December 2019 - Practical Systems Super

SMSF lifestyle asset breaches under the microscope

Dec 23,2019 Comments Off

The ATO has indicated it will be taking a closer look at lifestyle assets such as marine vessels, fine art and high-value motor vehicles in the new year, identifying possible breaches of the sole purpose test by SMSFs around these assets as an area of focus.

In a statement released on Wednesday, the regulator said it would be investigating SMSFs suspected of acquiring lifestyle assets “purely for the personal enjoyment of the fund’s trustee or beneficiaries”, as part of a wider exercise to match taxpayer data and high-value asset ownership.

The ATO said it would request policy information from 30 insurance companies to ascertain the value of assets owned by around 350,000 taxpayers between the 2016 and 2020 financial years, as part of its efforts to ensure taxpayers were fulfilling their tax and super reporting obligations.

The insurers would be required to provide the ATO with detailed policy information where the value of the asset was equal to or above $100,000 for marine vessels, $65,000 for motor vehicles, $100,000 for fine art, $150,000 for aircraft and $65,000 for thoroughbred horses.

ATO deputy commissioner Deborah Jenkins said knowing who owned such assets helped the agency get a more complete picture about the financial situation of taxpayers compared to what they had reported on their returns.

“If a taxpayer is reporting a taxable income of $70,000 to us but we know they own a $3 million yacht, then this is likely to raise some red flags,” Ms Jenkins said.

“Regardless of your level of wealth, we all need to pay the correct amount of tax, and this data will allow us to ensure those people who can afford these kinds of items are doing the right thing along with everyone else.”

Ms Jenkins clarified that the data would not be used to initiate compliance activity against taxpayers, but to aid the ATO in its investigations against individuals that had already been selected for compliance activities.

“The data is made available to our compliance teams to support their risk profiling of the selected taxpayers,” she said.

“Existence of an insurance policy may or may not prompt the compliance officer to pursue a particular line of inquiry.”

The regulator said it encouraged taxpayers who suspected they had failed to properly comply with their tax or super obligations to speak to their tax agent or make a voluntary disclosure to the ATO.

“Taxpayers who make a voluntary disclosure can generally expect a reduction in the administrative penalties and interest charges that would normally apply,” the ATO said.

Source: SMSF Adviser

Make the most of your super with a personal deductible contribution

Dec 19,2019 Comments Off

Would you like more flexibility with your superannuation but don’t have the option to salary sacrifice? You can now claim a tax deduction on your personal contributions. SMSF expert Bob Locke explains.

How much can you contribute?

Under the current rules, the maximum amount of “concessional” superannuation contributions that can be claimed as a tax deduction is $25,000.00 per person per annum. This is referred to as the “Concessional Contributions Cap”. This amount includes any super contributions paid by your employer; salary sacrifice contributions plus any other tax-deductible personal contributions you make to your super account.

On the other hand a “non-concessional” contribution is a payment made to superannuation after tax. It can be from a range of sources such as an inheritance, additional payment from your after-tax salary, property sale etc. The usual cap on non-concessional contributions is $100,000 per financial year.

Salary sacrifice vs PersonalContributions

Until 30 June 2017, only the self-employed, retirees or those who earned less than 10% of their income as an employee, could claim a tax deduction on a personal contribution.

This restriction meant that many employed individuals could not make deductible personal contributions to reduce their taxable incomes. The only way to maximize their total concessional contributions cap was to make arrangements with their employer for a salary sacrifice arrangement where they would reduce their gross salary in favour of the employer making a larger contribution (above the normal 9.5% of salary) to the employee’s super fund.

Now there’s an opportunity to give your super investment a boost and reduce your tax bill at the same time. With the changes effective from 1 July 2017, employees can make additional personal contributions and claim a tax deduction for the additional contributions, thus putting them on the same footing as self-employed people.

But how is that different from a salary sacrifice arrangement you may ask. Though salary sacrifice arrangements provide the same benefits one may not always be able to make such arrangements with their employer.

Compared to regular salary sacrifice contributions which can only be made prospectively a personal deductible contribution means you can make one lump sum contribution towards the end of the financial year. The additional flexibility of this system may be helpful in several different scenarios.

Take Mary’s case for instance. Mary works as a specialist teacher earning $110,000 annually. She has had an investment property for many years that she decides to sell in preparation for her impending planned retirement. On speaking to her accountant Mary finds out that based on the estimated sale price, there will be a taxable capital gain of $100,000 on the sale of the property which will cost her almost $45,000 in additional tax. She decides to make an additional contribution to superannuation of $14,500 and as a result, reduces her tax bill by around $7,000. Although Mary’s super fund will have to pay tax of $2,175 (15% of 14,500) on the additional contribution, she is still almost $5,000 better off.

Or take the case of Joe who is employed as a builder and earns $60,000 pa. In May, Joe receives a bequest of $25,000 from the estate of a recently deceased relative. He would like to retain around $6,000 of the money to take the family on a holiday trip and save the balance of $19,000. After talking to his financial adviser, Joe decides to contribute the full $25,000 to his existing superannuation fund; $19,000 is claimed as a concessional contribution and $6,000 as a non-concessional contribution.

As a result of claiming the additional contribution, Joe receives an additional tax refund of $6,800, which he uses for the family holiday. After allowing for the additional tax in the super fund on the concessional contribution of $2,850 (i.e. 15% of $19,000), Joe has increased his net savings by $3,150 and also has an additional $800 spending money for the holiday!

Super contributions over 65

Turning 65 years of age is a life milestone, but unfortunately, it does make putting money into your super a bit more difficult.

If you are over 65 you will need to pass the “work test” to continue making contributions – this means you will need to have worked a minimum of 40 hours in any 30-consecutive day period during the financial year.

Also, just like salary sacrifice superannuation contributions, Centrelink adds back any personal concessional contributions claimed when assessing entitlements that are subject to the “income test”.

Note that this age limit is proposed to increased to 67 from 01/07/2020.

Making extra contributions to your super

If you would like to make extra contributions to your superannuation, you can do it using either ‘before-tax’ or ‘after-tax’ money, keeping in mind that there are annual limits (caps) on how much you can contribute to superannuation.

Consider your financial situation and decide whether making extra super contributions is right for you across the short and long term.

Bob Locke – Chartered Accountant & SMSF Specialist

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

Death benefit types affect minimum payments for pensions

Dec 17,2019 Comments Off

When an SMSF member passes away midway through a financial year, the minimum pension payments for that year may not need to be met for the deceased person’s pension, depending on how they have nominated it to be paid out to their beneficiaries, according to Accurium.

Speaking in a recent webinar, Accurium general manager Doug McBirnie said that following the passing of an SMSF member, it was still possible to claim exempt current pension income on the deceased member’s pension for the financial year in which they had passed away despite the fact that the minimum payments may not have been met before they died.

“If it’s non-reversionary, there is no requirement to make a pension payment in that year — the ATO is happy that the ECPI can continue until the death benefits are paid out, as long as they are paid out as soon as practicable,” Mr McBirnie said.

“If the pension is reversionary, the spouse will take the pension, and in that case, if they have withdrawn the minimum pension during the year they can still claim ECPI.”

Accurium technical services manager Melanie Dunn said it was important to note that if the deceased member had opted for their pension to be reversionary on death, the minimum payments still needed to be met for the financial year in which they had passed away.

“The ability to not pay the pension payment is only where the pension is not automatically reversionary,” she said.

“Where it is reversionary, you must pay a minimum payment in the year, and if the client has not made the minimum payment, the income stream would not have met the minimum standards.”

However, Ms Dunn said the death of the member would not affect the amount that needed to be paid out of the pension during the year of the member’s passing.

“It’s based on the same minimum pension payment calculated back at 1 July — it doesn’t need to be pro-rated or anything like that, it’s the same minimum payment calculated on the income stream at the beginning of the year,” she said.

Source: SMSF Adviser

ATO flags Christmas shutdown for SMSF functions

Dec 17,2019 Comments Off

The ATO has advised SMSF professionals that its systems will be unavailable during the period between Christmas and New Year due to planned upgrades.

In a communication on its website, the regulator said that from midday Australian eastern daylight time on 24 December, its systems would progressively become unavailable as it prepared for “major systems upgrades”.

“You should consider what reporting or activities you can lodge with us before the outage period starts,” the ATO said.

“We expect services to be restored from 6.00am AEDT on 2 January 2020.”

Between these dates, it would not be possible to notify the ATO of any changes of SMSF details or check the registration details of an SMSF, the regulator said.

“The electronic superannuation audit tool used to lodge an auditor/actuary contravention report will also be unavailable during this period,” the ATO said.

The announcement follows previous reporting by SMSF Adviser sister title Accountants Daily that noted the ATO was set to undertake its Activity Statement Financial Processing project during the annual Christmas/New Year closure period.

The major system upgrade would see more than 17 million activity statements and franking deficit tax accounts move into the accounting system currently used for income tax.

As such, the ATO advised that all Standard Business Reporting, including the practitioner lodgement service, and ATO online services, including Online Services for Agents, would be unavailable from 24 December to 2 January.

Commenting on the shutdown, ATO assistant commissioner Colin Walker said it would be a good opportunity for practitioners to take a well-deserved break.

Source: SMSF Adviser

Christmas Trading Hours

Dec 16,2019 Comments Off

Merry Christmas from the team at Practical Systems Super

We wish you and your family a joyous and safe Christmas.
Thank you for your wonderful support throughout the year, we look forward to working with you in 2020!

We will be closed from 5:30 pm, Monday 23rd December and reopen at 8:30 am on Thursday 2nd January.

If you have any questions regarding our services, please contact our office via email [email protected] or call the office on 1800 951 855.

Understanding SMSF Trustees

Dec 12,2019 Comments Off

A Self-Managed Superannuation Fund (SMSF) is a type of “trust” and like any trust must be run by trustee/s. However, before setting up it is important to understand the SMSF trustee structure and rules.

Who is a Trustee?

An SMSF trustee is responsible for running the fund and making decisions that affect the retirement interests of each fund member. The Trustees are responsible for administering the SMSF duties including:

Establishing the Investment Strategy
Complying with all Super Laws
Maintaining all records of the SMSF
Lodging Tax and Regulatory Returns

Trustee Options

There are two SMSF trustee structure options available, one where the trustees work in their individual capacity and the second where a company is appointed as the trustee. Each option is detailed below.

In both cases, the members run the fund and as a general rule, all members are either trustees themselves or directors of the corporate trustee.

Individuals as trustees: In this case, trustees who are individual people (as the name suggests) manage the fund and each trustee is a member. It is important to note that where an SMSF has individual Trustees, it is a legislative requirement to have a minimum of two Individual Trustees. In the case of a sole member fund, the member would need to appoint an additional person to act with them as joint trustees.
A company as corporate trustee: In this option, if you have an existing established company you can nominate this Company to be the Trustee of the SMSF. If not, you can establish a company for a “special purpose”, where the sole purpose of the company is to act as Trustee for an SMSF.

Generally, all of the members will need to be directors of the trustee company. In the case of a sole member fund, that member can be the sole director of the trustee company

Trustee Rules & Exceptions

SMSF trustee rules state that:

Trustees (or trustee directors) cannot generally be in an employee/employer relationship (unless they are related).
Trustees cannot be paid by the fund for carrying out their trustee duties. However, they could be paid for professional services supplied such as bookkeeping, legal or taxation services.
Trustees need to be Australian residents as the place of central management and control of an SMSF must always be in Australia.
All trustees must sign a declaration acknowledging their roles and responsibilities.
People acting as trustees must not be “disqualified persons” – for example, those who have been convicted of an offence involving dishonesty or who are undischarged bankrupts.

In an SMSF, all members of the fund must be trustees and all trustees must be members. However, some exceptions to this rule are:

Where a member is under 18 years of age – they will require a representative to act as a trustee on their behalf
Where a member loses capacity – they will also require a representative to act for them
In the case of a single member fund – where the trustee is not a company, they will require an additional person to act with them as trustees

Individual or Corporate Trustee: making the right choice

Statistics from the ATO indicate that as of 30 June 2017, the majority (58.6%) of all SMSFs had a corporate trustee.

The current “best practice” recommendation from most professionals in the industry is to use a trustee company and it is evident that more than 80% of newly established funds have a corporate trustee. The reasons for this are varied but include:

Sole member funds. Single-member funds with a corporate trustee can have a sole director and no additional trustees are required. As the sole Director and Shareholder of the Company, this gives one total control of the SMSF.
Administration simplicity. Members can move in and out of a fund through death, marriage, divorce, etc. Where this occurs when the trustees are individuals, the fund will be required to change all of the ownership details of its assets and investments and this can be a daunting and time-consuming task.
On the other hand, changing the directors of a trustee company is very simple and no other changes are required to assets or investments
Continuity when members change. Unlike other types of trusts which have a limited life (80 years) due to the “rule against perpetuities”, a superannuation fund is exempt from this and can last for multiple generations. A company lasts until it is wound up or deregistered.
Concessional tax guarantee. The rules for SMSFs provide that where the fund has individual trustees, its sole or primary purpose must be to pay old-age pensions. Where funds have both member pension accounts and accumulation accounts this could be brought into question.
This may become more significant with the latest round of changes to superannuation law which limit the total amounts that can be held in pension accounts and may result in some cases where accumulation accounts are held long term. Having a company as a trustee will avoid these uncertainties.
Asset protection. In the case of a fund being sued, individual trustees could potentially be liable but this would not normally be the case for directors of a trustee company.
Borrowing. It is easier for an SMSF with a corporate trustee to borrow (via a limited recourse borrowing arrangement), as often lenders will insist that an SMSF has a corporate trustee.
Reduced penalties. In the event that any super laws are breached, the ATO levies administrative penalties on each trustee per violation. If the fund has a corporate trustee and the trustee is charged a penalty, it is only charged one penalty amount and the directors of the corporate trustee are jointly liable to pay that penalty.

However, where a fund has individual trustees a penalty would be imposed on each individual trustee. For example, if the fund has four members the penalty is four times that of the penalty imposed on a corporate trustee for the same superannuation law infringement.

It is also generally recommended that the trustee of an SMSF should be a “special purpose superannuation trustee company”. This means that the company only acts in that single capacity and does not operate a business or act as trustee of another trust (these conditions are set out in the company’s constitution). The advantages of this approach include that there is no possible confusion over the separation/ownership of superannuation fund assets and the annual ASIC filing fees are only around 20% of the usual fee.

The additional one-off set up costs for a company trustee will generally be less than $1,000 (with annual filing fees of less than $50) but this represents good value in light of the advantages outlined above.

Make the most of your super with a personal deductible contribution

Dec 12,2019 Comments Off

Would you like more flexibility with your superannuation but don’t have the option to salary sacrifice? You can now claim a tax deduction on your personal contributions. SMSF expert Bob Locke explains.

How much can you contribute?
Under the current rules, the maximum amount of “concessional” superannuation contributions that can be claimed as a tax deduction is $25,000.00 per person per annum. This is referred to as the “Concessional Contributions Cap”. This amount includes any super contributions paid by your employer; salary sacrifice contributions plus any other tax-deductible personal contributions you make to your super account.

Salary sacrifice vs Personal Contributions
Until 30 June 2017, only the self-employed, retirees or those who earned less than 10% of their income as an employee, could claim a tax deduction on a personal contribution.

This restriction meant that many employed individuals could not make deductible personal contributions to reduce their taxable incomes. The only way to maximize their total concessional contributions cap was to make arrangements with their employer for a salary sacrifice arrangement where they would reduce their gross salary in favour of the employer making a larger contribution (above the normal 9.5% of salary) to the employee’s super fund.

Now there’s an opportunity to give your super investment a boost and reduce your tax bill at the same time. With the changes effective from 1 July 2017, employees can make additional personal contributions and claim a tax deduction for the additional contributions, thus putting them on the same footing as self-employed people.

But how is that different from a salary sacrifice arrangement you may ask. Though salary sacrifice arrangements provide the same benefits one may not always be able to make such arrangements with their employer.

Compared to regular salary sacrifice contributions which can only be made prospectively a personal deductible contribution means you can make one lump sum contribution towards the end of the financial year. The additional flexibility of this system may be helpful in several different scenarios.

Take Mary’s case for instance. Mary works as a specialist teacher earning $110,000 annually. She has had an investment property for many years that she decides to sell in preparation for her impending planned retirement. On speaking to her accountant Mary finds out that based on the estimated sale price, there will be a taxable capital gain of $100,000 on the sale of the property which will cost her almost $45,000 in additional tax. She decides to make an additional contribution to superannuation of $14,500 and as a result, reduces her tax bill by around $7,000. Although Mary’s super fund will have to pay tax of $2,175 (15% of 14,500) on the additional contribution, she is still almost $5,000 better off.

Or take the case of Joe who is employed as a builder and earns $60,000 pa. In May, Joe receives a bequest of $25,000 from the estate of a recently deceased relative. He would like to retain around $6,000 of the money to take the family on a holiday trip and save the balance of $19,000. After talking to his financial adviser, Joe decides to contribute the full $25,000 to his existing superannuation fund; $19,000 is claimed as a concessional contribution and $6,000 as a non-concessional contribution.

As a result of claiming the additional contribution, Joe receives an additional tax refund of $6,800, which he uses for the family holiday. After allowing for the additional tax in the super fund on the concessional contribution of $2,850 (i.e. 15% of $19,000), Joe has increased his net savings by $3,150 and also has an additional $800 spending money for the holiday!

Super contributions over 65

Turning 65 years of age is a life milestone, but unfortunately, it does make putting money into your super a bit more difficult.

If you are over 65 you will need to pass the “work test” to continue making contributions – this means you will need to have worked a minimum of 40 hours in any 30-consecutive day period during the financial year.

Also, just like salary sacrifice superannuation contributions, Centrelink adds back any personal concessional contributions claimed when assessing entitlements that are subject to the “income test”.

Note that this age limit it propsed to increased to 67 from 01/07/2020.

Making extra contributions to your super

If you would like to make extra contributions to your superannuation, you can do it using either
‘before-tax’ or ‘after-tax’ money, keeping in mind that there are annual limits (caps) on how much
you can contribute to superannuation.

Consider your financial situation and decide whether making extra super contributions is right for you across the short and long term.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST
Mr Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.
To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

Estate planning health check

Dec 11,2019 Comments Off

With end of financial year compliance now wrapped up, many practitioners are turning their attention to estate planning concerns. Cooper Grace Ward Lawyers partner Scott Hay-Bartlem flags some of the key aspects that should be reviewed.

What needs to be reviewed with trust deeds?

It’s a good time for everyone to look at documents like trust deeds for SMSFs. Lots of trust deeds still have issues with things like binding death benefit nominations and reversionary pensions and don’t deal with them well, particularly if they’re older ones. One of the issues I’m really seeing at the moment is that there’s a problem with an old change of trustee or an old variation hasn’t been done properly, and that can call into doubt later decisions. Certainly, things like pensions and binding death benefit nominations, and other death benefit planning can go awry because we don’t have an early document done properly. There was a case last year called Perry v Nicholson where an old change of trustee nearly derailed the estate planning, so it’s important to make sure you’ve got all your documents lined up from the past.

Following the introduction of the transfer balance cap and other super reforms, what are some of the estate planning strategies that need to be reviewed?

Everyone with money in super certainly should be reviewing their estate planning following the budget reforms for a couple of reasons.

Firstly, it’s always good to make sure that what you’ve done is what you remember you did, and it’s still current and effective because things change all the time. Also, with the new limits and transfer balance cap, the option that we used to have of just continuing the pension to the surviving spouse may no longer be there, and that means you may need to look at some alternatives to get the best estate planning results for the client.

We’ve certainly seen files from three years ago, where there was an estate plan set up with a great result, but because of the new limitations on how much we can have in pension phase, we’re not going to get that result we had anymore, and we need to do something differently and tweak the plan to continue getting the best result. With some clients, when we look at the old estate plan, we decide that we’ll have to do it differently, but what we set up initially is still going to work for us. With other clients, it’s clear that one of the other options is going to achieve a better result now, because we can’t do what we used to do.

Strategies such as binding nominations or reversionary pensions, for example, that force all the super to the spouse may not be the best answer or doable. Some clients will have to have a large amount of money leave the superannuation system when one of them dies. For example, some of the old estate planning that was done sent all of the money to the spouse, because you could with a pension. Now, it has to leave the super system as a lump sum. So, we’re now asking questions around whether it’s better to put that into the estate and have it go into a testamentary trust in order to create almost like a life interest for the spouse, so that it must go to the kids once the spouse has died. Rather than having $1 million come out of the super system and end up in the name of the surviving spouse, we have it go through the will and into a testamentary trust. That can provide some tax benefits to the adult children and their minor grandchildren. It may also give protection from a lawsuit that the spouse might be subject to, because they have professional or business risk. It might also provide protection if the spouse re-partners. So, for some people, having that as an alternative can be a better option than having it come out of the super system and end up with the spouse. If you’ve got a binding nomination to the spouse or reversionary pension that forces it all to the spouse, then we’re going lose that kind of option.

For some clients, we’re skipping the spouse altogether, and we’re planning to send the lump sum amount to the adult children or the young children. May not be as tax effective initially, but where the surviving spouse has enough money or the client is concerned about them repartnering or business risk issues, that can be an effective alternative to just forcing the super to go to the surviving spouse.

We’ve done a few reviews of clients from 2011 and 2012, back when the ATO came out with the tax ruling that said a pension stopped when you died, and, therefore, you lost the tax exemption for the income from the assets that were supporting the pension unless you forced it to continue to the surviving spouse. So, we’ve got a whole lot of estate planning from that era where, again, it forces it to the surviving spouse as a pension. That’s not always going to work anymore, and those strategies are ones that really need to be reviewed to make sure it’s still going to work for us. If the client is happy for their spouse to have the money and the choice, then they may not need a binding death benefit nomination anymore. They may want to give their spouse the flexibility of choosing an estate with a testamentary trust, or paying it to the kids or themselves, if they want to. They may not want the pension to revert to the surviving spouse because of the limits on the amount that they can take as a pension, and there’s going to be amounts coming out as lump sums.

The other side of it too is that in many cases, the structure of an SMSF will have changed. Those who once just had a pension interest now have a pension and a lump sum interest. So, they might have been relying on a reversion to pass all their super through to the spouse, but they’ve now got an accumulation interest as well, so they will need to do a binding death benefit nomination for that. Therefore, we need to look at whether the current arrangements, whether that’s binding nomination or a reversionary pension, are still appropriate and support the estate planning outcome. It might be the super fund itself has changed, and what we used to do is not going to get us the result anymore.

Is there anything else that should be reviewed on the estate planning front?

We’re still seeing lots of files where someone comes to us after a death with what they think is a reversionary pension or a binding death benefit nomination, and for a variety of reasons, they’re not. It’s a good time to do a health check. Look at all the documents and deeds, and make sure they still get the client the result.

I see lots of people with the old pensions, because often it’s hard to find pension documents from 1996 that are now well over 20 years old – so it’s a good time to make sure you know where those documents are, because, eventually, you’ll need to see these pension documents.

These days, with technology, we scan everything in, but back in the mid-90s, we didn’t do that, so putting hands on documents that are 20 years old can be a challenge. If we’re trying to establish that the pension automatically continues because it’s reversionary, we’re going need to see the pension documents, so if no one can find the pension documents, we can’t establish there’s a reversion, or it’s very hard to establish that there’s a proper reversion in place.

I also still haven’t seen many people embracing child pensions. I think with transfer balance caps, limiting the amount that can often go to a surviving spouse, it’s important to remember that there can be benefits in paying benefits to children as pensions. A child pension has to finish effectively at age 25, but if you’re looking at children under age 18 or even 25, or disabled children, they can be a good strategy for those categories. It’s not going to work for everyone, but you should be conscious that it’s there as an option.

Source: SMSF Adviser

Australians not prepared for ‘largest’ transfer in history

Dec 9,2019 Comments Off

Despite being the largest transfer of intergenerational wealth, the vast majority of Australians are not prepared, according to new figures.

Perpetual has revealed that 76 per cent of Australians do not have a current will, while 53 per cent of parents have not discussed their will and legacy with their children.

Perpetual Private’s Andrew Baker, general manager of private clients, believes the majority of parents wish their children would use their inheritance wisely and build for the future, but research shows the opposite is happening.

He conceded, however, that the rising costs of living, slow wage growth and a volatile property market is painting a different picture of wealth today than it was 30 years ago.

“It is estimated that 70 per cent of families will lose their wealth by the second generation and 90 per cent will lose it by the third,” said Mr Baker.

To offset risks of families losing their wealth, Mr Baker advocates for discussions around wills and inheritance be broken down so all parties can be prepared and have a plan in place.

“As humans, we tend to shy away from discussing money amongst our families and friends.”

“However, as we approach the largest intergenerational wealth transfer in history with more than half of Australians expecting to inherit, why have only just over a third discussed their wishes with their children?” Mr Baker said.

The wealth manager believes normalising discussions around money and the future can preserve wealth across generations.

Source: SMSF Adviser

Tax Institute calls for delay to enforcement of NALE rules

Dec 5,2019 Comments Off

The Tax Institute has called for enforcement of changes to non-arm’s length expense (NALE) rules to be delayed until 1 July 2020, suggesting the ATO’s interpretation of the laws should be referred to its General Anti-Avoidance Rules (GAAR) panel as the powers handed to the regulator are too broad.

In a submission to the ATO this week in response to its Draft Law Companion Ruling 2019/D3, which outlines the ATO’s interpretation of the NALE laws, The Tax Institute suggested compliance guidelines released with the ruling, which indicated resources would not be allocated to policing the general expense provisions until the 2021 financial year, should be extended to all SMSFs caught by the changes.

“The PCG should apply across the board to any taxpayers where the ATO seeks to apply the new NALI/NALE provisions for any of the FY2019 and FY2020 periods,” the institute said.

“The Tax Institute rejects the ATO’s position that the PCG be limited so as to apply only in the instance where a general expense taints all the fund’s income.

“We recommend that given the delay in introducing the NALE reforms, the ruling in relation to the NALE measures only take effect from 1 July 2020.”

The institute warned that the ATO’s ruling had “serious ramifications” for many SMSF trustees because of the degree to which “substantial adverse tax implications” could result from small matters, such as an accountant assisting with their own fund’s tax returns, and as such should be reviewed to the GAAR panel before it was applied to any taxpayer.

Tax Institute Superannuation Committee member and DBA Lawyers director Dan Butler said the ruling as it currently stood gave the ATO “very broad power” and could result in affected clients being caught up in costly long-term legal battles to fight excessive assessments from the ATO.

“In some circumstances, it takes years of information gathering and correspondence with the ATO to work through these matters, and it inflicts great costs on the taxpayer to prove that the NALI assessment is excessive,” Mr Butler told SMSF Adviser.

“We don’t like that the legislation has provided the ATO a lot of discretion. There is not much protection for a taxpayer, and to get the system right, there should at least be independent representation given to the ATO’s GAAR panel which then decides whether to pursue a NALI assessment, because of the costs and the consequences that follow.”

Clarification needed around who will be caught

The Tax Institute also suggested in its submission that the ATO provide more specific clarification around which trustees would be caught by the rules, by applying a “de minimis” principle and providing guidance around which activities constituted trustee and non-trustee services.

Mr Butler said the industry would benefit from guidelines about what constituted a “material” expense, which could also reduce the administrative workload required from the ATO to police the laws.

“Why are we talking about expenses at $100? The administrative side of it is too great,” he said.

“We need a guideline from the ATO to say we won’t go looking for bits and pieces, it’s material items. Let’s say an administration service may be $2,000 a year — I would consider that immaterial, so perhaps it should be above $20,000. You need a benchmark where people can say we’re above the limbo bar.”

Equally, while the ruling mentioned the distinction between services performed in a trustee capacity or an individual capacity as a key factor in whether an expense would be considered non-arm’s length, Mr Butler said there needed to be clearer guidance as to what these services were.

“In the ATO’s 2013 NTLG super committee minutes, the example they gave of when something becomes a non-trustee service was a builder, because it’s someone who’s got specific skills and they are adding a lot of material value to the fund,” he said.

“The ATO may say as an adviser you have investment skills, but because the adviser is a trustee and under trust law they have to do the best for the fund, it’s hard to start splitting hairs about what is their role as a trustee and what is their role as a planner.”

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Archive December 23, 2019

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