Posts tagged with: Trustee

Significant changes impacting discretionary trusts with land holdings in NSW

Posted on September 17, 2020

Does your discretionary trust hold land in NSW?

Are you considering acquiring land in NSW in a trust structure?

Be aware of the potential cost increases if your family trust beneficiary tree includes non-resident beneficiaries.

Andrew Noolan from Brown Wright Stein Lawyers is warning trustees of discretionary trusts about the introduction of the State Revenue Legislation Amendment (Budget Measures) Act 2016 (NSW) which received Royal Assent on 28th June 2016.

As a result of these changes, trustees of discretionary trusts may be liable for additional duties where those trusts hold or acquire land in NSW, in two ways:

  1. From 21 June 2016 a discretionary trust trustee that acquires land may be liable to an extra 4% duty on the acquisition.
  2. From 1 January 2017 a discretionary trust trustee that holds NSW land may be liable to pay an extra 0.75% ‘surcharge land tax’.

In both cases what will determine whether the trustee is subject to these imposts is whether a ‘foreign person’ can benefit under the trust. Note that this means that the person is capable of benefitting, not that they have received a benefit from the trust.

Most discretionary trust deeds are drafted to include a large range of persons as potential beneficiaries. It is common for a deed to name one or more beneficiaries, and then to have other beneficiaries defined by their relationship to that person.  For example, a deed might nominate John Smith as a beneficiary, and then define the potential beneficiaries of the trust to include any descendant of John Smith’s grandparents.

Where any of the potential beneficiaries of the trust is a non-resident (and not an Australian citizen, with there being some other exceptions) the trustee will be taken to be a ‘foreign person’. This has the following consequences:

  1. If the trustee is taken to be a foreign person then in relation to the acquisition of ‘residential land’ they will need to pay an extra 4% duty on the dutiable value of the property.
  2. If the trustee is taken to be a foreign person then in relation to any land holdings on 31 December 2016 they will need to pay a surcharge land tax of 0.75% in additional to their ordinary land tax obligations.

For discretionary trust trustees intending to acquire residential land, great care should be taken in drafting the deed.

For discretionary trust trustees holding taxable land in NSW, a deed amendment may be necessary before 31 December 2016 to prevent the surcharge land tax being payable.

There are similar provisions in place in other Australian jurisdictions.

If your trust is exposed to these changes, please contact us and we will liaise with our legal specialists to arrange for review and amendments of your trust deed if required

(Based on Brown Wright Stein Lawyers newsletter dated 12th September 2016)



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Save Now, Pay Later!?? – “Revealing the true cost of poor quality SMSF administration services”

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:

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Why is it recommended to appoint a Special Purpose Corporate as the Trustee of a Self Managed Superannuation Fund?

Posted on September 17, 2020

Why is it recommended to appoint a Special Purpose Corporate as the Trustee of a Self Managed Superannuation Fund?

It is essential on the establishment of a SMSF that the trustee structure is established properly.

A fund can be established with individual trustees or a corporate trustee and below are the reasons why we believe that a fund with a corporate trustee is a more appropriate structure:

A:   If a fund is established with individual trustees and the trust deed allows for the fund to pay members lump sum benefits on retirement, it may be putting its regulation status at risk as the primary purpose of the fund should be the payment of pensions and not lump sums. Therefore, for benefit payment flexibility, a corporate trustee allows the payment of a lump sum or pension.

B:   An SMSF is a multigenerational vehicle. As such trustees come and go over time. If the fund has individual trustees this becomes an administrative nightmare. The ATO requires specifically requires that the trustees must ensure to have all fund assets in the fund’s name. In doing this, the ATO stipulates that the fund’s assets to be held in the names of all of the individuals as trustees of the fund. Therefore, where members and trustees come and go, all relevant asset registers need to be notified with each change. However, if the trustee was a corporate trustee, the corporate does not change only the underlying directorship changes.

C:   On a litigation point of view, individual trustees are jointly and severally liable ( i.e. a personal liability action) in relation to one of the fund’s properties. The trustees may be able to recover from the assets of the fund subject to the fund’s governing rules and any superannuation laws preventing trustees from being financially accommodated for actions taken as a trustee. In circumstances where there is a corporate trustee any action will be limited to the assets of the company not those of the underlying directors.

D:   One of the main arguments cited against using a corporate trustee is the cost issue. Considering the some of the downsides as per above discussion and the potential consequences that may arise, this argument does not hold a lot of merit. As mentioned, a SMSF is a multigenerational vehicle and as such certainty in terms of trusteeship is required. Also the ongoing ASIC lodgement fee of a Special Purpose corporate is only $43 per annum.

Once the decision is made to use a corporate trustee, the next step is to choose the type of corporate trustee. It has been common practice that a standard shelf company has been used as the trustee of a SMSF. Since the introduction of the director/member rules in section 17A of the SISA 1993 in 1999, the standard shelf company can prove dangerous due to the voting power of the board.

  • Standard Shell Company. The trustee of the fund is empowered to make many and varied important decisions of the fund. Under a standard shelf company, directors are able to cast one vote each and as such the majority has power and control over the fund. However, this may not be appropriate in the case where there is a three member/director SMSF with the member with the most significant benefits able to be out voted on important decisions for the fund. This situation can also be exasperated on the death or incapacity of a member.
  • Special Purpose Corporate Trustee. In contrast, the voting power of the Board of Directors of a Special Purpose Corporate is based on the account balance of each member. Unless agreed otherwise in any meeting of the Board of Directors, a director holds the same number of votes as the account balance of the member they are representing. For example in a three member fund with Dad – $450,000 in benefits and his two children – with $50,000 in benefits between them, at any Board meeting Dad would have 450,000 votes and thus control of the fund.

Therefore, as illustrated above, a Special Purpose Corporate Trustee ticks all the relevant boxes and as such is the recommended trustee structure.

(Based on the article by Julie Dolan published in the SMSF magazine in June 2013)

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