Posted on March 31, 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 March 31, 2020
As is the case with many things there is a divide when it comes to the superannuation savings for men and women.
However a Self-Managed Superannuation Fund (SMSF) could be the thing to help close the gap.
This article by the Australian Financial Review looks out how a SMSF can be a big factor in contributing to a women’s super, to see the full article you can click the below link;
If you want to know if an SMSF would be beneficial to you, please do not hesitate to contact our office to discuss.
Posted on March 31, 2020
Many advisors recommend SMSF strategies as a vehicle to accumulate family wealth.
SMSFs are a very attractive tool for tax planning as generally the income of a complying fund is taxed at 15%, the income from assets supporting pension is tax exempt and super benefits received by members over 60 years of age are tax free. SMSFs also provide individuals with control subject to compliance with SIS Act. However, sometimes this control creates desire to implement strategies which can put the trustees on the spot light for compliance investigation by your SMSF auditor or the ATO.
One strategy that may create concern is the use of SMSF in dividend stripping arrangements. This strategy is typically used when the member(s) of the fund are ready to retire and have sold the business run by a private company they own or control. The shares in the company are sold to the SMSF at par value. The private company subsequently pays dividend income to the SMSF and is deregistered. The superannuation fund treats the dividend income as exempt income as the member(s) have commenced account based pension. The fund receives the dividend franking credit in full.
Sometimes the above scenario may have variations such as having an interposed company between the SMSF and the private group. Typically the member of the SMSF is a director of a holding company. An interposed company is established to acquire a business using loan from the holding company and runs a successful business. The shares in the interposed company are held by the super fund and acquired for nominal value. To comply with the in-house asset rules, the super fund sells the shares in the interposed company for $$$ concessionally taxed or exempt if the fund is in pension mode.
The above structures and strategies involving related parties are risky as trustees are exposed to breaching the sole purpose test and in-house asset rules and auditors and ATO will question the transactions. These arrangements raise the following alarm:
Valuations based only on par value with no account of statutory right to a franking credit can be challenged and may bring upon the trustees other issues such as non-arm’s length income provisions, contributions limit breach, capital gain tax provisions and non-compliance with related party in-house asset rules;
At HCG we always consider carefully the application of the various provisions of the Tax Act and SISA rules when advising on strategies using SMSF vehicles. Working closely with our SMSF specialist lawyers and SMSF auditors which we trust gives us additional comfort that the proposed transactions are reviewed from different angles prior to implementation to ensure that our SMSF trustees are not exposed to the risk that their most valuable asset and retirement vehicle is targeted for non-compliance.
If you are considering a SMSF strategy, you are welcome to contact us and we will be happy to provide our opinion.
By Venetta Sacha
Posted on March 31, 2020
A client came to see us for advice and review of his current tax and financial situation. He mentioned that he had bought properties in the US and bitterly admitted that he had made a significant loss from this investment.
“I wish I had jumped on the plane and went to Detroit to see the properties before I signed the contracts” said our client. He trusted a promoter in Australia and didn’t do a proper research before making the decision. It is a consolation that he did not invest through his superannuation fund.
One of the most common questions from clients with a Self Managed Superannuation Fund (SMSF) is, can I buy property? Followed by the second question, can I buy property in the United States?
SMSFs provide investment flexibility for those that understand the rules. They can also be a significant liability if you get it wrong. There are a few key things to check before purchasing a property:
The SMSF’s investment strategy and trust deed must allow for the purchase you are contemplating.
You can’t purchase property from a related party (for example a relative or spouse) unless the property qualifies as business property (business real property to use the technical term).
When you are exploring the viability of the property purchase, be aware that the SMSF cannot lease the property to a related party (again, unless it is business real property). For example, you can’t have your kids living in the property even if they pay market rate rent.
Your SMSF needs to have the cashflow and liquidity to purchase the property.
Factor in transaction costs such as stamp duty into your planning
Consider the exit strategy of both SMSF and property.
Australian SMSFs can purchase property in the US if it is correctly structured (you will need good legal and structuring advice). The question is, should you invest your retirement savings in a market where you have limited visibility or knowledge?
A SMSF would not usually acquire US property directly. Generally, the fund would structure the property investment through a Limited Liability Company (LLC) where the SMSF (and its associates) own and control the majority of the “membership” (the shares). The US LLC is likely to be required to lodge a tax return and pay US federal and state taxes.
As the actual investment the fund holds is the interest in the company (with the company owning the property), there are in-house asset issues to consider. One issue is that the company bank account needs to be with an entity that is classified as an Authorised Deposit Institution (ADI) – not all foreign banks are. Fail this criteria and the investment held by the SMSF may become an in-house asset and require the fund to sell the asset.
But most importantly, do your ground work and consider all the risks!
If you are contemplating purchasing property in your SMSF, talk to us today about achieving the right structure and outcome.
Posted on March 31, 2020
Your SMSF’s trust deed is its rulebook. If the deed does not allow or recognise something then the trustees can’t do it. Despite this, a lot of trustees are unaware of what their trust deed says – it was just something that was required when the fund was established. The problem with any document is that unless you amend it, it is only current for the circumstances that existed at that time. However, the law changes regularly and so do individual circumstances.
This month, we shortcut the review process and highlight the key SMSF trust deed problem areas.
Trust deed does not allow the types of payments being made
A common audit issue is SMSFs paying pensions and other payments to members that are not allowed by the trust deed. The assumption is that because the superannuation laws allow that type of payment then it must be ok.
But, if your deed does not allow the types of payments your fund is making then you’re breaching your deed. Check the deed detail well before you anticipate the fund needing to make payments. This is particularly important for deeds created before 1 July 2007 when the superannuation laws on pension payments changed significantly.
Trust deed does not recognise life changes and estate planning needs
There are several aspects of a SMSF deed that have a direct impact if you die or your circumstances change:
Does your deed allow you to nominate who will receive your super if you die? Some deeds don’t allow for binding death nominations. In some cases the remaining trustees decide who gets your super.
If you have death nominations in place, is the wording consistent with the requirements of the trust deed.
Who has the power to add or remove trustees? There are a lot of court cases around this with kids excluded from a parent’s super by a new spouse or vice versa.
When does someone become or stop being a member? Some deeds will automatically remove members with a nil balance.
Flexibility and control
Does your deed allow the use of reserves or other strategies that your accountant may recommend at year end to minimise tax? Some deeds don’t allow for effective tax planning strategies!