation tax and build your nest egg.
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.
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.
Self-funded retirees have felt like punching bags for the last few years with hit after hit chipping away at their ability to fend for themselves within the rules they had relied upon in making their savings plans over the last 30 years. Combine the changing of goal posts with low interest rates and blue-chip underperformance from the banks, telcos and utilities and they are not to be blamed for thinking a hex had been put on them.
So an SMSF friendly budget is the welcome news coming out of the 2018-19 Federal Budget. With many of us SMSF Specialists and you the SMSF members still working through the wide-reaching and complex superannuation changes which took effect from 1 July 2017, this Federal Budget will provide much needed stability while looking to reduce costs for SMSFs and prove additional flexibility.
The key changes proposed for SMSFs and superannuation are:
Three-yearly audit cycle for some self-managed superannuation funds.
The Government will change the annual SMSF audit requirement to a three yearly requirement for SMSFs with a history of good record keeping and compliance. The measure will start on 1 July 2019 for SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.
One concern I have is if trustees make a mistake in year 1 that is not discovered until year 3, will they face 3 years interest charges on the penalties.
Expanding the SMSF member limit from four to six
As already announced, the Federal Government confirmed its decision to expand the number of members allowed in an SMSF from four to six. Expanding the definition of an SMSF to a fund with a maximum of six members will provide greater flexibility in how funds can be structured.
Whilst there are some concerns over making decisions I like this move where as mum and dad in their later years want to reduce their involvement but they want help rather with the fund rather than moving to separate retail funds. It may help prevent elder Financial abuse where instead of one child assuming control of the SMSF, more of the family could be involved. Temptation and inheritance impatience is always there for one person but add a few others in to the decision making and the risk of financial abuse reduces considerably.
Also 6 members of a family small business allows for later drawdown from the parents accounts and recontribution for younger family members to retain business real property in the fund after death of the older generation.
Note; you will need to ensure your trust deed allows more than 4 members and it most likely won’t so you will need to update the trust deed first before accepting new members. READ THE DEED
Over 65, 1 additional year Work test exemption
The Government will provide more time for Australians aged 65 to 74 to boost their retirement savings, by introducing an exemption from the superannuation work test.This exemption will apply where an individual’s total superannuation balance is below $300,000 and will permit voluntary superannuation contributions in the first year that they do not meet the work test requirements.
This is good but limited in its scope as more and More people have reached the $300k level because of Super Guarantee Contributions for most since 1992 or before for some. But it is a female friendly move as they are most likely to have lower balances
Life insurance cover in super to be opt-in for individuals under 25 years of age.
The Government will legislate that life insurance cover in superannuation will be opt-in for those individuals under 25 years of age or with account balances under $6000 to ensure that unnecessary fees do not erode smaller balances.
Life insurance cover will also cease where no contributions have been made for a period of 13 months.
If you have kept a retail or industry fund open with small balances to retain insurances you may need to put a small annual contribution in place (I would recommend $100 per half year just in case) to ensure it does not get tagged as dormant.
Older Australian package
The Government introduced the following measures to enhance the standard of living older Australians:
• Increase to the Pension Work Bonus from $250 to $300 per fortnight.
• Amendments to the pension means test rules to encourage the take up of lifetime retirement income products.
• Expansion of the Pensions Loan Scheme to allow more Australians to use the equity in their homes to increase their incomes.
I think this will be a major bonus for those with a lumpy asset or shareholding’s they wish to retain but need more cashflow. At a current rate of 5.25% the Pensions Loan Scheme is a very decent rate and security that you are borrowing from a bank or predatory lender based on a brokers conflicted commissions.
Personal income tax bracket changes (take most these with a pinch of salt!)
The Government has provided personal income tax relief to lower and middle income earners. A Low and Middle Income Tax Offset will now be available for individuals with incomes of up to $125,333.
The $87,000 income threshold, above which a 37 per cent tax rate applies, will increase to $90,000.
Other changes
• A surplus of $2.2 billion is expected in 2019-20, one year ahead of schedule.
• The Government’s planned increase in the Medicare levy from 2 per cent to 2.5 per cent, to fund the National Disability Insurance Scheme, will now not go ahead due to increased tax revenues.
How can we help?
Some of these measures may open up strategy options for you and your family.
If you have any questions or would like further clarification in regards to any of the above measures outlined in the 2018-19 Federal Budget, please feel free to give me a call or email to arrange a time to meet or talk by phone so that we can discuss your particular requirements in more detail.
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.
Over this last week I have read so many politically biased responses to Bill Shorten’s proposed strategy to stop the refunds of franking credits that I despaired and I know it is going to be a political football rather than part of comprehensive tax reform. Then I came across a really well explained and positioned argument from Scott Phillips of The Motley Fool fame that takes the politics out of the analysis. I immediately reached out to Scott and asked him could I re-post it for my readers who may be finding the debate confusing or hard to explain to others. So here goes:
Why Bill Shorten is wrong — and right — on dividends
Scott Phillips
What’s that? Bill Shorten has announced a new policy on the refund of franking credits?
I hadn’t noticed.
Okay, that’s not true. I noticed. And, based on feedback on Twitter over the last week, many of you noticed, too.
If Shorten wanted to stir a hornet’s nest, he got just that. Maybe it’s clever politics. Maybe the focus groups told the pollsters this was a smart political strategy.
It sure as heck isn’t good policy, in my view.
Before you fire off an email to either abuse me or suggest I be knighted, let me explain.
I’m going to start with three premises that I think most people can agree on:
The tax system should be fair
You shouldn’t have to pay tax twice on dividend income; and
The tax system, as it stands, is broken.
That last point seems to be Shorten’s main thrust. And it’s a battle cry taken up by many partisans:
“We have a problem, and I have a solution. If you don’t like my solution, you’re saying we don’t have a problem.”
To which I reply:
“We absolutely have a problem. But your solution is a poor one. There are better ways to skin this cat.”
And before we go any further, please leave your political affiliations at the door. This week, on Twitter, I have bagged and praised Labor for different policies. I’ve done the same in the past to the Libs. If you can’t put aside your team jersey and engage in a discussion of ideas, then there’s not much for you in what follows.
But if you’re interested in good policy, read on.
Bill Shorten’s policy, as announced, goes something like this:
“We’re happy for you to reduce your tax using franking credits, but we’re not going to give you a refund.”
There are a few problems with that approach:
First, it implies that if you pay tax, you’re welcome to use the credits to reduce your tax burden to zero.
Second, those credits somehow magically are worthless once you hit zero, meaning that to me they’re worth something, but to a retiree in a 0% tax bracket, they’re worth nothing.
How can franking credits be worth different amounts to different people in different circumstances? Search me… I’m buggered if I know.
And third, and this is what’s stirred up most heat among those who have gone into bat for the policy:
“I pay tax and my taxes shouldn’t go to give a refund/handout to people who already have a lot of money.”
Now, don’t get me wrong. I think the current situation — regarding the ability to pay exactly zero tax on certain income in retirement that might be up to $80,000 — is crackers.
But, Shorten’s policy doesn’t fix that problem. Here’s why:
Consider three people, all of whom have SMSFs in pension phase, and who — according to the current tax rules — pay 0% tax: Banking Betty, Rental Richard and Dividend Davina.
Banking Betty deposits $100,000, and earns $2,000 each year in interest. Betty doesn’t pay any tax.
Rental Richard has a $100,000 property that pays him $2,000 each year in rent. Richard doesn’t pay any tax.
Dividend Davina buys $100,000 worth of shares that earned a profit of $2,000. The company paid tax of $600, so Davina gets $1,400. Davina doesn’t pay any tax.
See the difference here? Because Davina’s investment is in the form of shares in a company, she gets less than the other two. Even though she’s not supposed to pay any tax, the company paid tax, so she gets less.
Under current rules, she’d get the $600 back, delivering on the current government policy of a 0% tax rate, and equalising the return for each of those investors.
Bill Shorten, in effect, is penalising people for owning shares.
Now, let’s address the elephant in the room. Yes, because the company has already paid tax on that $2,000, Davina does officially get a refund. And the optics of that are bad: it looks like somehow the taxpayer is subsidising Davina.
But it’s all a question of cash flows and timing. The ATO just gives Davina back the money the company paid in tax.
And remember, a company is just a legal structure to organise your ownership interest in an asset. Shares in a company aren’t all that different in effect to accounts at a bank. Your bank account is evidence that you have a claim to a share of that bank’s assets, even if you don’t know specifically which notes you deposited.
Imagine a scenario under which Banking Betty’s bank withholds 30% of her interest and sends it to the government as tax. And where Rental Richard’s property manager is obligated to send 30% of his rental income to the ATO.
Both of these investors would have to fill out a tax return and the ATO would send them a refund — because tax was paid on their income, even though the tax rate should have been 0%.
Would Bill Shorten stop Betty and Richard getting their money back?
I doubt it.
But somehow, because Labor has (unfortunately, disingenuously) used extreme examples to make their point, and because they’ve dressed it up as a handout, they’ve mischaracterised the situation.
Somehow Dividend Davina is a fatcat living high on the hog, while Betty and Richard are perfectly entitled to pay no tax.
Essentially, because of the asset class they decide to invest in, our three protagonists are being treated differently.
Sound fair to you?
No, me neither.
Yes, the idea of a ‘refund’ for someone who has paid no tax feels, somehow, deeply wrong. But it’s because tax was paid by the company, on behalf of a shareholder who shouldn’t be paying tax, so the ATO is essentially just righting that wrong.
Still with me? Excellent!
Still fuming that well-off people pay no tax? Me too.
What? Didn’t I just spend 984 words (don’t waste time counting them. I checked) defending those people?
Well, yes. And no.
Here’s where both parties are engaging in a phony war of words. And we’re poorer for it.
Having an essentially uncapped income at a 0% tax rate is madness.
Yes, yes, it’s not technically uncapped, for a host of reasons. So let’s say $80,000 among friends.
You and I pay a decent slug of tax on an $80,000 income. And there’s no reason that a well-off retiree should be able to draw a completely untaxed income of a similar amount, when they likely have a very decent asset base — say a home and a seven-figure superannuation balance.
It’s simply not sustainable, especially as more boomers retire, to have that slice of the economic income pie remain completely untaxed.
But — and this is important — that doesn’t mean we should simply ban franking credit refunds and assume that fixes the problem.
Let’s go back to our alliterative actors, Betty, Richard and Davina.
If Betty was earning $80,000 in interest, should that be untaxed? Should Richard’s $80,000 in rent be untouched by the taxman? Should Davina’s $80,000 in dividends remain completely unscathed?
I don’t think so. But again, it’s not a question of the source of the income; it’s the size.
Under Bill Shorten’s plan, Davina would be worse off, but Betty and Richard laugh all the way to the bank. Does anyone, seriously, think that’s a good basis for a tax plan?
I didn’t think so.
Here’s what I’d do: I’d have a generous tax-free threshold for income from superannuation, maybe $10,000 or so above the pension level. It’s not unreasonable that you’re allowed a little extra, given the sacrifice you made to save for your retirement.
But above that level, I’d implement a progressive tax scale not unlike the one that applies to regular income: The more you earn, the higher your marginal tax rate.
Simple, no?
Fair, yes?
That way, the tax code doesn’t discriminate on the basis of the asset class. There are no free lunches. And the unsustainable tax situation that currently applies to Super is fixed.
So Bill Shorten, and Chris Bowen, it’s time to admit defeat and go back to the drawing board. Feel free to use my template, above.
And Scott Morrison and Malcolm Turnbull, please stop with the emotive and negative language and grandstanding.
Politics should be a battle of ideas, not soundbites The best idea, well explained, should win, regardless of political party or ideological affiliation.
And, ladies and gentlemen of the Parliament, the Australian people will give you bonus points for explaining it clearly and for anything that reduces the complexity of our tax affairs, while ensuring fairness.
Indeed, Turnbull and Morrison’s political forebear, John Howard spoke to the National Press Club in 2014 when he shared the stage with former Labor PM, Bob Hawke. At that event, according to the Sydney Morning Herald , Howard said
“We have sometimes lost the capacity to respect the ability of the Australian people to absorb a detailed argument. They will respond to an argument for change and reform [but] they want two requirements. They want to be satisfied it’s in the national interest, because they have a deep sense of nationalism and patriotism. They also want to be satisfied it’s fundamentally fair.”
I’d like to think that’s still true.
I agree with Bill Shorten’s characterisation of the problem. I disagree completely with his solution.
I imagine I lost the most partisan readers — of both stripes — a few minutes ago. If you’re still reading, thank you for engaging in a discussion of ideas.
I hope I’ve convinced some of you. Of those I haven’t convinced, I hope I’ve at least done a decent job of addressing the issue, without bias, grandstanding or misdirection. Thanks for reading.
At the very least, I hope I’ve productively added to the conversation. It’s the least each of us can do.
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 contains a huge library of articles, life events, videos, quiz’s and calculators, so that you can learn about managing money while having a bit of fun at the same time.
The best part of all is that you work at your own pace and we offer a free trial to one and all but it will always be free to our clients as part of our advice service.
Watch this short video which explains what is available in this vast knowledge base.
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.
Ok this may seem like a boring question but have you actually checked if you have a copy of your latest SMSF deed on file or that your accountant and financial adviser have one of file? Has it been dated properly and signed and witnessed properly by all parties.
In this era of everyone rushing around and having busy lives, it’s the little things that get missed and that can cause a huge problem later. An unsigned or undated deed may result in your fund being found non-compliant and unable to function or leave major headaches for your beneficiaries. If you are a professional adviser then those disgruntled parties will be looking for someone still alive to blame and pick up the costs.
An SMSF trust deed is a legal document that sets out the rules for establishing and operating your fund. It includes such things as the fund’s objectives, what the fund can invest in, who can be a member and whether benefits can be paid as a lump sum or income stream. The trust deed and super laws together form the fund’s governing rules.
The trust deed must be:
prepared by someone qualified to do so – it’s a legal document
signed and dated by all trustees
properly executed according to state or territory laws
regularly reviewed, and updated as necessary.
I take over management of a lot of funds and we are seeing many cases where the original trust deed was signed correctly and dated but a subsequent update or deed of amendment is sitting on the file unsigned or undated.
It is illegal to sign and backdate documents. As the Trustee of your fund it is your responsibility to ensure that deeds are legally compliant, signed and up to date.
If you are an Accountant, Administrator, Financial Planner or Auditor then you may share in the responsibility to ensure that deeds are compliant and properly completed. Your client may love you but their beneficiaries may come looking for someone to blame if an unsigned deed means a compliance breach with heavy tax or administrative penalties.
So what should you do.
See if you have a SMSF deed in your files and check if it is properly signed, witnessed and dated.
If you don’t have a copy then email your accountant and financial adviser and ask then to confirm if they have a signed and dated original copy on file. If they do then ask for a Certified Copy.
If it has been updated with a Deed of Amendment, has that been signed and dated? Get a copy of all Deeds of Amendment for your records so you can show the full history of your fund. Keep a copy yourself in case you fall out with your professional advisers.
Don’t be the one who leaves a mess behind!
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 am being inundated by queries from young men aged 20-40 looking to learn more about Bitcoin and then a cohort of traditional SMSF trustees aged 40-70 who have an interest in alternative investments and especially Gold who now want to at least know more about Bitcoin and cryptocurrencies in general. so when I came across this latest paper dealing with both subjects from my good mate Jordan Eliseo, Chief Economist at ABC Bullion I twisted his arm to let me share it to my readers.
The key finding of his paper are:
KEY FINDINGS
Blockchain technology has serious real world applications – it is here to stay
Given valuations in broader financial markets, it can make sense to speculate in the cryptocurrency market with a small portion of one’s wealth
Cryptocurrencies like Bitcoin are money today, but whether that status will endure remains to be seen
Physical gold remains the simplest and most effective hedge against the monetary, market, and macroeconomic risks that investors confront today
I recommend that you read Jordan’s full report here:
Now, if you are determined to go ahead and invest in Bitcoin or other cryptocurrencies then you need to do some serious groundwork.
NOTE: I DO NOT RECOMMEND CRYPTO CURRENCIES AS A SUITABLE INVESTMENT FOR AN SMSF, I AM JUST MAKING SURE THAT THOSE WHO DO INVEST DO IT COMPLIANTLY
How the SMSF regulations affect investing in Bitcoin, Ethereum or other cryptocurrencies
SMSF Professionals and Trustees should be well aware of the restrictions placed on the investment choices of SMSFs by the Superannuation Industry (Supervision) Act 1993 and supporting regulations. The Australian Taxation Office (ATO) is in charge of the administration of these rules and they have issued this guidance on their website:
Although there are not yet any formal rulings from the ATO clarifying how the rules apply to Bitcoin, there are a number of Tax Determinations that help guide any SMSF Trustees considering investing in bitcoins.
TD 2014/25 Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)
TD 2014/26 Income tax: is bitcoin a CGT asset for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)
TD 2014/27 Income tax: is bitcoin trading stock for the purposes of subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)
GSTR 2014/3 Goods and services tax: the GST implications of transactions involving bitcoin.
Considerations before investing in Bitcoin:
Is it right for your needs and objectives? Consider if an investment in Bitcoin would satisfy the ‘sole purpose test’? – Are you honestly investing in it for your retirement?
In your circumstances does Bitcoin investing suit your risk tolerance (and the other member’s of your SMSF) and have you done enough research to validate your investment decision,
Does you Trust Deed allow for investing in bitcoins or cryptocurrencies. Read your deed and maybe ask the trust deed provider.
Talk to your fund’s auditor before proceeding as they have to sign off on the investment’s validity annually so better to run the strategy by them upfront.
They may ask you to verify the following:
If you wish to proceed with a purchase then have you amended your SMSF’s investment strategy to cater for this investment? Click the link for more details.
Trap: Make sure you know who is in ‘control’ the bitcoins? All assets must be clearly in the name/control of the trustees of the fund
How would the SMSF acquire the bitcoins? Do not acquire them from yourself or a “related party”
How secure is the exchange/wallet you are storing your cryptocurrencies in. Some have been hacked and coins lost.
No matter what it is essential to do you research and not take a gamble with your retirement nest egg unless you have covered all your bases.
Audit Tip:
Auditors and trustees can have access to the single public ledger that records Bitcoin. Websites such as Blockchain, BlockExplorer and Blockonomics allow input of a transaction ID to get detailed data of that Bitcoin transaction. Third party verification for auditors is therefore also possible. You can obtain a transaction list from the SMSF wallet provider and verify each holding. I am sure further tools will become available.
Here is another article worth reading as part of your research:
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.
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.
There are many rumours and well-intentioned but wrong advice out here on the internet about how to maximise Centrelink or DVA pension by “gifting assets” before applying. I want to clear up some of those misunderstandings
The gifting and deprivation rules prevent you from giving away assets or income over a certain level in order to increase age pension and allowance entitlements. For Centrelink and Department of Veteran’s Affairs (DVA) purposes, gifts made in excess of certain amounts are treated as an asset and subject to the deeming provisions for a period of 5 years from disposal.
Acknowledgement: I have relied on the excellent guidance of the AMP TAPin team for the majority of the content in this article. They write great technical articles for advisors and I try and make them SMSF trustee friendly.
What is considered a gift for Centrelink purposes?
For deprivation provisions to apply, it must be shown that a person has destroyed or diminished the value of an asset, income or a source of income.
A person disposes of an asset or income when they:
− engage in a course of conduct that destroys, disposes of or diminishes the value of their assets or income, and
− do not receive adequate financial consideration in exchange for the asset or income.
Adequate financial consideration can be accepted when the amount received reasonably equates to the market value of the asset. It may be necessary to obtain an independent market valuation to support your estimated value or transferred value or Centrelink may use their own resources to do so..
Deprivation also applies where the asset gifted does not actually count under the assets test. For example, unless the ‘granny flat’ provisions apply, deprivation is assessed if a person does not receive adequate financial consideration when they:
− transfer the legal title of their principal home to another person, or
− buy a new principal home in another person’s name.
What are the gifting limits?
The gifting rules do not prevent a person from making a gift to another person. Rather, they cap the amount by which a gift will reduce a person’s assessable income and assets, thereby increasing social security entitlements.
There are two gifting limits.
A person or a couple can dispose of assets of up to $10 000 each financial year. This $10, 000 limit applies to a single person or to the combined amounts gifted by a couple, and
An additional disposal limit of $30 000 over a five financial years rolling period.
The $10,000 and $30,000 limits apply together. That is, although people can continue to gift assets of up to $10 000 per financial year without penalty, they need to take care not to exceed the gifting free limit of $30 000 in a rolling five-year period.
What happens if the gifting limits are exceeded?
If the gifting limits are breached, the amount in excess of the gifting limit is considered to be a deprived asset of the person and/or their spouse.
The deprived amount is then assessed as an asset for 5 anniversary years from the date of gift. It is assessed as an asset for asset test purposes and subject to deeming under the income test.
After the expiration of the 5 year period, the deprived amount is neither considered to be a person’s asset nor deemed.
Example 1: Single pensioner – gifts not impacted by deprivation rules
Sally, a single pensioner, has financial assets valued at $275,000. She has decided to gift some money to her son to improve his financial situation. Her plan for gifting is as follows:
Financial year
2017/18
2018/19
2019/20
2020/21
2021/22
2022/23
Amount gifted
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000
With this gifting plan, Sally is not affected by either gifting rule. This is because she has kept under the $10,000 in a single year rule and also within the $30,000 per rolling five-year period.
Example 2: Single pension – Gifts impacted by both gifting rules
Peter is eligible for the Age Pension. He has given away the following amounts:
Financial year
Amount gifted
Deprived asset assessed using the $10,000 in a financial year free area rule
Deprived asset assessed using the $30,000 five-year free area rule
2017/18
$33,000
$23,000
$0
2018/19
$2,000
$0
$0
In this case, $23,000 of the $33,000 given away in 2017/18 exceeds the gifting limit (the first limit of $10,000) for that financial year, so it will continue to be treated as an asset and subject to deeming for five years.
In 2018/19, while gifts totalling $35,000 have been made, no deprived asset is assessed under the five-year rule after taking into account the deprived assets already assessed, ie $33,000 + $2,000 – $23,000 = $12,000, which is less than the relevant limit of $30,000.
Example 3: Couple impacted by both gifting rules
Ted and Alice are eligible for the Age Pension. They give away the following amounts:
Financial year
Amount gifted
Deprived asset assessed using the $10,000 in a financial year free area rule
Deprived asset assessed using the $30,000 five-year free area rule
2017/18
$10,000
$0
$0
2018/19
$13,000
$3,000
$0
2019/20
$10,000
$0
$0
2020/21
$10,000
$0
$10,000
2021/22
Any gifts in 2014/15 will be assessed as deprived assets under the five-year rule
In this case, $3,000 of the $13,000 given away in 2018/19 exceeds the gifting limit for that year, so it will continue to be treated as an asset and subject to deeming for five years. The $10,000 given away in 2020/21 exceeds the $30,000 limit for the five-year period commencing on 1 July 2017, so it will also continue to be treated as an asset and subject to deeming for five years.
Are some gifts exempt from the rules?
Certain gifts can be made without triggering the gifting provisions. Broadly speaking, these include:
− Assets transferred between the members of a couple. A common example is where a person who has reached Age Pension age withdraws money from their superannuation and contributes it to a superannuation account in the name of the spouse who has not yet reached age pension age.
− Certain gifts made by a family member or a certain close relative to a Special Disability Trust. For more information on Special Disability Trusts, refer to Department of Human Services – Special Disability Trusts.
− Assets given or construction costs paid for a ‘granny flat’ interest. See Department of Human Services – Granny Flat Interest for further detail.
Trying to be too smart – Gifting prior to claim
Contrary to what many read on the internet any amounts gifted in the five years prior to accessing the Age Pension or other allowance are subject to the gifting rules
Deprivation provisions do not apply when a person has disposed of an asset within the five years prior to accessing the Age Pension or other allowance but could not reasonably have expected to become qualified for payment. For example, a person qualifies for a social security entitlement after unexpected death of a partner or job loss.
Gifting and deceased estates
The gifting rules apply to a person’s interest in a deceased estate if the person does any of the following:
− Gives away their right to their interest in a deceased estate for no/inadequate consideration,
− Directs the executor to distribute their interest in a deceased estate for no/inadequate consideration, or
− After the estate has been finalised, gives away their interest in a deceased estate to a third-party for no/inadequate consideration.
The above rules apply even if the deceased died without a will.
Gifting and death of a partner
In some circumstances, couples in receipt of a social security benefit may give away assets prior to death of one of them. Prior to death, any deprived assets would have been assessed against the pensioner couple for five years from the date of the disposal. Now that a member of the couple has passed away, how will the deprived assets be assessed for the surviving partner?
The amount of deprivation that continues to be held against a surviving partner depends on who legally owned the assets prior to death.
Table 1: Gifting and death of a partner
Legal owner of the deprived asset
Assessment of deprived assets
jointly,
does not change.
by the deceased partner,
is reduced to zero.
by the surviving partner,
increases by the amount held against the deceased partner by the outstanding balance held against the deceased partner.
Example 4: Death of a partner
Daryl (age 84) and Gail (age 78) gifted an apartment worth $260,000 to their son Ethan on 1 July 2019. At the time the gift was made, Centrelink assessed $250,000 as a deprived asset. Daryl passed away on 1 July 2020.
The treatment of the deprived assets for Gail will depend on who legally owned the assets prior to Daryl’s death. The impact of different ownership options is shown below:
Legal owner of the deprived asset
Assessment of deprived assets
jointly,
Half of the asset value of the deprived asset will be assessed against the surviving spouse. As the amount of the deprived asset is $250,000, only $125,000 will be assessed against Gail
by the deceased partner,
No amount will be assessed against the surviving partner. As the amount of the deprived asset is $250,000, the amount assessable to Gail is $0.
by the surviving partner,
The full amount will continue to be assessed against the surviving partner. As the amount of the deprived asset is $250,000, the amount assessable to Gail remains at $250,000.
Want a Centrelink 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 not 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.
There are all sorts of unexpected consequences coming out of the changes to the superannuation rules. As a result of moving funds over $1.6m back to accumulation to meet the Transfer Balance Cap (TBC), you may in fact now qualify for the Commonwealth Seniors Health Care card.
How?
There may be a silver lining to the new $1.6 million transfer balance cap (TBC) for some SMSF members. Having less money in an account based pension and more money in accumulation or other assets may result in some SMSF members being entitled to receive the Commonwealth Seniors Health Card (CSHC). This is because amounts held in accumulation phase are not deemed for the CSHC and are not included in a member’s personal taxable income.
Now if the excess over the $1.6m is/was withdrawn out of superannuation, whether it will count as income for the CHSC will depend on how the client invests it. for example financial investments such as shares, rented investment property and interest will be deemed but a Holiday home not rented out will not be deemed towards the CSHC income test.
Older pensions may be even more forgiving!
Income from an account based pension is deemed under the usual Centrelink deeming rates unless the account based pension commenced before 1 January 2015, and the client was entitled to the card before 1 January 2015 and continues to hold the card. This is known as the grandfathering rules.
For SMSF members who are not eligible for the grandfathering rules, holding a significant amount of money in an account based pension means that they have a lower likelihood of being eligible for a CSHC. Prior to 1 July 2017, for most SMSF members it was more beneficial to hold as much as possible in an account based pension for tax purposes even if this meant they were ineligible for the CSHC. The tax savings on the excess would have outstripped the CSHC benefit.
However, from 1 July 2017, SMSF members can only hold up to $1.6 million in an account based pension and if they are also receiving defined benefit pension income the amount which can be held in account based pensions will be lower. Depending on other income the member receives, this may result in them now being entitled to the CSHC.
You don’t believe me? The following example explains how this works in a simple scenario:
Example – single person
James is single and is age 67. In the 2016 -2017 financial year, he had $2 million in his account based pension, and no other income.
The deemed income from his account based pension is calculated as $64,247 based on deeming rates and thresholds as at 1 July 2017. His deemed income exceeds the income threshold of $52,796 for the CSHC and therefore he is not entitled to a CSHC.
On 30 June 2017, he rolls $400,000 back to accumulation leaving $1.6million in his account based pension.
The deemed income on $1.6 million is $51,247 and is under the income threshold of $52,796 (20 March 2017) meaning that James is entitled to a CSHC after rolling back money from his account based pension to accumulation.
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.
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.
