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Super' and Estate Planning

SUPERANNUATION  - Watch out !                                                                                                                  

 

ESTATE PLANNING, Wills AND SUPERANNUATION PROCEEDS …

 

Superannuation (“Super”) is often a person's second most valuable asset after their house. – clients are often surprised to find out that their Super is a "non estate asset" and (unless paid to their estate) can not be left in their Wills. What is required is for clients to 1) make an effective Superannuation Binding Death Benefits Nomination and 2) have provisions in their Wills that support their nominations.

 

Generally the trustee of a super fund decides who gets the Super’ and there are significant taxes to pay (up to the top marginal tax rate in Australia) if the Super’ goes to non- dependants. The Trustee of the Super Fund can override or ignore a nomination if it is not done properly.

 

If a client’s Will makes no mention of "Superannuation" then you know that the Will is old fashioned and not up to effective modern standards. A cheap “simple" Will is often a complete waste of a client’s money and can easily turn the client’s estate into a very expensive nightmare for the executors and beneficiaries.  

 

Estate Planning means putting in place Strategies to minimize tax exposure, maximize wealth and ensure a future orderly transfer (without disputes) and payment of monies/assets both before and after death to the  correct Beneficiaries (Recipients).

 

Key Points to bear in mind are as follows ;

  

           Applicable Taxation of Lump Sum Super Death Benefits General Principles:

n   Benefits paid to spouse or tax dependant on death of member are paid tax free

n   Benefits paid to non tax dependant are taxed at either 16.5% or 31.5% (proceeds of Insurance policies owned by Fund)

n   Benefits paid to LPR (Executor/Trustee) are taxed depending on ultimate recipient   status

       Consider:

n      What can be done to reduce or eliminate any super death benefit taxes?

n      What will be the best way to pay a benefit – pension or lump sum?

n      Can I protect any of my vulnerable/incapable/insolvent beneficiaries from losing/wasting a death benefit?

n      What does compulsory cashing of benefits in superannuation funds mean to me?

 

            Consider:

 

Pension or lump sum possibilities. What is best?

n There is No “one answer” – The “widow’s best friend” could be a disaster for an 18 year old drug addict !

n Pension/annuities (if available) are usually the better option for creating income stream

n Pension great for disabled dependants

n Access for trust capital for surviving parent

n Pension income paid directly to child once child is 18 years – capital to child by age 25 years

nNeed both options – tax and superannuation laws very much subject to change ! (so the provisions of any Will or Superannuation Deed need to provide maximum flexibility and numerous options for Trustees/Executors.)

 

n      What is the best way to pass control of my SMSF on death or incapacity?

 

n       

Ø      Using a Corporate Trustee may be best – perhaps established as a single director company

Ø      Avoid including others as members of the Fund ie children

Ø      Voting rights in proportion to benefits

Ø      Necessity for sophisticated Will and Power of Attorney addressing governance issues of SMSF

 

n   Clauses often omitted from SMSF/Super’ Trust Deed(s)

 

Ø      Binding Nomination provisions including indefinite (non lapsing) nominations.

Ø      Provision allowing/requiring LPR to act as Trustee on death or incapacity of member.

Ø      Provision allowing Trustee to treat pension as a reversionary pension on death of pensioner member.

Ø      In specie payment of benefits.

 

n    Clauses needed in Wills

 

Ø      Adjustment for unequal superannuation benefits (and any reserves), eg if only one child is a  tax dependant at fund member’s death.

Ø      Effective transfer of control of SMSF - Proper linking between Will and superannuation (and family trusts?).

Ø      Maintaining bankruptcy protection of life insurance and superannuation death benefits.

Ø      Streaming of taxable super to tax dependants.

Ø      Super Proceeds Trust

Ø      Testamentary Trusts.(Trusts which come into existence on death)

 

Should you or your clients require advice or discussion, leading to the putting into place of a Coherent Estate Plan incorporating the above ;please make contact with us for an appointment.

 

Alex Tees

Solicitor, Estate Planning Adviser.               http://www.trustdeedregister.com.au   and www.trustdeedregister.com

        

   Phone:  02 9016 7923/ 9281 3230/0409813622    After Hours (02) 9387 4836

Appointments (02) 02 9281 3230

Fax:  02 8088 7172

   Email admin@legalexchange.com.au     After Hrs Email atees@bigpond.com

  

 

 

 

 

 

Australia - Super ' Changes -Discussion

Australia - Estate Planning & Intergenerational Self Managed Super Funds, Circa November 2007

 

The  relatively recent Simpler Super reforms have focused attention on areas previously unchallenged or un-noticed.

The reforms have increased the focus on estate planning in the SMSF environment – particularly via a variant called the “Intergenerational SMSF” – designed to facilitate efficient investing and succession within a family across generations.

One issue that has received significant coverage is the potentially onerous tax treatment of benefits on death of the last survivor of the member and their spouse, leaving only mature age beneficiaries.

This article  examines the following issues:

· fundamental restrictions of any SMSF, such as number of members and who must be trustees

· two generations in a SMSF

· issues of control

· estate planning issues and opportunities

· “left over” children, because of membership restrictions

· pension and accumulation issues

· issues with Capital Gains Tax

· asset management and retention

· managing inheritances

· opportunities on death under the “anti detriment” provisions in section 295-485.

· The program includes Case Studies that illustrate key points.

 

Estate Planning & Intergenerational Self Managed Superannuation Funds

 

Introduction

The Simpler Super arrangements have (as promised) produced substantial simplification in the superannuation rules and arrangements post 1 July 2007. However, the simplification has focused attention on areas that had previously remained unchallenged or un-noticed.

One of these issues that has received significant coverage in the media and from industry participants is the treatment of benefits in the event of the last death of the member and their spouse, leaving only mature age beneficiaries. The issue of estate planning has become of greater interest, and provides some interesting discussion in the Self Managed Superannuation Fund (“SMSF”) environment. There are additional considerations in an Intergenerational Self Managed Superannuation Fund (“ISMSF”).

In this article, the following issues will be developed and discussed, together with some case studies to assist with the reader’s understanding.

· Definition of a Self Managed Superannuation Fund

· Two Generations in a SMSF

· Issues of Control

· Estate Planning

· “Left Over” Children

· Pension and Accumulation Issues

· Issues with Capital Gains Tax

· Asset Management and Retention

· Buying Power

· “Reverse Inheritances”

· “Advance Inheritances” (with Control)

· Section 295-485 Opportunities

Definition of a Self Managed Superannuation Fund

It is useful to revisit the definition of a SMSF, which is set out in Section 17A of the Superannuation Industry Supervision Act 1993, as follows:

(1)Subject to this section, a superannuation fund, other than a fund with only one member, is a self managed superannuation fund if and only if it satisfies the following conditions:

· it has fewer than 5 members;

· if the trustees of the fund are individuals—each individual trustee of the fund is a member of the fund;

· if the trustee of the fund is a body corporate—each director of the body corporate is a member of the fund;

· each member of the fund:

· is a trustee of the fund; or

· if the trustee of the fund is a body corporate—is a director of the body corporate;

· no member of the fund is an employee of another member of the fund, unless the members concerned are relatives;

· no trustee of the fund receives any remuneration from the fund or from any person for any duties or services performed by the trustee in relation to the fund;

· if the trustee of the fund is a body corporate—no director of the body corporate receives any remuneration from the fund or from any person (including the body corporate) for any duties or services performed by the director in relation to the fund.

Essentially, a SMSF has 1, 2, 3 or 4 members, which places tighter constraints on an ISMSF, which can have no more than 3 members from a generation.

In a “typical” example, a husband / wife SMSF can have no more than two of their children as members, to ensure that they meet the legislative requirements of an SMSF. Any children in addition to the two in the SMSF need to “wait it out“ until the death of one of the members. The issues that this creates are discussed later in the paper.

While there are no direct legislative constraints on the structure of the trustee entity (individual or corporate), there appears to be greater flexibility under a corporate trustee arrangement, especially where maintaining continuity of operation of the fund, in the event of the death or incapacity of one of the members / trustees.

Two Generations in a SMSF

The reader will note that the provisions of Section 17A of the SIS Act do not preclude family members or parent / children participants in a SMSF.

Where the children are over age 18, there is no restriction on the use of corporate or personal trustee options. However, if one of the children is under 18, use of the personal trustee arrangement appears the only option, with one of the parents acting as trustee for the minor, pursuant to the provisions of subsection (3) within section 17A:

(3)A superannuation fund does not fail to satisfy the conditions specified in subsection (1) or (2) by reason only that:

· a member of the fund has died and the legal personal representative of the member is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during the period:

obeginning when the member of the fund died; and

oending when death benefits commence to be payable in respect of the member of the fund; or

· the legal personal representative of a member of the fund is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during any period when:

othe member of the fund is under a legal disability; or

othe legal personal representative has an enduring power of attorney in respect of the member of the fund; or

· if a member of the fund is under a legal disability because of age and does not have a legal personal representative—the parent or guardian of the member is a trustee of the fund in place of the member; or

· an appointment under section 134 of an acting trustee of the fund is in force.

In the majority of cases, it would be expected that the children would be mature aged, and each member can then act either as a trustee or as a director of the corporate trustee.

Issues of Control

The author’s experience with family SMSF’s is that the vast majority have one participant who has the keenest interest and the passion for the operation of the SMSF, while their spouse often acts as the secondary role player.

However, all trustees / members need to be advised (at their commencement) and reminded (on a regular basis) that they have a collective obligation and responsibility under the legislation.

Most progressive Trust Deeds include provision for a “Principal” (or “Appointer”) type of role, where the Principal has effective control over admission or removal of members of the SMSF.

The absence of that provision can cause significant problems where the two parties reach impassable disagreement, which is often a consequence of separation and family law issues.

The Principal is appointed at commencement of the SMSF and the role of Principal can be transferred on to another member / trustee at the discretion of the Principal.

In a husband and wife SMSF, there is some scope for entrenched disagreement to obstruct the orderly operation of the fund. However, that scope is magnified in a multi generational ISMSF, with potential for disagreement between spouses, parents / children and siblings.

It is therefore highly recommended that the role of Principal be enshrined in the Trust Deed of an ISMSF prior to admission of further members. At time of entry to the SMSF, the new members would be formally invited to join and then accepted as members by the Principal and they would acknowledge the role of the Principal.

Some Trust Deeds also provide that, in the event of an equality of votes for and against a particular resolution, votes are re recounted with weighting given to the respective account balances of members in the SMSF. This ensures that members with smaller balances cannot unreasonably restrict (legal) investments that the main member(s) of the fund wish to undertake.

In the event of unresolved disagreement between the trustees, for example selection of investments, the Principal could consider removing the member from the SMSF, however needing to ensure that the member’s interests were not disadvantaged by that removal.

In an ideal “mature” family environment, that process would be expected to have some chance of acceptance, but that is often not the case in today’s complex family arrangements.

Estate Planning

One of the core features of estate planning is to ensure that assets are passed to family members in a manner that achieves an allocation according to the wishes of the person, in as effective a manner as possible.

One of the more restrictive changes in the Simpler Super reforms resulted in the removal of the ability to stream pension payments to the next generation, and thereby retaining assets within the superannuation system across generations. One of the advantages of this generational streaming was that assets could be retained within a tax concessional or even nil tax environment over extended periods.

From 1 July 2007, the only persons that can receive a member’s entitlements by means of a pension within the SMSF are generally restricted to their spouse and children under age 18 (or under age 25 if financially dependant). This means that it is not possible for mature age children to be reversionary pensioners or recipients of a pension entitlement within the SMSF.

It is therefore necessary for the entitlements to be paid from the SMSF to the estate if the member does not have an “eligible dependant”.

Much attention is focussed on enhancing the taxation outcome from these forced benefit payments, with contribution “recycling” and segregated pensions being two popular strategies.

However, there remains some estate planning opportunities within the ISMSF, even though it is necessary for the benefit entitlement to be paid from the fund. These estate planning opportunities generally relate to retention of assets within the SMSF or tax strategies involving the assets themselves.

Estate planning can also extend to ensuring that provision is made for the admission of further family members in the event of the death of one of the parents.

“Left Over” Children

As discussed earlier, a SMSF can have no more than 4 members, which creates some problems with families of 5 or more. Inevitably, one of the children is left over from the SMSF and careful planning is required to ensure that the interests of the “left over” children are not compromised.

Of particular note at this point is the example provided in Katz v Grossman, a well publicised NSW case in which the father and daughter were trustees of the family SMSF, and the daughter used her trustee role effectively to apply discretion in the payment of the father’s death benefit proceeds, to the detriment of the brother.

It is therefore important that there be a properly (i.e. legally) documented “succession” process for the introduction of an agreed family member to replace the deceased family member as a trustee or director of the corporate trustee. In addition, there needs to be a clear nomination process set down, preferably by means of a binding nomination (to the estate or nominated individuals) and explicit arrangements under the will for distribution of any superannuation proceeds through the estate.

Case Study 1

Donald and Daisy have three adopted children, Huey, Dewey and Louie. Each of the children is aged over 25 and in good health.

Having run the Duck Super Fund for a number of years, Donald and Daisy want to involve their children, and introduce Huey and Dewey as members. Louie is counselled and told that he will be “taken care of”.

In the event of Donald’s death, his benefit is payable to Daisy as a pension, and Louie is invited to join the fund by Daisy, who is the new Principal.

Case Study 2

Consider what would happen if Donald and Daisy adopted a fourth child, Phoey.

On Donald’s death, Louie is introduced as a member of the SMSF, Phoey still remaining a “left over”. In the event of Daisy’s death, one of the three remaining members / trustees takes on the role of Principal.

If Phoey is Daisy’s legal personal representative, he can act as a trustee without needing to be a member of the fund. Alternatively, after Daisy’s benefit is paid from the fund, Phoey can be invited to join as a new member However, if that occurs, Phoey has no direct say or influence over the payment of Daisy’s death benefit.

Pension and Accumulation Issues

An increasing proportion of ISMSF’s (Intergenerational Self Managed Superannuation Fund)  have one or more of the parents in pension phase, while the children are in accumulation (or growth) phase. This presents some interesting management and planning issues.

Illiquid Assets

A SMSF that has relatively illiquid assets or limited number of illiquid assets may encounter difficulties in supporting pension payments. In a single generation SMSF, this created pressure for the sale or partial sale of the illiquid asset, potentially at a time when the price may not have been favourable.

While the SIS legislation requires that trustees invest with regard to liquidity requirements, it is not uncommon to find these constraints occurring in practice. While the legislation now permits the member to revert to accumulation phase at any time, the member may need regular income outside the superannuation fund.

If the fund has active contributory members, the contributions of the children can be used as a source of ongoing liquidity to meet the future pension payments. Effectively, the children’s contributions are being invested in the illiquid investment and the parent / pensioner is progressively divesting their interest in the illiquid investment.

Common or Different Investment Ideals

There may be agreement within the family about appropriate investment strategies and particular assets form investment. However, it is quite common for differences of opinion and views as to what assets each member wishes to invest in.

Note that we are not suggesting that there is disagreement as to whether particular assets or investment strategies are inconsistent with the SMSF’s own investment strategy or the legislation, but rather a disagreement as to whether each member has a similar approach for their own balance within the fund.

The majority of Trust Deeds provide for segregation of assets for members in receipt of pensions, and most progressive Trust Deeds also provide for the ability to segregate some or all assets to individual members, regardless of whether they are in pension or accumulation phase.

It is the author’s experience that this divergence of investment approach is more common in ISMSF’s than SMSF’s.

Of course, the segregation of assets in favour of particular members and the maintenance of individual asset “pools” impose a much greater administration load.

Segregation for Tax Purposes

The question of whether to segregate or not is a complex one and one that is raised regularly by trustees of funds that have part pension and part accumulation arrangements.

In a husband and wife arrangement, it is not unusual to see an unsegregated approach used for the relatively limited time that the first member is in pension phase and the second is in accumulation phase. The attitude that is often taken is that the administrative cost and inconvenience of segregating assets is not warranted against the potential tax savings.

The tax savings are likely to be greater if assets are to be sold and there are potentially large realised capital gains. Since the assets sales are not expected to occur during the limited time period while there are pension and accumulation interests in the fund, it is expedient to adopt an unsegregated approach.

However, that expediency is not likely to apply in an ISMSF, where there will be pension and accumulation members for an extended period of time.

In the first instance, a brief review needs to be taken of the size and the likely investment activity of the pension and accumulation sections of the fund. If the pension section of the fund has less likelihood of capital gains and the accumulation section is more aggressively managed and invested, it is quite possible that the fund as a whole might be better of using an unsegregated approach. While this might initially be counter intuitive, it does bear some thought.

This is an area where an ISMSF might generate greater value than two SMSF’s for the different generations.

If the investment portfolio of the pension section is expected to produce larger (realised) capital gains, then some form of segregation is likely to produce a more favourable tax outcome for the fund and its members.

Under a segregated approach, all investment income (both realised capital gains and income) relating to the segregated pension assets is exempt from tax, as are the expenses attributable to that section of the fund. This means that any realised capital gains are exempt from tax, regardless of when they were derived (before or after the pension phase).

Issues with Capital Gains Tax

Sale of Assets on Death

While significant attention has been given to estate planning issues relating to the taxation of benefits paid to “non tax dependants”, there is less attention that has been given to the potential impost of capital gains tax arising from those benefit payments. It is quite likely that the tax impact from the latter could be significantly greater than the tax payable on the actual benefit payment itself.

The ATO Interpretive Decision under ATOID 2004/688 (published in August 2004) suggests that the exemption from tax as a result of supporting pension liabilities ceases on the death of the pensioner, if there is no reversionary pension. This ATOID suggests that, if assets are sold for the purpose of making payment to the estate or nominated beneficiaries, the resulting realised capital gains are subject to tax.

The capital gains tax issue requires careful consideration and management.

In a single member fund, the strategies that are advocated for managing the capital gains tax issues arising from the “last death” include:

· regular refreshing of the asset base, by selling down assets on a regular basis (hence leaving a smaller capital gain that will be subject to tax on death); and

· introduction of other family members into the fund prior to payment of the death benefit, with the cash balances from their contributions / rollovers being used to support a portion of the death benefit (hence reducing the assets that need to be realised to support the benefit payment).

In an ISMSF additional strategies become available, taking advantage of the existing asset pool and members.

These additional strategies include:

· in an unsegregated environment, consideration can be give to realising the assets that will produce the lowest capital gain;

· if any of the children are aged over 55, consideration can be given to commencing a “Transition to Retirement” pension, with the intention of increasing the exempt proportion in an unsegregated arrangement; and

· additional cash contributions might be made by the children, with the intention of reducing the amount of assets needing to be realised, with the expectation that this short term facility will result in a return of that cash through a binding nomination or the estate.

Sale of Assets at Other Times

In the previous section, issues relating to segregation of assets were discussed.

The trustees may follow a “primary strategy” of either unsegregated or segregated assets, according to their expectations of asset disposals for pension or accumulation members.

If the trustees are aware that there will be a change in these investment behaviours for a coming financial year, they may consider amending the “primary strategy”. However, as with all strategies that have an impact on tax, there needs to be a reason for moving to segregation or removal of segregation, which can be documented by the trustees, other than for the purpose of reducing tax.

It would be likely that a fund that moved from segregated to unsegregated on a frequent basis would draw scrutiny under an ATO audit.

Similar comments would apply to assets that are held outside the segregated assets supporting the pension, where a large capital gain would be expected to be realised. The initial temptation is to “transfer” ownership of the investment from the segregated accumulation section to the segregated pension section. However, there needs to be a clearly documented reason for “realignment” of the investment portfolios, other than the expectation of reduced tax paid by the fund.

Case Study 3

The Duck Super Fund has two pension members, Donald and Daisy, while Huey and Dewey are in accumulation phase and are both aged 50.

The assets of the fund include:

· Property of $500,000, with accrued gains of $300,000,

· Shares of $200,000, with accrued gains of $100,000,

· Cash of $300,000

· Total assets of $1,000,000.

Donald and Daisy each have pension balances of $350,000, while Huey and Dewey each have an accumulation balance of $150,000.

If a segregated basis is used:

Assume the pension assets are the property and $200,000 of the cash, which leaves $100,000 cash and the $200,000 share portfolio.

If the shares are to be sold to undertake another investment, the realised gain will be $100,000, resulting in Capital Gains Tax of $10,000.

If an un-segregated basis is used:

The exempt proportion will be 70%.

This means that 70% of any investment income will be exempt form tax.

On the sale of the shares, 70% of the realised gain is exempt, resulting in tax of $3,000.

Care needs to be taken with the un-segregated approach, when the property is to be sold.

If a segregated approach is followed at that time, there will be no tax payable.

If an unsegregated approach is followed at that time, tax payable will be on 30% of the gain, or on $90,000, resulting in tax payable of $9,000

Asset Management and Retention

There is potential for ISMSF’s to be established and operated on similar lines to the traditional “family business”, where long term investment decisions can be made involving assets that can be retained to support superannuation benefits of successive generations.

This is often seen for investment in property, where the family has business experience in property management or sales. Strategic acquisitions are made of properties, with the expectation of significant long term gain as city areas change in character or zoning.

Prior to the Simpler Super changes, this strategy was hindered by the requirement to pay benefits on cessation of full time employment or age 65, and it was difficult to retain capital after the retirement of the principal member. However, benefits can now be retained in the accumulation phase regardless of age, which enables the retention of the investment portfolio over a significantly extended period of time.

The inclusion of children in the ISMSF provides for greater longevity of capital and potentially a larger capital pool to achieve strategic holdings in adjoining properties.

With contribution inflow from the children, it may not be necessary to sell down properties at a time of relative down turn, if the parents need lump sum or pension cash flow.

However, care needs to be taken with these multi-generational investment programs, that the emotion needs to be counterbalanced by financial wisdom, and regard should be had to the effect of capital gains on disposal in the “last to die” scenario and the need to sell investments if they have reached a peak in their value, regardless if how long it has “been in the family”.

In specie benefit payments do provide an opportunity to retain assets within the family and, if paid while in pension phase, either no or reduced capital gains tax.

Buying Power

An ISMSF can generate a larger asset pool with its larger number of members than can be achieved by just 1 or 2 members.

This provides access to assets with larger capital values, as well as investments that have minimum capital requirements for entry. This expands the scope of assets that are available to the ISMSF.

However, as with all investment decisions, they need to be made in a manner that is consistent with the fund’s investment strategy and for the purpose of supporting the retirement benefits of the members of the fund.

If the fund includes in-house assets, a larger capital pool means that the 5% limitation applies at a higher level, potential allowing a greater take up of these investments over time.

“Reverse Inheritances”

This strategy is mentioned for completeness, as it has gained some public airing. However, it is worth noting that care needs to be taken with this strategy, as with all superannuation strategies, to ensure that it is not regarded as being caught under Part IVA.

In a traditional Social Security strategy, the parents are generally intent on divesting themselves of assets prior to becoming eligible for Social Security entitlements.

In the “Reverse Inheritance” strategy, children who have assets that are superfluous to their short term needs might pass them to their parents to invest. If their parents are aged between 55 and 65, contributions of up to $450,000 can be made into superannuation and then used to immediately commence a “Transition to Retirement” pension.

This strategy is intended to provide the investment capital with tax free investment income. There are limitations on the strategy, including:

· access to the capital is restricted according to the work situation of the parent who made the contribution to the ISMSF,

· pension payments are required to be made from the capital, and

· a binding nomination would be required to ensure that the capital passes to the specific child, rather than through the estate.

There is a further and more critical limitation, which relates to the requirement that tax components of accumulation balances must be “blended” at the commencement of a pension from the fund. If there are taxable components in the member’s accumulation balance, this will dilute the tax free proportion of the transition to retirement pension. This can have adverse consequences on the death of the member and on the payment of the remaining balance to the child.

For this strategy to work at its most effective, the (parent) member must have all of their entitlements in pension phase at the time the non concessional contribution is made and the resulting “transition to retirement” pension is commenced.

If the child is a member of the fund, there are advantages in being able to more closely monitor the “proxy” investment and ensure that beneficiary nominations are implemented.

“Advance Inheritances” (with Control)

In some instances, parents begin to realise that they will have more than sufficient assets to support themselves in their retirement, and consideration turns to “advance inheritances”, where a distribution is made to the children while the parents are still alive,

While the distribution can be made at any time after age 60 with no tax to pay on withdrawals, and exemption from capital gains tax, parents may be reluctant to just hand money over to the children and have it exposed to the risk of being dispersed.

In those circumstances, the parents may prefer to arrange for a non concessional contribution to be made to the ISMSF, enabling the parents to continue to have an influence over the investment of that capital. This could even be associated with a period of “instruction” in the investment process, with the intention of ensuring that the ISMSF remains in place after the death of the parents.

The early distribution to the children is another of the strategies that can be used to reduce the risk of tax on benefits under a “last to die” scenario and to reduce the risk of capital gains tax on disposal of assets under those circumstances..

This scenario has limitations, as the child member always has the ability to request the transfer of their interest in the fund to another superannuation fund.

Section 295-485 Opportunities

Section 295-485 of the Income Tax Assessment Act 1997 is the equivalent of the former Section 279D under the Income Tax Assessment Act 1936, with the former quoted below:

295-485    Deductions for increased amount of superannuation lump sum death benefit

(1) An entity that is a complying superannuation fund, or a complying approved deposit fund, and has been since 1 July 1988 (or since it came into existence if that was later) can deduct an amount under this section if:

(a) it pays a superannuation lump sum because of the death of a person to the trustee of the deceased’s estate or an individual who was a spouse, former spouse or child of the deceased at the time of death or payment; and

(b) it increases the lump sum by an amount, or does not reduce the lump sum by an amount (the tax saving amount) so that the amount of the lump sum is the amount that the fund could have paid if no tax were payable on amounts included in assessable income under Subdivision 295‑C.

(2) The fund can deduct the amount in the income year in which the lump sum is paid.

(3) The amount the fund can deduct is:

     Tax saving amount     

Low tax component rate

where:

low tax component tax rate is the rate of tax imposed on the low tax component of the fund’s taxable income for the income year.

Note:  The deduction is designed to compensate the fund for the tax payable on the contributions that are used to fund the lump sum.

(4) The amount the fund can deduct for a superannuation lump sum paid because of the death of a person to the trustee of the deceased’s estate is so much of the subsection (3) amount as is appropriate having regard to the extent to which individuals referred to in paragraph (1)(a) can reasonably be expected to benefit from the estate.

The application of this section to SMSF’s has been subject to ongoing debate. In a large corporate or public offer superannuation fund, the existence of reserves makes possible the payment of the Section 295-485 amount, and the deduction can be claimed against the taxable income from the non-pension section of the fund.

However, in a single generation SMSF, all members may be in pension phase (in which case there is no taxable income against which to claim the amount, and also there are generally insufficient available reserves to make the additional payment.

If the additional amount is paid, there is generally an accounting provision raised for Future Income Tax Benefit, which is an asset retained for the ongoing members to offset the “over draw” of the additional amount.

An ISMSF is ideally structured to support the payment of the additional amount under Section 295-485, since the children are likely to have taxable investment income and concessional contributions that are made to the fund. The trustees will need to satisfy themselves that the amount under Section 295-485 would be reasonably expected to be recoverable as deductions against either current year to later taxable income.

Case Study 5

Donald dies, with a balance of $350,000. His death benefit is payable to the estate and Daisy is the nominated beneficiary of his estate.

Since there have been no undeducted or non-concessional contributions, an additional amount of $61,765 could be payable under sub-section (1) (b). Note that, if contributions tax had not been imposed, Donald’s benefit would have been expected to be $411,765.

If a death benefit of $411,765 is paid, under sub-section (3) the amount that can be deducted from the fund’s income is also $411,765, which is calculated as the additional amount of $61,765 / 15%.

This means that the next $411,765 of taxable income for the fund will be offset by this deductible amount.

To make the payment, $61,765 is drawn from the cash, and an accounting provision of $61,765 is created as an asset for Future Income Tax Benefit.

If Huey and Dewey both make the yearly maximum concessional contribution ($100,000 under the transitional arrangements), the Future Income tax Benefit is progressively reduced over the next two years, leaving $11,765 at the end of that year (ignoring any other taxable income).

Concluding Comments

An Intergenerational Self Managed Superannuation Fund provides more extensive opportunities to take advantage of the special features of the SMS environment.

Opportunities extend to investments, tax management, estate planning, family investment programs and control.

However, as with any endeavour involving family members, the out-workings of an ISMSF can be complicated by potential disagreement and disputation within the family.

Just as members / trustees need to understand their responsibilities in a traditional SMSF, even more so there is a need for members / trustees to understand their responsibilities in an ISMSF arrangement.

It is evident that there remains a need for skilled advisers to provide advice to both SMSF and ISMSF participants, to ensure that they obtain the greatest opportunity and value from their Self Managed Superannuation Funds.

 

 

Disclaimer

 

The information contained in this publication is provided for general information only. It is not intended to represent any individual client advice or recommendation.

Any clients should contact their  adviser or broker before acting on any information contained herein.

The Publisher believes information contained herein is accurate and reliable, but no warranty for accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by the Company or its Officers.