Anne Fuchs

The Association of Financial Advisers (AFA) has partnered with PortfolioConstruction Forum to offer practitioner-focused investment content at the 2014 AFA National Adviser Conference to be held in Cairns, 12-14 October.

AFA Chief Commercial Officer, Anne Fuchs, said the partnership with PortfolioConstruction Forum will ensure that advisers have a clearer understanding of their obligations to clients with respect to investment recommendations. “The front-of-mind question for most advisers now is, what are my obligations as an adviser in this new world of best interests duty, where the practicalities remain largely unknown and untested? Advice being developed now around longevity risk is opening the door to innovative investment strategies that are very different to the old solutions and so we recognise a clear need to help our members protect the retirement savings of their clients.”

Ms Fuchs said many advisers are feeling uneasy about traditional strategic asset allocation and the AFA wants to encourage its members to think differently about model portfolios and their role in recommending them. “The best part about the investment content at the Adviser Conference this year is the realization of the need to live by the AFA theme for 2014, Innovate: Think. Create. Act. Advisers need to be thinking differently about how they invest their clients’ hard-earned savings so that clients have the really dignified retirement they aspire to have.”

ASIC Deputy Commissioner Peter Kell will also present at the AFA National Conference on a range of topics including putting forward ASIC’s view of the adviser role in the investment process. “Mr Kell will look at areas such as dynamic asset allocation and how advisers manage risk during an economic downturn,” Ms Fuchs said.

Technical experts from Perpetual and Australian Unity, who are the Australian market leaders in developing thinking about investment philosophy and advice strategy implications, will provide investment curriculum content. This will be moderated by Graham Rich from PortfolioConstruction Forum.

More than 80% of AFA Members include investment advice in their service solutions.

“When our delegates walk away from the 2014 AFA National Adviser Conference, they will have a much clearer idea about their Best Interests obligation, what it means to them, what it means under the law, what their investment philosophy could be and how they can best protect their clients’ money,” Ms Fuchs said. “This is market leading content and we are very pleased to make it available to our conference delegates.”

Register here for the AFA National Conference in Cairns from 12-14 October, or to view the program.

The post Investment focus at AFA National Conference – AFA partners with PortfolioConstruction Forum appeared first on AdviserVoice.

Business Council of Cooperatives and Mutuals release white paper discussing provision of public services.

Welcoming the launch of the Business Council of Cooperatives and Mutuals’ white paper: Public Service Mutuals: a third way for delivering public services in Australia, Group Executive Kimina Lyall said the inherent characteristics of mutual organisations—focused on returning profits to improve services for members—make them ideally suited to deliver public services.

Mutual companies such as Australian Unity operate on commercial principals without the need to return profits to shareholders. They aim to deliver shared value for members and the community, and are established in response to an identified community need.

The white paper calls on governments, challenged to continue to operate some public services for operational and fiscal constraints, to consider the mutual model as a viable alternative to privatisation. One way this could be achieved is by “spinning out” existing services into mutual organisations, governed for example by employees or customers. Governments could also support existing or new mutuals or cooperatives to broaden their service provision.

As Australian Unity prepares to celebrate its 175th year in 2015, Ms Lyall noted that the white paper talks about the provision of public services by cooperatives or mutuals as the third way.

“In fact, in many instances, it was the first way,” she said. “Long before there was such a thing as governments, people were forming self-governing societies set up to give mutual help.”

“With 13 million Australians currently members of a mutual or a cooperative, this is a sector that remains relevant to the needs of the community. In a time when governments are seeking new ways to deliver public services within budget constraints and rising consumer expectations, there is a clear opportunity for an expanding role for the sector.”

Ms Lyall was part of the task force that prepared the Business Council of Cooperatives and Mutuals’ white paper.

Click here to view the white paper.

The post Australian Unity welcomes a mutual approach to delivering public services appeared first on AdviserVoice.

Chris Smith

The Australian Unity Healthcare Property Trust (HPT) has acquired the Brisbane Waters Private Hospital on the New South Wales Central Coast for $16.175 million.

The property is forecast to deliver a yield of 9.27 percent in its first year with the potential to add additional value through brownfield development, says Chris Smith, Australian Unity’s head of healthcare and retirement property funds.

HPT is an unlisted property trust that invests in healthcare-related property assets with a primary focus on delivering regular income, plus the opportunity for long-term capital growth.

The property purchase will be funded by capacity within the debt facility of HPT, which currently has a gearing level of 21 percent, and the property will have an initial 22.5 year lease term to Healthe Care.

The property at 21 Vidler Avenue Woy Woy is a two-level, 78-bed general hospital complex. It was originally constructed in 1978 and comprises a number of ancillary buildings and site improvements. HPT will refurbish and extend the hospital during the early years of ownership.

“The purchase of this property is another quality addition to HPT’s diverse property portfolio, and increases its allocation to New South Wales property to 37 percent,” Mr Smith says.

“Woy Woy is located at the southern end of NSW’s Central Coast region, 80 kilometres north of Sydney’s CBD, and is a popular retirement destination with a growing population.

“The Woy Woy area, including Ettalong, Umina, Ocean Beach and Koolewong, is also an important part of the Sydney commuter belt, with rail journey times of just over an hour to reach Sydney’s CBD and easy access via the F3 Motorway from Sydney to Newcastle.

“HPT will continue to look to invest in quality healthcare property that meets its stated aims of providing income and capital growth.

“The HPT now has significant capacity to acquire property that meets its strict acquisition criteria and is seeking opportunities to acquire new assets as well as looking at further developing existing assets within the trust. Both the pace and frequency of these developments have picked up substantially over the past few years, and we expect more expansions in the future will play an increasingly important role in the delivery of community healthcare services,” Mr Smith says.

In line with its active management strategy the Australian Unity Real Estate Investment team has recently re-financed HPT’s debt facility in two tranches, the longest of which expires in 2019. This has resulted in the cost of debt decreasing by 70 basis points and subject to HPT’s total level of gearing the reduction is expected to be accretive to the earnings and distribution yield of HPT.

Over the past 15 years HPT has grown to become one of the largest and highest-rated unlisted property funds in Australia. Today, it has a diversified tenant base and holds a quality direct portfolio of 25 healthcare properties across Australia, valued at over $550 million (as at 30 June 2014).

The Healthcare Property Trust – Wholesale Units returned 9.03 percent over one year, 7.71 percent per year over three years, 6.29 percent per year over five years and 11.36 percent per year since its inception on 16 May 2000[1].

HPT was named the winner of the 2013 Australian Property Institute NSW Excellence in Property Awards in the Property Trust Industry category, and the Australian Unity Real Estate Investment team was named the Professional Planner / Zenith Investment Partners Direct Property Fund Manager of the Year for 2013.

The post Healthcare property continues to show value appeared first on AdviserVoice.

The Australian Unity Healthcare acquires a medical technology facility in St Leonards, NSW.

The Australian Unity Healthcare Property Trust (HPT) will shoot through the $500 million in funds under management mark, with the acquisition of a medical technology facility at 8 Herbert Street, St Leonards, New South Wales for $38.5 million, says Chris Smith, Australian Unity’s head of healthcare and retirement property funds.

HPT is an unlisted property trust that invests in healthcare related property assets with a primary focus on delivering regular income, plus the opportunity for long-term capital growth.

“The purchase of this property will enhance the geographic, property type and tenant income diversification of HPT and will be funded by capacity within the existing debt facility. The property represents an initial yield of 9.8 per cent and as such is accretive to earnings,” Mr Smith says.

“HPT has an outstanding history of delivering stable income and capital growth to investors. We believe this property will contribute to the continued success of the trust. Since inception HPT has returned 11.44 per cent and its 10 year return stands at 11.56 per cent. Over three years it has returned 7.28 per cent and the one year return stands at 9.48 per cent,” Mr Smith says.

The Herbert Street property is a modern three storey medical technology facility, with a net lettable area of 10,556 m2 and basement security car park for 156 vehicles. It is located only seven kilometres from Sydney’s CBD and walking distance from the main hospital building of the Royal North Shore Hospital (RNSH) precinct.

The anchor tenant of the property is leading global prosthetics and medical equipment manufacturer and distributor, Stryker Australia. Other tenants include RCPA Quality Assurance Programs, an entity closely associated with the Royal College of Pathologists of Australia.

This is the second acquisition for HPT in St Leonards since the purchase of 176 Pacific Highway in 2008. This property is home to the North Shore Specialist Day Hospital and is the company headquarters of Virtus Health.

“Healthcare property continues to be attractive and highly sought after as an asset class. HPT has seenconsiderable investor support over the past year, with inflows comparable to pre-GFC levels,” Mr Smith says.

“The long-term outlook for healthcare is extremely positive. Australia’s ageing population, and the associated health and medical implications of this, mean demand for private healthcare and related services will continue to grow.

“There is already evidence of expanding demand in the sector and having built significant capacity for further acquisitions, HPT stands ready to capitalise on this demand for the benefit of its investors.

“Further to the St Leonards acquisition we are working on a number of other property acquisitions and brownfield developments that will result in further growth and accretive earnings for HPT by 30 June 2014.

“The acquisition focus is on hospitals, medical centres and other health related type assets in New South Wales and South-East Queensland valued at over $10 million,” Mr Smith says.

Australian Unity Investments (AUI) was named the winner of the 2013 Australian Property Institute NSW Excellence in Property Awards in the Property Trust Industry category, and it also was named theProfessional Planner / Zenith Investment Partners Direct Property Fund Manager of the Year for 2013.

Over the past 13 years, HPT has grown to become one of the largest and highest-rated unlisted property funds in Australia. Today, the Trust has a diversified tenant base and following the completion of this acquisition, will hold a quality direct portfolio of 25 healthcare properties across Australia, which together with its other assets, will be valued at over $520 million.

AUI manages a range of diversified property funds, covering healthcare, retail, industrial, commercial and office property and has over $1.7 billion in property assets under management (as at 31 October 2013).

The post Acquisition pushes HPT FUM over $500 million appeared first on AdviserVoice.

David Bryant

Four financial services industry experts have partnered with Australian Unity to launch a new investment platform, Federation Managed Accounts.

The company that provides the new platform is Federation Alliance, which has been formed by industry experts John Morrison, Stephen Reed, Jan Morrison and John (Monty) Grainger, in partnership with Australian Unity.

The platform’s fees and functionality are highly competitive with other platforms currently available, offering access to a broad range of investment options and providing transparent investment administration including consolidated reporting, tax management and online content management.

One of the platform’s key advantages is that platform investors can also apply for shares in Federation Alliance. Shareholders will then be entitled to dividends distributed by Federation Alliance, subject to a dividend pool being available and the financial position of the company at the time.

Shares representing a 90 percent interest in Federation Alliance will be offered to investors, based on their usage of the platform, and the remaining 10 percent indirectly shared between the Federation Alliance key principals and Australian Unity.

The Federation Managed Accounts platform will be administered by Linear Asset Management, an established provider of platform and administration services to the financial services industry.

David Bryant, head of Australian Unity Investments (AUI), said the previous experience of the principals in developing products right at the coal face of the industry was a major factor in AUI’s decision to partner with them.

“The Federation Alliance principals’ experience in the industry has led to the development of this distinctive approach for Federation Managed Accounts.

“Our conversations with financial advisers highlight that they are very interested in non-aligned platforms, and we believe Federation Managed Accounts will appeal to such advisers.

“At the same time, advisers and investors are looking for more value from relationships, and Federation Managed Accounts has been purpose-built to offer this.

“Offering a non-aligned platform that provides benefits to investors through shared ownership provides an attractive option for advisers and clients.

“Federation Managed Accounts will be a competitive entrant in the market at a time when complex record-keeping required by regulation makes platforms increasingly appealing for investors—if the price is right,” Mr Bryant said.

Dr Morrison agreed the platform’s administration features simplify matters for investors, and such options can only become more important as continuous changes to regulations inevitably make things more complicated.

“The ever-increasing complexities of maintaining portfolio records for tax and compliance reasons have become a major consideration for investors—the compliance struggles that SMSF trustees face are a good example of this.

“Our intention is for Federation Managed Accounts to provide managed fund, wrap and model portfolio capabilities as well as separate platforms for superannuation, non-superannuation and corporate superannuation,” Dr Morrison said.

The post New platform adds benefits for both investors and advisers appeared first on AdviserVoice.

Aged care plans require plenty of communication.

Unpalatable as it may be, clients should be encouraged to have sensitive discussions with their families about aged care needs sooner rather than later if they want to avoid potential conflict and distress, as well as financial problems, says Derek McMillan, CEO of Retirement Living at Australian Unity.

“Our rapidly ageing population, increasing life expectancy, and busy lives mean that more and more Australians will need some form of assistance as they age, whether that be care in the home or residential aged care.

“As the supply of aged care services is limited, families need to consider their options in advance to avoid unnecessary stress and anxiety for themselves and their families.

“The best preparation for parents is to discuss well in advance with their children, and other involved relatives, what their preferences are and what plans may need to be made as they get older.

“These discussions should take into account what parents want to do with the family home when they are no longer able to live in it alone; what kind of facility they would like to live in; what they want to do if they can no longer drive; and even what kind of medical care they would like.

“Most of us find such issues difficult to talk about at the best of times. However, having this conversation under pressure when an immediate decision needs to be made is much more difficult, more emotional, and often a source of unhappiness.

“Therefore, families should start to talk about it well before any decisions are likely to be needed, so the discussions can be held in calm and rational manner – and most important of all, they reflect what the parents want.”

Mr McMillan said that often, people find they have very different expectations to their parents.

“For instance, we have seen adult children assume their parents didn’t want to leave the family home, when the reality was their parents couldn’t wait to move into a smaller place but hadn’t moved out because they thought their children would be upset if they sell it.

“We have also spoken to parents who assumed they would be invited to move in with one of their children who would then provide the support and care t they required, and were bitterly disappointed to find their children had no intention of taking them in.

“Having an open and frank discussion about expectations well in advance will allow better planning and help avoid the conflict that unpleasant surprises usually bring,” Mr McMillan said.

He said families should apply the “40-70” rule (after research undertaken in the US*) which recommends that when the children reach age 40 or the parents reach age 70, it’s time to have the conversation, even if the parents are still perfectly healthy and independent.

He added that a necessary component of the conversation is the finances.

“We are inundated with advertising images of retirees on caravanning trips around Australia or walking hand in hand down a beach, which might be the dream for a few years.

“But the reality is most Australians will need to plan for the cost and the probability of additional health and aged care in latter years of their retirement.

“The significant gap between the amount of funding provided by the Government to aged care and healthcare services, and the ever-increasing demand for such services resulting in potential difficulty in getting aged care accommodation, needs to be understood and planned for.

“Consequently, families will need to talk about how they will fund the care needed by ageing family members as well as how and where that care should be provided” Mr McMillan said.

The post Have conversations about aged care sooner rather than later appeared first on AdviserVoice.

“After three or four years of most clients being unwilling to do anything but put their money into cash, things are starting to change, and there is increasing interest among investors in equity and property markets.
 
“The fact clients are now more willing to take on risk and look at growth assets means advisers can show they add value by making recommendations about suitable asset classes that not so long ago would have fallen on deaf ears.
 
“Advisers also have a role to play in reducing the timelag between the market making a move, and investors following.
 
“It is normal for there to be a timelag between the market moving into a ‘bull’ phase and investors getting back into equities, and advisers should be doing everything they can to reduce this timelag for their clients by developing and explaining the best strategy for them.
 
“To best assist clients, advisers need to show the ability to develop portfolio construction strategies, and not just be ‘order executors’ who follow their clients’ directions, which has tended to be the case since the GFC for those clients who have insisted on sitting on cash.
 
“It’s also an opportunity for product suppliers to give more support to advisers rather than just promote products, by providing the resources and data to help advisers communicate to clients an understanding of asset classes and the attractions of particular sectors,” Mr Purcell said.
 
He added advisers have an even more important role to play for those clients who are still uncertain about whether to move back into markets.
 
“It’s understandable advisers might be nervous about arguing with clients but they need to help clients understand they can’t sit on the sidelines forever, and that they are already missing out on significant gains in the market.
 
“Advisers need to engage and be persuasive with their clients because that’s what they are there for.
 
“If the relationship is going to develop in the way in needs to in a post-FOFA world, advisers need to stick to their guns and show the value of their advice,” Mr Purcell said.

The post Opportunity for advisers to show value of their advice appeared first on AdviserVoice.

Zenith’s View
With Australian Unity Property Funds Management Limited (AUPFML) firmly installed as the new RE, management continues to pursue the short-term strategy to rationalise some of the assets, recycle capital and rebalance the portfolio to a mix deemed more appropriate to their long-term strategy.

Following our last review in 2011 while the Fund remains somewhat overweight to certain sectors, regions and tenants, there is clear evidence that the strategy is taking shape.

Zenith retains a strong level of conviction in AUPFML’s property team which underpins our faith in the ongoing strategy execution.

While the total returns under previous management and to date have been disappointing, the Fund has continued to generate moderate income yields. Since the change in RE in late 2010, Zenith has always considered the potential in the Fund to be viewed as longer term and not focussed on short term performance. While total returns are likely to continue to be subdued in interim we continue to retain faith in the turnaround strategy proposed by management and but expect that in the immediate term returns will lag our sector benchmark. 2012/13 should continue to represent a period of stabilisation for the Fund with the significant experience and active strategy of AUPFML paving the way for solid future performance.

Zenith believes that the significant experience and active strategy of the new manager is a significant positive for unit holders as we believe that this entity has greater depth and experience compared to its predecessor. Property markets are generally stabilised and notwithstanding some short-term global economic uncertainties we see a positive outlook for quality assets under strong managers over the longer term. We are of the opinion that going forward the Fund should be more than capable of providing a superior risk adjusted returns to investors and continue to hold our high opinion of the investment managers’ capabilities in this space.

The post Zenith Recommended on Australian Unity Diversified Property Fund appeared first on AdviserVoice.

The Group’s operating earnings were $34.6 million, up eight percent, a result that included substantial costs associated with responding to the federal government’s changes to private health insurance legislation. 

The Group’s profit after tax was $22.3 million, a reduction of 13 percent compared to the previous year and largely attributable to volatile investment markets and expenses incurred in relation to mergers and acquisitions. 

Result overview

• Revenues $1.12 billion, up 10.6%
• Operating earnings $34.6 million, up 7.8%
• Profit after tax $22.3 million, down 12.8%
• Members funds $449 million, up 15.7%
• Funds under management $12.2 billion, up 2.5%
• Funds under advice $2.0 billion, up 91%
• Health claims paid $535 million, up 12.7%
• Retirement Living development projects of $515 million 

Group Managing Director Rohan Mead said that the 2012 result was a creditable achievement in a year where the operating environment, both economic and regulatory, remained difficult. 

“While the external environment affected our overall result, the Group significantly expanded its operating base by joining with Big Sky Credit Union. The credit union business combined with the Lifeplan Australia Building Society to form the Big Sky Building Society, bringing more than 30,000 new members and customers into the Group,” Mr Mead said.  

At year end the Big Sky Building Society had assets of $655 million. 

“Another major growth contributor during the year was the healthcare business, with the corporate health fund, GU Health, growing policyholder numbers by 16.7 percent and the retail fund by 6.1 percent. Both businesses were well above the industry average growth rate (3.7 percent), for the second consecutive year. 

“We believe this growth should assist our businesses as they adjust to the as yet unknown and future impacts of the Government’s decision to impose a means test on the private health insurance rebate from 1 July 2012,” he said. 

Mr Mead said that during the year the company also made major acquisitions in the financial advisory and funds management businesses. He said that he was particularly pleased that, after some years of investment by the Group, the Personal Financial Services business began posting positive monthly financial contributions in the second half the year. 

Additionally, the Group’s preventative health and chronic disease management business, Remedy Healthcare, provided intervention and coaching to its 5000th patient and continued to strengthen the evidence base for its programs. The Retirement Living business kept village occupancy and residential aged care occupancy at 95 percent and 98 percent respectively. 

“These achievements are reflective of continuing progress on our ambition to become Australia’s leading wellbeing company. 

“The investments we made during the year demonstrate the depth of opportunity available to Australian Unity to pursue its long-term growth strategy,” he said. 

Mr Mead added that despite the patchy economic environment and global uncertainty, Australian Unity remained well-placed to respond to the changing demographic and social needs in Australia, where an ageing population seeks high quality financial, health and retirement services. 

“Governments all over the world are grappling with these demographically driven issues, and they will remain with Australia for decades to come. As we all come to understand these powerful forces, we believe Australian Unity can play its part in responding to these changing needs and help to provide important social infrastructure to the community,” Mr Mead said. 

“We believe a strategy that is centred on the wellbeing of Australians and building a leading, sustainable portfolio of businesses that foster this wellbeing is the right one for the future.”

The post Australian Unity Group revenue up in challenging environment appeared first on AdviserVoice.

In many instances, ‘Mum and Dad’ had a family business for many years that has long since ceased to be a going concern and, but for the large loan account inside the company, would have wound it down a long time ago. In other cases, it is a family investment trust – testament to a wealth creation and/or asset protection strategy set up years ago with their accountant and financial adviser which may have provided some tax benefits and built scale in pooling family investment reserves. Sometimes, however, it is not necessarily Mum and Dad’s family trust or private company but their high-income-earning son or daughter who has set up the structure and asked Mum and Dad to be beneficiaries to help manage tax.

Nevertheless, in all the cases I have looked at, no-one has ever had the forethought, a decade out from retirement, to ask; “Will this impact on our ability to qualify for the Age Pension?”

What are the Attribution Rules?

The attribution rules were introduced from 1 January 2002 and became effective from 30 April 2002. Their purpose was to assess interests in family trusts, testamentary trusts and private companies under both the Income and Assets Tests.  This would effectively remove a ‘Centrelink shelter’ that had allowed many people to qualify for Government assistance who otherwise would have been caught if assets held in these structures had been invested in their own names.

Trusts and Private Companies

Without going into “what is a company?” and ‘“what is a trust?”, details of which I am sure we are all cognisant, consider what Centrelink and the Department of Veterans’ Affairs (DVA) defines as a private company or private trust. According to the Centrelink Financial Information Services (FIS) Fact Sheet FIS022.0905, a private company,

“is a separate legal entity, set up to run a business or to hold investments, registered under Corporations Law, owned by shareholders and managed by its directors who are elected by the shareholders (1).”

Centrelink will deem the entity as a private company if, at the end of the last financial year, it met any two of the following three criteria:

1. the consolidated gross operating revenue of the company and any subsidiaries was less than $25 million;
2. the consolidated gross assets of the company and any subsidiaries were less than $12.5 million;  and
3. the company and any subsidiaries had less than 50 employees.

Most of the Mum and Dad enterprises I have encountered are certainly within that range, and if private companies hold many millions in Net Tangible Assets (NTAs) it generally means the directors hold significant wealth in their own names and in family trusts and Self-Managed Superannuation Funds (SMSFs), so they will not be looking to qualify for Centrelink anyway. But the Global Financial Crisis (GFC), which has been our constant companion since 2007, has put many previously high net worth retirees in a position where Centrelink support is certainly an option to help cover the costs of living in retirement.

But the attribution rules have come into play to reduce or deny the prospect of Centrelink support for many people. Money tucked away in family trusts and private companies, even where it is for the benefit of children, or for asset protection purposes, has been caught in the ‘attribution’ net.

In terms of private trusts, again referring to the aforementioned FIS Fact Sheet, Centrelink includes family discretionary trusts and testamentary trusts with fewer than 50 ‘members’. Now, trusts generally don’t have ‘members’, they have beneficiaries, or objects (in the case of a discretionary trust). But for the purposes of the attribution rules, a trust with more than 50 members is deemed to be a widely-held trust in the same form as listed (or unlisted) property trusts, managed equity trusts and other public trading trusts. In these cases the member’s holding is treated as a financial asset and deemed for income using the normal deeming rates.

The Assessment Tests with regard to Private Companies and Trusts

One of the difficulties faced by many people seeking to apply to Centrelink or to the DVA for financial support, particularly when they become eligible for the Age Pension, is determining how they will be assessed when there are often some seemingly minute and innocuous associations to a private company or trust. For instance, in the examples mentioned above where Mum and Dad are directors of a defunct company that ceased trading many years earlier, or where they are objects of a family trust and have never received a distribution, are they still caught by Centrelink/DVA?

There are two distinct tests that apply jointly to determine the inclusion of assets and income from a private company or trust. These are:

1. a Source Test; and
2. a Control Test.

Simply speaking, the Source Test relates to the source of funds introduced to a trust or private company, and the Control Test relates to who is in control of the trust or private company – for instance, directors of the company or corporate trustee, individual trustees, appointors and beneficiaries/shareholders.

By applying the attribution rules, a person applying for Centrelink/DVA support is attributed with the assets or income of the private trust or company and those assets and income are treated no differently to how the person’s own assets and income are treated.
1. The Control Test

You might think, “Well, the trustee has control of the assets of the trust so it is likely they will be ‘pinged’ by Centrelink/DVA”. And it is true that the director of the private company or the trustee of the trust does have control of the assets. But consider also, apart from the day-to-day management of the trust, who else can exercise effective control of the trust. Centrelink considers that anyone that can dismiss and appoint a trustee, veto a trustee’s decision or change the trust deed is also included; that is, an appointor, principal or guardian. Centrelink will also look beyond the normal trust law auspices where it deems a person might have influence over the trustee, or where the trustee might be expected to act for the benefit of that person.

2. The Source Test

The Source Test, on the other hand, seeks to attribute capital invested in a trust or company with the person(s) who originally transferred assets (which can include non-tangibles such as services), into the company or trust. If there has been no consideration paid for these assets, then there is necessarily an assumed retention of control by the transferor, unless in the case of a genuine gift.

If, after applying the above tests, a person is attributed with a share of the assets and/or income of a private trust or company, then the person’s share of the market value of the attributable assets, or the portion of net attributable income, will be assessed as being his/hers.

Strategy Considerations

There are some positives and negatives when applying the attribution rules.

Negatives

Many would consider it a negative to be assessed in the first place.  In addition to this, not all deductions allowed under the Tax Act will be allowed by Centrelink/DVA as a deduction to reduce income. These non-allowable deductions can include:

• prior year losses;
• losses from unrelated businesses;
• deductions caught up in the definition of Reportable Employer Superannuation Contributions (RESC); for example – salary sacrifice, and certain capital expenses.

Positives

There are some positive aspects however. On the assets side, a principal residence owned by a family trust will not be assessable. Also, assets are net of liabilities (if those liabilities are attributable to assessable assets). If a person is deemed not to be the controller of the trust of a private company, the person will not have the market value of the assets assessed against him/her, but will be assessed on the actual distributions or dividends (including imputation credits) made by the private trust or company for twelve months after the date of distribution.

However, the strategic advantage of the attribution of private trust/company income comes from the fact that private trusts and companies are not deemed for income, as are other financial assets, such as listed shares, term deposits and managed equity trusts.

This provides for the ability to manage the amount of income that is assessed to the Age Pension applicant. It can also have a positive outcome in planning for aged care as the use of a private trust may be useful in reducing the income-tested fee with only the actual (taxable) income of the trust assessed under the Income Test.

The following is an extract from the Guide to Social Security Law, 4.12.7.10, which contains the general rules regarding the attribution of income to an attributable stakeholder:

‘Attribution of the income of a private trust or private company
The basic approach for the attribution of the income (section 8(1)-‘income’) of a private trust or private company is as follows:

• If the assets (1.1.A.290) of an entity are attributed to a person (the attributable stakeholder) then all of the income (adjusted net profits) generated by those assets will also be attributed to them (subject to the percentage of attribution of the assets)
• Income from the entity for an attributable stakeholder will NOT be deemed, actual income will be used and will generally be assessed on an annual basis from the income tax return
• If the attributable stakeholder(s) choose to distribute entity capital or income to other people, the amounts distributed are to be treated as gifts by the attributable stakeholder and are subject to deprivation (1.1.D.110).

Exception: Distribution of the income of an entity to the partner of an attributable stakeholder is NOT treated as a gift of the stakeholder and is NOT subject to deprivation.

Note: An income support recipient who is an attributable stakeholder of a controlled entity can request a reassessment of their circumstances at any time (2).’

Therefore, in order to manage assessable income, a non-interest bearing deposit (or an insurance bond purchased by a private trust where there are no withdrawals) will generate zero assessable income for tax purposes. This means that while the value of the insurance bond will continue to be assessed under the Assets Test in full, there will be no assessable income, thus resulting in minimising the assessable income of the trust.

Of course, the benefits of the treatment of income from a private trust or company as opposed to the  deemed income from financial assets needs to be weighed up against the reporting and other associated costs of running a separate investment structure.

But what about the mum and dad with a loan to a defunct company, or the elderly parents who are trustees or minor beneficiaries of their children’s family trust?

Other Options

According to Centrelink, any person who has a loan to a private trust or company will be assessed under the deeming provisions, irrespective of whether he/she is a controller or non-controller. On the surface it sounds fairly black and white. This is, however, where the ‘Special Assessments’ area of Centrelink earns its stripes. In the case where a private company has a debt to the directors that will never be repaid (because the business that the company ran ceased to be a going concern a long time ago), it is worth going the extra step to push pass the initial bureaucracy and appeal the decision. I have seen instances like this where the loan was ignored, pending the winding-up of the company, without the amount being seen as a gift and deemed for a period of five years (as might normally happen).

For beneficiaries or shareholders with minority interests, Centrelink will look at the trust’s history of income distributions, or the company’s history of dividend payments to ascertain a payment pattern. If Mum and Dad are objects of a trust that has been in existence for a long time and have never received an income distribution (and are not deemed to be controllers of the trust or to have been an initial or subsequent source of transferred capital), then Centrelink has, in the past, been shown to disregard the holding, pending surrender of the holding.

In the case of a trusteeship or a directorship that has precluded eligibility for the Age Pension, the trustee or director can relinquish control, that is, resign as the appointor and/or trustee of a trust or, for a company, relinquish all formal roles, directorships and shareholdings. They are, of course, considered to have gifted all the assets held by the trust or company and the deprivation rules will therefore apply where the market value of the amount foregone/gifted, is assessed as an asset for five years and deemed for income.

According to Centrelink, it will accept a genuine resignation has occurred where, in respect of the private trust or company, both the controller and his/her partner:

• relinquish all formal roles and control;
• relinquish all beneficial interests; and
• make a written declaration that they will not exert any control over, or benefit in any way from, the trust or company.

Excluded Trusts

For the purposes of the Centrelink/DVA means test provisions, and in particular the attribution of assets or income of a private trust to an individual, the Social Security (Means Test Treatment of Private Trusts – Excluded Trusts) (DEEWR) Declaration 2008 specifies classes of trusts that are ‘excluded trusts’ for these attribution purposes, including:

• pre-10 May 2000 community and fixed trusts;
• trusts where the sole or dominant purpose of a trust is to receive, manage and distribute property transferred to it by a government body for a community purpose; and
• trusts that hold, manage, or dispose of indigenous-held land for a community purpose or where the sole or dominant purpose of a trust is to receive, manage and distribute income generated from the use of indigenous-held land for a community purpose.

It is also important to note that certain ‘Court-ordered trusts’ and, particularly, Special Disability Trusts, have different treatments again imposed by Centrelink and the DVA. But these issues are beyond the scope of this paper.

Conclusion

There are three important aspects of dealing with private trusts and companies to bear in mind:

1. Make sure your clients fully disclose all beneficial interests and any trusteeships or directorships they might have.
2. Know the attribution and deprivation rules and how they will impact on your clients’ chances of qualifying for Centrelink/DVA support before you implement any strategies to maximise their pension amount.
3. An initial Centrelink assessment should not be taken as the be-all-and-end-all – there are avenues for appeal.

And get some good technical advice!

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

1. Centrelink, Private trusts and private companies, FS022.0905, p1, <http://www.centrelink.gov.au/internet/internet.nsf/filestores/fis022_0905/$file/fis022_0905en.pdf>, accessed   23 July 2010.

2. Australian Government, Guide to Social Security Law, Version 1.166,  Section 4.12.7.10 Income Attribution, updated 1 July 2010, <http://www.fahcsia.gov.au/guides_acts/ssg/ssguide-4/ssguide-4.12/ssguide-4.12.7/ssguide-4.12.7.10.html>, accessed 28 July 2010.

The post Family Trusts, Private Companies and Centrelink – how do the Attribution Rules affect your Retiring Clients? appeared first on AdviserVoice.