Posted on September 17, 2020
By Venetta Sacha, Director Hall Consulting Group and David Saul, Director Saul SMSF
SMSF trustees are increasingly facing retirement and estate planning decisions, that ultimately include the payment of death benefits. It’s a complex area, that can puzzle even the best at times.
Many of them don’t realise that these decisions can be significantly affected by the accuracy and completeness of record-keeping, during the life of their fund. A trustee can save money in the short-term by compromising on the quality of the fund administration services, but the true cost will likely be a larger tax liability down the track when it really matters!!
Many trustees are unaware of the importance of the information included in the financial statements prepared by SMSF fund administrators and how errors, omissions or inadequate information may impact their benefits.
The financial statements report the net income and financial position of the fund, but the key reports (relied upon by advisers when preparing pension or estate planning advice) are the Members Statements. These reports include not only the member’s withdrawal balance, but also provide details of the tax components of this balance.
A new law came into effect on 1 July 2007 requiring classification of the superannuation account balances to taxable and tax-free components. Fund administrators were required to reclassify existing members’ balances to preserved, restricted non-preserved and unrestricted non-preserved benefits, as well as split the benefit balance into taxable and tax-free components.
These components are extremely important to determine how much tax will be paid if a transition to retirement pension stream commences or a death benefit is paid.
A new SMSF client of Hall Consulting Group recently became painfully aware of the difference between a good quality fund administrator and a cheap administrator.
Dodging a Bullet!!
Crisis averted a $44,200 tax bill in the making…
The trustees approached us with a request for assistance in retirement and estate planning strategies. The fund had two members in accumulation phase. The latest financial report prepared by their previous fund administrator contained Members Statements that only provided information of the withdrawal balances. These statements did not mention many key member details and, critically, excluded the tax-free and taxable components. When contacted, the previous accountant advised that all benefits were 100% preserved and 100% taxable. However, with some critical analysis – the client recalled that they had made non-concessional contributions over the last few years. The reconstruction of contributions history over the last 10 years and review of rollover statements from industry funds revealed that the withdrawal benefit of the older member included 40% tax-free component.
The older member inquired about transition to retirement. His superannuation benefit was approximately $650,000. If a pension strategy was implemented based on the advice that the entire benefit is 100% taxable, at his tax level, this member would have paid $3,536 extra tax on his pension per annum until he turns 60.
If both members were to die together suddenly, a death benefit payment would be made to their 2 adult children and the taxable component of the lump sum taxed at their marginal tax rate less a tax credit of 15% or 17% (including Medicare Levy), whichever is lower. As a result, if the advice of the previous fund administrator had been accepted without question, then beneficiaries of the deceased would be subject to an extra unwarranted tax of at least $44,200! The tax could be as high as $88,400 if marginal tax rates apply.
This is just a simple illustration of the potential cost to members and beneficiaries if the fund’s records are not maintained in an accurate and complete manner.
There is more to consider when planning for retirement. In the case discussed above: the fund was established with individual trustees, the trust deed was 10 years old and did not align with current legislation. From a compliance perspective, the trustees had never considered insurance and did not have an up to date investment strategy. There were no death benefit nominations or wills in place. The previous tax agent was also the auditor of the fund.
This is not an isolated case. SMSF trustees need to be educated on the composition of their superannuation benefits and have a basic understanding of how benefits are taxed on death or retirement. Their focus should be on making sure they sign meaningful reports and deal with quality providers to avoid unnecessary rectification costs and excess taxes in the future.
We work together with our SMSF advisers, SMSF auditors and SMSF legal specialists to create awareness and educate our SMSF trustees on a number of topics relevant to their decision making process, such as:
- Composition of superannuation benefits, when they can be accessed and how they are taxed on withdrawal or as death payment;
- Quality and accuracy of the annual financial report of the fund and all key information;
- Importance of having an independent quality SMSF auditor. A truly objective auditor’s eye will more likely spot a problem and request clarification. Quite often the trustees aren’t aware of the true independence of their auditor;
- Importance of current SMSF trust deeds. Are they well-suited to the needs of fund members and do they comply with the latest superannuation legislation;
- The advantages of having a corporate trustee;
- The importance of death benefit nominations and when they are valid. Learn about non-lapsing nominations and consider trust deeds incorporating non-lapsing binding death nomination provisions;
- The importance of estate planning and how death benefits are taxed. Often non-resident beneficiaries are nominated not knowing that the benefits paid to them are subject to capital gains tax;
- Types of pension streams, commutation and the benefits of reversionary pension.
The current focus of many advisers is to provide a proper statement of advice upon set up which outlines strategies to trustees to meet their goals. These benefits can be lost during the life of the fund to administration shortcuts and laziness in record keeping.
Our message to all SMSF trustees is to choose their fund administration provider wisely and ask many questions. They should ensure that they engage an independent auditor and read their recommendations. They should surround themselves with quality trusted advisers and stay informed!
We hope this article has now got you thinking about these important issues as well as how you might benefit from further research and inquiry into this area. If you have any questions about your own fund administration or establishing a new SMSF (a great opportunity to start fresh with all the fundamentals in place!), please don’t hesitate to contact me directly at: VenettaSacha@hallconsulting.rbdev.com.au
Posted on September 17, 2020
If you care about your loved ones it is important to keep your affairs in order. This will help your beneficiaries to easily establish what assets form part of your estate in order to distribute them in accordance with your wish.
One of the common problems our clients face when a parent passes away is to worry about the financial records evidencing the assets of the deceased.
Many Australians love investing in the share market and own a long list of investments acquired on floats more than 30 years ago. Many listed companies have undergone various share capital reconstructions since then or merged with other companies. Bonus share issue and dividend reinvestment plans are also commonly offered to investors.
Our clients hear us often talking about the “cost base” of their investments in shares or units in trusts. We always stress the importance of having a full record of when the investment was purchased and its cost base which includes the purchase price, additions through dividend reinvestment or bonus issues and reductions for buy backs and tax-deferred distributions.
Why is it so important top keep the cost base information?
One of the main reasons to update the documentation of your portfolio is to get the Capital Gains Tax (CGT) right and avoid triggering unnecessary tax liability. Not just for yourself but for your family when they inherit your assets on your passing.
The following scenario illustrates the importance of keeping accurate records of the cost base of your investments.
Scenario: Lisa owns a parcel of pre-CGT shares in Company X (acquired pre 20 September 1985), and a parcel of post-CGT shares in Company Y (acquired after 20 September 1985). Lisa passes away suddenly, and her son, David, is trying to get her tax affairs in order. David struggles to find documents in regards to the cost base of the shares.
Upon Lisa’s death, her shares form part of her estate which will be passed on to David as the beneficiary. David does not know when the shares were purchased or how much was paid. The pre-CGT shares will generally be deemed to have been acquired by David at the market value on the day Lisa died. If David sells these shares subsequently, his capital gain will be calculated as the difference between the proceeds and the market value. However, David will inherit the post-CGT shares at the cost base applicable to Lisa and will pay higher capital gains tax when he sells these shares. The pre-CGT shares may be treated as post-CGT assets due to lack of purchase substantiation. This means that unnecessary CGT will be paid by David on disposal.
Poor documentation can also lead to making estimates about the cost base of your investment. Understating your investment’s cost base can result in excess CGT that could have been avoided with a little documenting along the way.
If you would like to reconcile and update your investment portfolio and save the extra pain and cost your family may experience at a difficult time, we will be happy to assist.
Written by Grace Shideh
Posted on September 17, 2020
With the end of the financial year fast approaching we want to remind you of the possible tax planning opportunities still available if you act by 30th June 2015.
Here are links to our two fact sheets with our 2015 tax tips and planning opportunities:
We look forward to hearing from you if you have any questions.
Posted on September 17, 2020
We all see complex relationships around us with divorce, remarriage and blended families becoming commonplace.
In all the hurly burly of modern life many people overlook the future financial consequences of life choices made today. Many people don’t want to consider the impact on their estate of new marriages and blended families. Failure to properly address this can have serious implications for family harmony and financial stability.
What can happen if you don’t have a well thought out structure and will in place? Ex-partners and children from various relationships can all have a potential claim on the estate. This can cause disputes resulting in not only huge legal fees but damage to family relationships.
One of our clients recently remarried (for the fourth time) and has several children with different partners. We helped him to address and restructure his succession and estate planning to ensure that his family assets are protected and passed equitably to the client’s children and partners who will ultimately receive a share of the estate.
The majority of the client’s assets are held in his Self Managed Superannuation Fund due to careful tax and finance planning over many years. This has resulted in a very effective asset protection and tax structure. However, it is important to note that superannuation benefits do not automatically form part of the estate. In conjunction with an estate planning lawyer and SMSF specialist we ensured that the client’s beneficiaries will receive benefits from the Fund in a very tax effective manner.
Each of the client’s children have their own very different sets of financial and personal circumstances with the potential for challenges to a will. The lawyer has ensured that the will is structured in such a way that any challenge is minimised.
If you have a blended family that will challenge your estate and wish to protect your assets and achieve a family harmony, come and talk to us!
Posted on September 17, 2020
Why the death of your business partners can have dire consequences.
Imagine this scenario…. Michael, James, and Nadine are shareholders in a successful business, MJN Solutions. The shares in the company are fairly evenly split reflecting the contribution that each has made to the business, with Michael and James each holding 35% and Nadine holding 30%. They have been working together for years to build the business to its current level. The business is now worth around $4 million and is still on a growth path. While no one is related to each other, everyone is close. They have had their disagreements but they trust each other and respect each other’s ability. It’s a fairly common scenario.
But one morning Michael and Nadine are shocked by a call from James’ wife Monica, telling them that James has died in a car accident.
If you are in business with shareholders, your business faces a major potential threat and its shareholders unexpected personal costs, if one of your fellow shareholders dies or becomes permanently disabled. And, the situation can be exacerbated where the shareholders are not related.
Good planning through buy/sell agreements and appropriate insurance can make all the difference.
For many businesses, if no pre-existing arrangements are in place, the death of a shareholder can mean having an unknown person (the beneficiary of the shares) actively involved in the business or an unwilling shareholder. The alternative is for the original shareholders to find the cash, then and there, to buy back the shares. Think about the value of your company…do you have enough cash to quickly fund the buy back for another shareholder?
What does a buy/sell agreement do?
Many companies do not have a plan in place that contemplates the untimely death of its shareholders or a break-up of the shareholders, and as a result, do not have buy/sell agreements in place.
Buy/sell agreements are legal documents that define what happens in an event that may trigger the disposal of a shareholder’s interest in a company. Amongst other things, the agreement determines how the company will be valued, and how shares can be disposed of in a series of scenarios including death.
Outcome 1 – Nothing planned
Michael and Nadine have a problem beyond dealing with the demise of a close friend and trusted professional in the business. While everyone knows that the unexpected can happen, nothing was planned or put in place to manage a worst case scenario.
James’ shareholding and the rights that come with it, transfer through his estate to his wife Monica. Monica however wants nothing to do with the business that consumed so much of her husband’s time. She just wants to cash out the shares and get on with her life.
MJN Solutions is still on a growth path and does not have the cash available to buy back James’ shares. This means that Michael and Nadine now need to personally fund the purchase of Monica’s shares (assuming they can come to an agreement about what the company is really worth). If they are unable to come up with the money, then Monica will become an unwilling shareholder.
Outcome 2 – Pre planning
Michael, James and Nadine worked with their accountants to put a buy/sell agreement in place to manage succession and unplanned events, such as the death of one of the shareholders. The buy/sell agreement defines how MJN Solutions will be valued and how the equity will be managed. In this scenario, the buy/sell agreement states that James’ shareholding will be purchased by Nadine and Michael if James dies or becomes permanently disabled.
During the planning process, the funding arrangements necessary were put in place should the buy/sell agreement be triggered. In this scenario, Michael, James and Nadine opt to manage the funding through an insurance policy taken out in their own names (another way would be to fund the policy through a self managed superannuation fund – although there may be changes in this area with the ATO flagging that they will soon release their position on insurance held through superannuation for buy/sell agreements. Whichever way you go, it will be important to get current, structured advice in this area.)
When James dies, the insurance proceeds are used to purchase James’ shareholding. As a result, neither Michael nor Nadine are out of pocket or take on debt, they own an increased share of the business, they avoid having an unplanned shareholder running the company, and they can get on with business.
(Courtesy of KnowledgeShop)