Opinion Archives - Practical Systems Super

Deciding who gets your super after you die? Follow these three steps.

Oct 18,2022 Comments Off

The High Court has spoken. In its decision in Hill v Zuda Pty Ltd, it has given self-managed super fund trustees much-needed clarity around a binding death benefit nomination (BDBN). The debate over how long a BDBN can last has been put to bed – it is indefinite.

The Court’s ruling also gave trustees – and their advisers – greater clarity around reversionary pensions and established that a BDBN can override pension documentation. For trustees, this good news comes with one overriding message – the trust deed is paramount, and they need to ensure it is always up-to-date.

But before going into detail, a quick backgrounder on the High Court case is necessary. [Incidentally, legal minds were puzzled it took on this case considering previous state court decisions were in unanimity on this issue.] A married couple with an SMSF inserted a BDBN in their trust deed in December 2011 to the effect that when one died, the trustee (Zuda Pty Ltd) was to distribute the whole of the deceased member’s balance in the SMSF to the surviving member.

When the husband died in 2016, his biological child (Ms Hill) from another relationship challenged the BDBN on the basis that a notice binding a trustee on how to pay superannuation death benefits expires after three years, arguing that Regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 applies to SMSFs. [This regulation stipulates how a super fund member can direct their fund trustee to handle their death benefit. It also says that a BDBN will expire three years after the day it was first signed.]

The High Court begged to differ with Hill, stating this regulation did not apply to an SMSF and dismissed the appeal.

The consequences flow far beyond abolishing the three-year time limit. It means a BDBN can make a pension reversionary mid-stream. It also means a BDBN can override pension documentation, and that has definite benefits for trustees.

Both pension issues have been a source of conflict for the industry for some time.

The ability to add or remove a reversionary beneficiary can often require a pension to be stopped and restarted. This involves some administration and cost and can also trigger unintended consequences. Issues have also arisen where the pension documents have instructions to be reversionary, yet a new BDBN says the benefits are to go to someone else.

This court decision provides clarity that a BDBN can be everlasting and that they can be the ultimate estate planning document, trumping instructions in the pension documents. This provides certainty and clarity on how a member’s benefits are to be dealt on their death. More importantly, the Hill v Zuda case highlights the importance of what your SMSF trust deed says. It is the ultimate law, setting out the rules on what the fund can and cannot do.

Although the court’s ruling has established the primacy of the BDBN, it does not give trustees carte blanche to do what they like with their superannuation death benefits, with the legislation still requiring these benefits to be paid in a prescribed way. In essence, this means it can be paid to your spouse or de facto spouse, any child of the deceased or a person who is dependent on the deceased at the time of their death (interdependency is defined as having a close personal relationship, living together, financial support and/or providing personal care).

For those who want to step outside this legislative stricture and leave their death benefits to someone else, there is an option. They can make their legal representative (executor) their beneficiary, allowing the super proceeds to be distributed according to their wishes via their will. You will need a valid BDBN in place to direct your super into your estate and your will needs to then direct what is to happen to your superannuation benefits. The person’s will alone will not be enough for this to work.

Do look before you leap. Directing your super in this way will mean that your superannuation will be caught up if there are any estate disputes.

Whatever decisions SMSF members decide to take regarding their death benefits, there are some important guidelines to follow:

First, have your trust deed reviewed and, if required, updated. As the court ruling determined, the deed is all important.
Second, ensure there is no conflict between a BDBN and pension reversion documentation. If there is, use a BDBN as the vehicle for dictating your wishes about your death benefits.
Third, always ensure your documentation is up to date, and be prepared to make changes as personal circumstances change. When in doubt, seek professional legal advice. Remember, it’s too late after you have shuffled off this mortal coil.

Opinion piece written by John Maroney, CEO, SMSF Association.

Hottest new super strategies to help your kids and spouse

Aug 23,2022 Comments Off

Recontribution tactics made possible by rule changes are a game changer for older Australians and their families.

The 2021 federal budget introduced sweeping changes to superannuation, most of which have become law. Two changes – removing the work test requirement for non-concessional super contributions for people between 67 and 75 and extending the eligibility for individuals under 75 to make non-concessional contributions using the bring-forward rules – are rewriting the rule book for recontribution strategies relating to estate planning and spouse equalisation.

First, the changes. Under the old rules, the bring-forward arrangements were available only to individuals aged 67 or less. That has been extended to those aged 74 or less on July 1 of a financial year. But no other eligibility requirements to access the bring-forward arrangements have changed.

It means individuals must have a total superannuation balance at the previous June 30 of less than $1.48 million to be eligible for a three-year bring-forward period and can contribute up to $330,000 of non-concessional contributions. Those with balances between $1.48 million and $1.59 million are eligible for a two-year bring-forward period and can contribute up to $220,000 of non-concessional contributions. Individuals with balances between $1.59 million and $1.7 million cannot use the bring-forward rule but can still contribute up to $110,000.

Regarding changes to the work test requirement, it means those aged 67-74 no longer need to meet a work test to be able to contribute to super. Also, there continues to be no work test requirement to receive Super Guarantee or award contributions.

But there is a small catch. For individuals wanting to claim a tax deduction for their personal super contributions, there is no change to the work test definition. This means individuals must work at least 40 hours in 30 consecutive days in the financial year the contribution is made to be able to claim a tax deduction for their personal contribution.

So why are these two changes having such an impact? In simple terms, a recontribution strategy involves a member withdrawing a tax-free amount from their super account, and then recontributing it to their super account as a non-concessional contribution. It typically involves withdrawing an amount from super that comprises a taxable component, or a proportionate amount of taxable and tax-free amount, and then recontributing it as a non-concessional contribution. The result is the taxable component is converted to a tax-free component.

With the work test no longer being a barrier for individuals aged 67-75 making a non-concessional contribution, it means many can use this strategy.

Helping adult kids

Although the taxable and tax-free status of your super benefit may not matter much if you are over 60 (as a lump sum or super pension paid to you after 60 is typically tax-free), it does matter on your death. That’s because super death benefits that are paid to a non-tax dependant (such as an adult, non-financially dependent child), are subject to tax, with tax being deducted from the taxable component of your benefit.

As a recontribution strategy reduces the proportion of your benefit that is classified as a taxable component and increases the proportion that is classified as a tax-free component, it has the effect of reducing the tax that may otherwise be payable when the benefit is paid to a non-tax dependant.

Helping your spouse

Recontribution strategies can also be used to even up balances between spouses. This can be particularly useful if one spouse is getting close to the transfer balance cap and the other spouse is well under their cap. Removing funds from one and adding them to the other can maximise the combined amount that can be transferred to the pension phase when the couple retires.

However, it’s important to note recontribution strategies are subject to the same contribution caps and total superannuation balance limits that normally apply to non-concessional contributions.

It’s also important to be aware of the 75 age limit and whether the recontribution strategy involves the full commutation of an existing pension. If the latter is the case, you will also need to receive at least a pro rata pension payment before the commutation and, if you are receiving the age pension, before implementing the strategy you must consider what impact, if any, it could have on your age pension entitlements.

For SMSF members, if the withdrawal is likely to require the sale of one of more fund assets, it is also important to consider and factor in any potential CGT and other transaction costs such as brokerage and conveyancing costs.

A recontribution strategy can be a powerful estate planning and spouse equalisation strategy, but there can be many traps for the unwary. Seeking professional advice could be the smart option.

Opinion piece written by John Maroney, CEO, SMSF Association.

What the new super rules mean for those aged 67-75

May 26,2022 Comments Off

For self-managed super fund trustees, July 1 will usher in a new era. For the first time, individuals aged between 67 and 75 will no longer need to satisfy a work test to make voluntary super contributions.

Part of a package of superannuation reforms introduced in the federal budget last year and legislated in February, this is designed to give older Australians greater flexibility to top up their superannuation.

This reform acknowledges that many people retiring today have been receiving compulsory superannuation only since 1992. This initiative will allow them to continue making voluntary contributions long after they have retired.

So, what does this mean in practical terms? First, the definition of a “voluntary contribution” is not limited to salary-sacrifice. It can also include small business capital gains tax (CGT) contributions and personal injury contributions, with the former particularly relevant to business owners.

Second, this change has implications for contribution caps. In all the fuss about removing the work test, it is important to remember not to exceed the contribution caps. Otherwise, you may be liable for additional tax on the excess contributions.

These caps continue to apply regardless of your age or employment status. It is also worth noting that if your total superannuation balance is greater than or equal to $1.7 million at June 30, 2022, your non-concessional contributions cap for 2022-23 is zero. That means that if you make any non-concessional contributions in 2022-23, they will be treated as excess non-concessional contributions.

Two options available

If you made excess non-concessional contributions, the ATO will send you a determination explaining that you can either elect to withdraw the excess portion and pay tax on the deemed earnings associated with the excess at your marginal tax rate, including the Medicare levy (option one), or you can retain the excess amount in your fund and pay 47 per cent tax on the entire excess amount (option two) – hardly an enticing option.

Option one is the default if you receive a determination and don’t choose within 60 days because this option attracts the least amount of tax.

Third, it is important to note that contrary to popular belief, the work test has not been completely removed from the legislation. From July 1, individuals between the ages of 67 and 75 will still need to satisfy the work test to be able to claim a member contribution as a tax deduction.

To pass the work test, the member must have been gainfully employed for at least 40 hours over 30 consecutive days in the financial year in which the contribution is made. There is no requirement for the work test to be met before the contribution is made. This means the work test can be met in the same financial year, but after the contribution is made.

Removing the need, regardless of your age or employment status, to satisfy the work test when making voluntary superannuation contributions is arguably the most important superannuation reform from the 2021 federal budget. But there were other changes that also take effect on July 1 that trustees need to be cognisant of and may need to get advice on. Downsizing is probably the most relevant.

The law has been amended to reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60. This change, combined with the proposals regarding the removal of the work test and ability to use the bring-forward rule later in life, will broaden the ability of SMSFs to contribute proceeds to superannuation.

It improves the flexibility for Australians to contribute to their superannuation savings and may encourage people to downsize sooner and increase the supply of family homes.

Remember, too, a downsizer contribution – it’s a one-off, applying only to the family home – does not count towards any of the contribution caps, meaning it can be made even if a person has a total superannuation balance exceeding $1.7 million or if they don’t meet the work test requirements.

In addition, a partner, provided they are 60 or older, can also make downsizer contributions to their own super of up to $300,000 from the sale proceeds even if they are not an owner of the property.

Written by John Maroney, CEO, SMSF Association
First published in the Financial Review on18 May, 2022.

Why poor SMSF planning will leave less for your heirs

May 11,2022 Comments Off

A well-considered estate plan will make life easier for any beneficiaries – the invaluable parting gift.

For self-managed super funds, now numbering around 600,000 and with assets approaching $900 billion, estate planning has never been more important. This is especially the case when the Productivity Commission estimate of a $3.5 trillion wealth transfer over the next 20 years is added to the mix. A sizeable percentage of this $3.5 trillion will reside in SMSFs.

Yet there is often confusion around this important aspect of SMSF planning, especially among trustees who don’t seek specialist advice in what can be a complex issue.

For those who don’t plan properly, the consequences can be disastrous – both for the intended beneficiaries and even the value of the inheritance. The instances where the lack of clear directions have resulted in bitter and costly disputes are well documented.

The result can be lengthy delays in settling an estate, divided families and the potential for higher taxes reducing the size of the inheritance.

The payment of a death benefit from an SMSF is a good example. The benefit needs to be paid as soon as practically possible but to whom? Under super law, a beneficiary includes a spouse (same sex, husband/wife or de facto), children of any age (including ex-nuptial, adopted or step) and any person with whom the person has an interdependency relationship.

The member may have made a death benefit nomination asking the SMSF trustees to pay the benefit to the nominated beneficiaries. Subject to the fund’s trust deed, a death benefit nomination can be either binding or non-binding on the trustees. Regardless of what type of nomination it is, the SMSF trustees must still ensure the nominated beneficiaries are entitled to receive the death benefit under the trust deed and super law.

It is possible for members to nominate that their death benefit be paid to their estate. The SMSF trustee may also choose to pay a member’s death benefit to the estate if the deceased member did not nominate a beneficiary. If the benefit is paid to the deceased member’s estate, the executor of the estate will then distribute the benefit according to the instructions in their will.

Payable as a pension

Then there is the issue of how they are paid. It can be paid as either a lump sum or as a retirement income stream – unless the beneficiary is an adult child of the deceased, in which case the benefit can only be paid as a lump sum. But if the child of the deceased is under 18 or is 18 or over but under 25 and financially dependent on the deceased or is disabled, it can still be paid as a pension.

When a death benefit is paid as a pension, it cannot be paid to an estate. Then there is the issue of reversionary or non-reversionary pensions. With the latter, it ceases being paid on the member’s death, so any remaining pension balance in the deceased’s super account will need to be paid as either a lump sum death benefit and/or as a new pension to the deceased’s dependants (subject to the rules explained earlier).

A reversionary pension, however, enables a dependant (generally a spouse or a child in the circumstances explained earlier) to be nominated to automatically receive the deceased’s super pension. A reversionary nomination makes it clear to the trustee of your super fund who you want to continue receiving your super pension on your death.

Be aware of tax benefits

There is no doubt that a reversionary pension comes with advantages, including giving the member certainty about who will receive their super benefit on their death. It is also a relatively seamless and easy way to transfer your benefit to your dependants and the assets remain in the super system to continue enjoying preferable tax treatment. But there can be a downside such as having a negative impact on social security benefits, and it eventually (12 months after your death) counts towards the transfer balance cap of the recipient of the reversionary pension.

There is also the issue of whether it is better for the death benefit to be paid directly to the beneficiary or the deceased’s estate. If paid directly, it is typically less complicated and a quicker process as there is no need to wait for probate or a letter of administration.

It also has the benefit of not exposing benefits to creditors of the deceased or notable estate claims, and there can be clear direction if there is more than one beneficiary.

Paying the benefit to the estate means there may be tax benefits as the Medicare levy does not apply and, as the benefit has been removed from the superannuation system, there are no knock-on transfer balance cap issues for the recipient of the benefit. If structured correctly, there may also be asset protection and capital preservation benefits.

All this suggests estate planning requires careful thought long before the inevitable occurs, especially as the sums involved are increasing exponentially. The added bonus is that a well-considered estate plan will make life easier for any beneficiaries – the invaluable parting gift.

Written by John Maroney, CEO, SMSF Association.
First published in the Financial Review on 27th April, 2022

Protecting your SMSF assets

Mar 10,2022 Comments Off

It is essential that self-managed superannuation fund trustees make sure that all the accounts and investments are held in the right name. It sounds obvious, but simple oversights can prove costly.

Included in the compliance obligations that apply to SMSFs are eight core trustee covenants. These include a requirement that trustees keep the money and assets of the fund separate from any personal assets. They are also required to act in the best interests of the fund’s beneficiaries and to exercise care, skill and diligence when making investment decisions.

If a covenant is breached, the trustees are at risk of being sued. A beneficiary of the fund who suffers a loss because of the breach can take action to recover those losses. This might not seem to be an issue for couples in an SMSF. However, in the event of a divorce, or on the death of a member, things can change. The beneficiaries of a deceased member may become an aggrieved party if things go wrong.

As a rule, the assets in your SMSF are protected from your creditors. For that protection to work, SMSF trustees must ensure that the accounts and investments of the fund are held in the correct name.

Where the fund has individual trustees, purchase contracts and assets must be held in the name of all the individual trustees as trustees for the super fund. Similarly, where a company is used, the assets must be held in the name of the company as trustee for the super fund.

Any time there is a change of trustee, it is important to ensure all the fund’s bank accounts and investments are updated. For bank accounts, often a new account will be required.

Any time an asset is acquired by the SMSF, the documentation must note the change of ownership and record the change of name or title. This includes where a member makes an in-specie contribution. In-specie contributions are where a contribution is made to the fund by transferring personal investments rather than depositing cash. Use of this strategy is restricted to specific types of assets and includes listed shares and business real property.

Changing the asset title can be overlooked where the SMSF has individual trustees. One common misunderstanding is where an asset is held personally, and the individuals are also trustees of the SMSF, that no further action is required.

Trustees must ensure that the appropriate contracts and transfer documents are completed. These must clearly show the change in ownership to the SMSF. Where property is concerned, stamp duty may also apply.

In WA, land titles only record the name of the trustees. The SMSF’s name will not appear on the certificate of title with Landgate. It is therefore important that documents such as a declaration of trust and caveats are put in place to register and protect the SMSF’s interests.

It is important that appropriate legal advice is obtained to ensure that all the essential documents are put in place, stamped (if applicable) and registered.

A recent case in WA highlighted several key issues surrounding the separation of personal and SMSF assets. These included the importance of not mixing super fund monies with personal proceeds and getting the documentation and registered name for the investment right. The court noted that minutes alone are insufficient. Further, registering the SMSF’s tax file number with a share registry or changing an account “nickname” in an online banking facility does not change the ownership of those assets.