Julie Hartley

Product Disclosure Statements (PDSs) are subject to a range of regulatory obligations but they can also support commercial objectives (for example, a business that prides itself on speaking in plain English might want to present easy-to-read documents).

Below is a short refresher on content vs convenience.

Living documents

PDSs are not ‘set and forget’ documents. They need to be regularly reviewed and updated based on:

• Changes to product, insurer or legislation – e.g. design and distribution and unfair contract laws will impact terms and conditions including the information contained in your PDS;
• Changes to other extraneous material included in the PDS – e.g. changes to the Insurance Contracts Act such as the wording of the duty of disclosure notice or other changes, including privacy disclosures;
• Regulatory guidance and instruments such as ASIC instruments, ASIC Regulatory Guides (e.g. Regulatory Guide 271 which includes enforceable provisions), good disclosure principles and other guidance contained in Regulatory Guides (like RG168 and RG221) or ASIC Information Sheets being developed or updated;
• Product intervention orders issued by ASIC – these may require product issuers to include additional disclosure;
• Industry code updates – e.g. the General Insurance Code of Practice was updated in 2020; and
• Customer feedback/complaints – e.g. reviewing relevant customer feedback allows you to identify any ongoing systemic issues that are causing customer complaints. These may need to be addressed in the PDS.

Tip: Staying abreast of regulatory changes and the regular review of your PDS should form part of your risk management and compliance framework. When DDO laws come into effect in October 2021, there is an expectation that all PDSs will be regularly reviewed and updated – start developing the review process now.

Supplementary documents

It is not necessary for a PDS to be a single document. PDS information can be incorporated by reference, i.e. the PDS can refer to other documents or information, provided the information is in writing, publicly available and easily accessible. For example:

• Supplementary PDSs: These can be used to correct misleading or deceptive statements, include missing information or update the information in a PDS;
• Terms and Conditions: These can be hosted on a website and updated regularly (however every update must be communicated to the insured); and
• Product Excess and Discount Guides (PED Guides): These are used for specific insurance products (e.g. motor vehicle and home and contents) to provide information about the costs of the insurance policy (e.g. premiums and excess payable, discounts available, no claims bonus) and the claims process. PED Guides are not required by law but insurers use them to move prescribed content into another document to simplify and shorten the PDS to promote product understanding.

Tip: Any information that is incorporated by reference is still subject to the same rules as a PDS, so make sure that a supplementary document is clear, concise and effective and is not misleading or deceptive. Sanity-check whether more than one document is really necessary – it can be hard to deliver and difficult to maintain.

Combining the FSG and PDS

In some cases, it is possible to combine the FSG and PDS with the policy wording – effectively creating a one-stop shop for your disclosure document. This can help to ensure there are no problems when the document is delivered because it is one document rather than 2 or 3.

Whether you are using a digital channel for the sale of the insurance or it is a face-to-face sale, it is convenient to have one single document that covers all the required disclosures. Check whether you qualify for the use of a combined FSG and PDS.

If you are a representative of the insurer (for example an authorised representative of the insurer or agent of the insurer) you can combine your FSG with the insurer’s PDS.

Definitions

In order to meet the ‘clear, concise, and effective disclosure’ obligation, most PDSs include defined terms. There are, however, no specific obligations that apply to defined terms. The question of how to balance the flow of reading and consumer understanding with the need to define certain terms in a manner that will make it clear that they are defined, is a tricky one.

As a general principle, words and phrases in a PDS possess their natural and ordinary meaning unless the word or phrase has acquired a special meaning through a definition. Identify defined terms by differentiating them from other words in the document (for example, bolding, italicising or capitalising defined terms). Definitions can be included in a specific ‘Glossary’ or ‘Defined Terms’ section at the beginning or end of a PDS, or terms can be defined as they come up in the document.

Tip: Make sure all defined terms are used in the PDS to avoid confusion and add a warning at the start of the PDS that some terms have been given a special meaning.

Electronic Delivery

A PDS can be provided electronically, provided it is given to a client in a manner that allows them to view the PDS and save it. Normally this means sending the PDS as a PDF attachment or emailing a hyperlink to view the document. However, technology could also be used to innovate insurance products, such as making PDFs interactive or personalising PDS documents as part of an online digital platform.

Tip: Make sure the PDS can be downloaded and saved, regardless of how it is provided.

With technology solutions it is possible to innovate and simplify. Beyond using plain English to make the PDS more understandable and more accessible, you should seize the opportunity offered by the new design and distribution obligations (commencing on 5 October 2021) to:

• Modify the design of your products;
• Re-draft the documentation accordingly; and
• Consider how you can innovate so that a product is unique in the market.

By being the first to seize new opportunities and improve your products (while still meeting your compliance obligations), you will be able to position your business as an industry leader.

By Julie Hartley and Lydia Carstensen

The post Insurance PDS Obligations – ticking the box and thinking outside it appeared first on AdviserVoice.

Julie Hartley

Going through a divorce may upset the best laid out estate plans by partially or completely revoking a couple’s Wills.

Jennifer and Thomas were married for 5 years before Jennifer filed for divorce earlier this year. They have 2 children under the age of 10 and previously executed a Will appointing each other as the executor, trustee and sole beneficiary of their estate. In the event that their spouse does not survive them, the estate was to be split equally among testamentary discretionary trusts set up for each of their children.

What does the end of the relationship mean for their respective estate plan?

The rules surrounding what happens to someone’s Will in the event of a legal breakdown of their relationship (whether divorce or annulment) differ from State to State, with the provisions in one particular State being more drastic than the others.

If the Wills had been made in New South Wales, Victoria, Queensland or the Northern Territory, Jennifer’s Will (for example) would operate as if Thomas had-predeceased her, which means that the gift to and appointment of Thomas as executor, trustee or guardian would be ineffective (subject to a couple of exceptions). The exceptions are provisions in the Will which, broadly speaking are an appointment or grant of a power of appointment exercisable by Thomas in favour of beneficiaries which include Thomas’ children. These would remain unaffected.

The above applies not only to the termination of a marriage but also to the termination of a civil union or civil partnership in the Australian Capital Territory, a registered relationship in South Australia as well as the revocation of a deed of relationship in Tasmania.

But what if Jennifer’s Will was governed by the laws of Western Australia? The rules in Western Australia are quite harsh as they treat the whole of Jennifer’s Will as being revoked upon the termination of her marriage (instead of the revocation being limited to gifts or appointments in favour of her spouse as in the other jurisdictions). The implication of this is that Jennifer would die intestate and the intestacy laws of Western Australia would apply, thereby losing the benefit of testamentary trusts set up for the children or any charitable gifts she may have made. The revocation would occur even if her Will only contained gifts and appointments unrelated to Thomas.

There are two ways for Jennifer to avoid the application of these rules. The first is by demonstrating a contrary intention in the Will. In certain States and Territories, such an intention may be evidenced by means other than the Will to the satisfaction of the Court.

Alternatively, the revocation provisions will not apply in the Australian Capital Territory, Western Australia and South Australia if Jennifer re-affirms or republishes her Will, either by re-executing the document (in accordance with the requirements of a formal Will) or by way of a codicil.

In any case, while the revocation provisions provide a temporary safety net while the testator is going through a stressful period, we strongly recommend that an updated Will (and ancillary documents such as enduring power of attorney and enduring power of guardianship) be prepared and signed implementing the revised estate plan for the individual to ensure these reflect the testator’s current wishes and strategy.

By Julie Hartley, Associate

The post What happens to a testator’s Will after divorce? appeared first on AdviserVoice.

Julie Hartley

“No” is probably the first answer that comes to mind but it is actually “maybe”, if we are to believe the full Federal Court in the judgement it handed down in the Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] case last month.

One of the issues the Court examined is whether the leasing of a student accommodation unit owned by a related sub-trust of the fund to the daughter of the sole member would cause the trustee to breach the sole purpose test.

According to the Court such an arrangement, if conducted in the right manner and circumstances, will not breach the sole purpose test. While this is the latest judicial decision on this issue, the position may still change in the future if the ATO decides to appeal the decision to the High Court.

So what are the right circumstances?

The sole purpose test is concerned with the purposes for which assets are maintained by the fund. This means that if acquiring the property is a prudent investment that will provide returns for the provision of membership benefits in the future, then it is consistent with the core and/or ancillary purposes set out in the legislation.

A fund is prohibited from providing a present benefit to members or their relatives. However, provided the fund can show the tenant could have obtained accommodation elsewhere (i.e. they were not an unsuitable tenant) and the fund could have leased the property to an unrelated tenant (i.e. the property was not unsuitable), then leasing the property to a related party who pays market rent will not generally confer any financial or other non-incidental benefits to the related party or the member.

It is crucial that the arrangement is conducted at arms’ length (and the fund can show supporting evidence) and the relative pays market rent (ideally supported by rental history, though valuation may be enough).

For example, some of the key factors in the case were that the property had been rented out twice to unrelated students for a period of one year each, the rent paid by the daughter matched the rent paid by the unrelated former tenants (noting that the Court did not expect the rent to have increased over that period), and the leasing of the property was handled by an unrelated third party without any direct involvement by the director/member of the fund.

The Court took the view that, in the above circumstances, the identity of the tenant was irrelevant in determining whether the fund had complied with the sole purpose test or not.

It was noted that the failure to pay market rent would most likely result in the trustee breaching the sole purpose test as it could be inferred that the fund was instead maintained for the collateral purpose of providing accommodation to a related party at a discounted rate.

Such an inference could also be drawn if the arrangement had impacted the investment strategy of the fund. Similarly, a breach may occur if there is evidence of a collateral purpose to the arrangement.

So it is unlikely that the arrangement would comply if it could be shown that the main purpose of the fund buying the property was to provide accommodation to the related party.

One of the judges did caution that the purpose of the trustee in entering into the transaction (i.e. diversifying its asset pool for the purpose of deriving income and capital growth) is not to be confused with the subjective factors motivating the person(s) controlling the trustee.

The argument that the fund fails the sole purpose test simply by virtue of entering into a transaction with a related party is not supported by the wording of the SuperannuationIndustry (Supervision) Act 1993 (Cth).

However, it is important to keep in mind that while the arrangement may not breach the sole purpose test, it may still be in breach of other limitations in the SIS Act (such as in-house asset rules for instance).

So as always, whether this can be done or not depends on the facts and circumstances of each particular case and it is best to seek professional advice before acting.

The post Can an SMSF lease residential property to a related party? appeared first on AdviserVoice.

Julie Hartley

A significant ruling was recently handed down in the Queensland decision of Re Narumon Pty Ltd regarding an attorney’s right to extend a member’s binding death benefit nomination.

The facts

Mr Giles, the sole member of his SMSF, appointed both his wife and his sister (“Attorneys”) as his enduring attorneys for both financial and health matters by executing an enduring power of attorney (‘EPOA’) in early June 2013.

In the period between 2010 and 2013, five binding death benefit nominations (‘BDBN’) were signed by the member.  While differing in their percentages, in substance the nominations were generally in favour of his wife Mrs Giles, their son Nicholas and some other relative, such as his sister.

When he was deemed to have lost mental capacity in August 2013, the latest binding death benefit nomination had been signed on 5 June 2013 (“2013 BDBN”) but was expressed to lapse after 3 years.  The beneficiaries under the nomination were Mrs Giles, Nicholas and Mr Giles’ sister.

In order to maintain his wishes, in March 2016 his Attorneys executed a document titled ‘Extension of binding death benefit nomination’ which extended the 2013 BDBN by a further 3 years (“BDBN extension”).

They also executed another BDBN in favour of Mrs Giles and Nicholas. Mr Giles’ sister was not included as they realised she was not an eligible beneficiary under the superannuation laws.

After the member’s death in June 2017, the trustee of the SMSF applied to the Court for declarations and orders to clarify uncertainties about certain documents for the Fund, including the BDBN extension.

Findings

The Court made the following findings in relation to the 2013 BDBN and its extension:

• The 2013 BDBN was valid, except to the extent that it allocated a portion of his death benefit to his sister, who was not an eligible beneficiary. That portion is to be allocated as per the trustee’s discretion.
• The Attorneys were not prohibited by the terms of the trust deed to sign a nomination on behalf of a member, nor were they prohibited to do so by the superannuation laws. Instead, the trust deed expressly allowed an enduring attorney (who had been validly appointed under an EPOA) to exercise any right or power given to a member under the terms of the trust deed if the member were under a legal disability.  As a result, since the member had a right to make a BDBN, the Attorneys had the authority to sign one too.
• Pursuant to the EPOA, the Attorneys were given the authority to make financial decisions on behalf of the member, which the Court interpreted as including the signing of a BDBN.
• While on the face of it, it appears that the Attorneys (and in particular Mrs Giles) entered into a conflict transaction, which had to be expressly permitted by the EPOA, when she executed the extension allocating Mr Giles’ death benefit to herself and her son, the Court found that there was in fact no conflict transaction.  As demonstrated by the pattern established by Mr Giles throughout his 5 nominations, his wishes were clearly for his wife and son to receive his death benefit.  Accordingly, the Court’s view was that all the Attorneys did was ensure his wishes were carried out as he intended, which was in line with the Attorneys’ duty to act in Mr Giles’ best interest. The fact that one of the Attorneys benefitted from their actions did not breach the duty they owed to him.
• Since the BDBN extension was held to be valid, the validity of the new BDBN made by the Attorneys was not considered.
• The judgement did not address the situation where an attorney makes a BDBN on behalf of a member who had never made one before, or amends/varies an existing BDBN, however it notes that in these circumstances, various considerations would need to be taken into account, such as the scope of the attorney’s authority, their authority to enter into conflict transactions, whether the act is in the interest of the principal, etc.
• Lastly, the Court agreed with previous judicial decisions and confirmed that section 59(1A) and regulation 6.17A of the Superannuation Industry (Supervision) Act do not apply to self-managed superannuation funds.

Take away points

So, if you want your attorney to be able to make, vary or revoke a BDBN on your behalf then:

• the trust deed should contemplate the member giving authority to their attorney to exercise any powers conferred on the member under the terms of the trust deed,
• for certainty, it is best if the trust deed expressly allows an attorney to make, vary or revoke a member’s BDBN on their behalf,
• the scope of the EPOA must be wide enough to include the signing of a BDBN – at the very least it needs to allow an attorney to deal with the principal’s financial affairs – and must not include an express limitation on the attorney’s power in relation to BDBN,
• the EPOA may need to allow an attorney to enter into conflict transactions, and
• evidence of a member’s intention as to the allocation of their death benefit is pivotal, including any previous nomination (whether binding or non-binding) by the member and other evidentiary documentation.

While the case only dealt with the extension of the member’s lapsed BDBN by their attorneys, the reasoning of the case may similarly be applied to an attorney making a brand new BDBN on behalf of the member.  However, the question of whether the new BDBN is valid will be determined on a case by case basis having regards to the specific circumstances of the case.

By Julie Hartley, Associate

The post Court sheds light on an enduring attorney’s right to extend a BDBN appeared first on AdviserVoice.

Julie Hartley

The First Home Super Saver Scheme (FHSSS) is intended to assist individuals entering the property market by allowing them to save on tax and receive higher earnings than if the money was invested in a bank account.

What is the scheme?

From 1 July 2018, an eligible member may apply to withdraw certain contributions (and their associated earnings) from the superannuation system for the purposes of purchasing their first home (and not for the acquisition of furniture for example).

It is a single use system only, available per taxpayer (and not per superannuation fund).

Eligibility of member

Broadly speaking, to take advantage of the FHSSS, the individual must be an adult member of a superannuation fund who does not currently own or have previously owned any type of real property.

An exception will be included in the yet-to-be-released regulations dealing with circumstances where a member previously suffered financial hardship that resulted in a loss of ownership of a property interest (e.g. bankruptcy, divorce, loss of employment, etc).

Eligible contributions

Only eligible contributions can be withdrawn from the superannuation system under the FHSSS.  Eligible contributions are contributions which were voluntarily made by the member since 1 July 2017 and include personal contributions by the member as well as employer contributions in excess of the superannuation guarantee (e.g. salary sacrifice contributions).

The maximum amount (being comprised of eligible contributions and their associated earnings) that can be withdrawn is capped at $30,000 across all years however only the first $15,000 of eligible contributions made in a single financial year are counted (an example will illustrate this below).  This $30,000 cap is not in addition to existing contribution caps.

Priority rules

In order to maximise the release amount, the legislation incorporates priority rules dictating the order in which contributions are counted.  This is relevant as a member can only withdraw 85% of their concessional contributions as opposed to 100% of their non-concessional contributions.

Pursuant to these rules, contributions are counted in the order in which they are received by the fund (earliest to latest) and if concessional and non-concessional contributions are received on the same day, the non-concessional contribution is counted first.

Example

• Lucy is employed and her fund has received the following contributions in the 2018/19 financial year.
• Lucy’s employer: $6,000 of super guarantee contributions (non-eligible)
• Lucy’s employer: $18,000 (salary sacrifice on 20 June 2019) (eligible)
• Voluntary non-concessional contributions: $10,000 (on 1 November 2018) (eligible)

The super guarantee contribution is disregarded as it is not a voluntary contribution. The non-concessional is counted first (as first in time) and only $5,000 of the salary sacrifice contribution is counted to make up the difference to the $15,000 annual cap.

Accessing payment

The process that a member has to follow to access payment is quite complex. It includes requesting the ATO for a FHSSS Determination via MyGov, the ATO issuing a FHSSS Determination to the member and the member choosing to act on the Determination by requesting a FHSSS release authority. The authority is then served on the trustee of the superannuation fund who pays the amount to the ATO.  The ATO will deduct any tax payable before releasing the amount to the member (within 25 business days of approval).
The member then has 12 months to utilise the FHSSS amount from the date of receipt (an extension may be requested).

The FHSSS amount will be included in the member’s tax return and taxed at their marginal tax rate minus a 30% offset.

Conditions to be met

In addition to the above process, there are multiple conditions that a member must meet once they have received the FHSSS amount to avoid adverse tax consequences.
These include:

• entering into a contract to purchase or build residential premises after the release (it cannot be vacant land or a caravan for instance) within 12 months of receipt of the FHSSS amount;
• the price of purchase or construction to be at least equal to the FHSSS amount; and
• occupying or demonstrating a genuine intention to occupy the premises, and doing so for at least 6 of the first 12 months.

The ATO must be notified that all of the above conditions are satisfied within 28 days after execution of the contract.

What if amount is not (fully) used?

In this situation, options for the member are to:

• apply for an extension for a further 12 months; or
• make a non-concessional contribution equal to the unused FHSSS amount within the relevant period and advise the ATO.

If the member fails to do either of the above, a 20% tax will apply on the unused portion of the FHSSS release, including on the unused associated earnings.  The member will be allowed to keep the amount.

What should members do?

Members should first consider whether the scheme is worth the effort – the above rules are complicated and one oversight could have detrimental consequences. A comparison tool is available at https://www.budget.gov.au/estimator/.

If the member decides to proceed, it is important to ensure all of the intended contributions have been received and that they time the request right as they only get one chance. Once a release authority has been issued the member is no longer eligible for the scheme (regardless of whether the member used the FHSSS amount or not).
While the amount of contributions that can be withdrawn is capped, there is no limit on the associated earnings of that amount – so delay in acting may allow a member to take out a greater amount.

Consider pooling resources as couples, siblings or friends can access they own eligible FHSSS contribution to purchase the same property.

Check the fund’s trust deed to ensure the use of the scheme is authorised by the rules.  If not, an amendment will be necessary.

Get your superannuation compliance documentation sorted to comply with your trustee obligations under the superannuation laws.

By Julie Hartley, Associate

The post The First Home Super Saver Scheme appeared first on AdviserVoice.

Julie Hartley

A new piece of legislation giving effect to proposed measures announced during the 2018 Budget in respect of limited recourse borrowing arrangements (‘LRBA’) is currently being discussed by Parliament.

What are the new rules?

It is proposed that a member’s share of the liability under a limited recourse borrowing arrangement entered into after 1 July this year will be included in the calculation of their total superannuation balance (‘TSB’) immediately before the end of the financial year. This means that in a fund with several members, the outstanding loan balance will need to be proportioned among them in order to be added to the member’s respective TSB.

If a member’s TSB reaches $1.6 million, the member is unable to make non-concessional contributions.

However, only members who have satisfied an unrestricted condition of release or those whose interests are supported by assets subject to a related party loan will be affected by the new rules.

The measures are intended to stop arrangements circumventing the new TBS cap rules. These generally involve a member who has satisfied a condition of release withdrawing a certain amount which is then lent back to the SMSF by way of a related party loan. The withdrawal allows a member to reduce their TSB to below $1.6 million, thereby making them eligible to make further non-concessional contributions while also allowing the SMSF to use the cash towards the purchase of the asset.

What about refinancing?

An existing LRBA which is refinanced after 1 July 2018 will remain unaffected by these measures provided the security under the new loan is still the asset acquired under the old LRBA and the amount for the refinance is equal or lesser than the outstanding balance on the existing arrangement. A greater amount would likely qualify as a brand new arrangement to which the new rules would apply. Similarly, a refinancing to a related party loan would also likely be caught.

What can the fund do?

The trustee can repay the loan to extinguish the liability before 1 July.

Member is over the age of 65: unfortunately, not much can be done in this situation as members cannot change their age.

Member reached preservation age and retired: if a member is between their preservation age and the age of 65, they may decide to come out of retirement. What this means varies with each member’s employment history and age so it is best to seek advice from a professional adviser.

LRBA with a related party loan: the option here would be to refinance the loan with a commercial lender before 1 July. This may not be as easy as it seems and practical considerations may pose a few hurdles. These include the ability for the fund to secure finance and make the necessary repayments (as the interest rate charged by the commercial lender may be higher than the current rate), particularly where the asset subject to the loan isn’t the standard real estate type.

For a new LRBA, the trustee should try and secure finance before 1 July 2018 so the new rules do not apply to the arrangement. However, as commercial lenders generally need a few weeks to get the loan documentation drawn up and executed, time may be quickly running out for this alternative.

By Julie Hartley, Associate

The post New LRBA rules to apply after 1 July 2018 appeared first on AdviserVoice.

Julie Hartley

SMSF trustees need to be careful when going away overseas for extended periods as they face many risks including losing residency

These include:

• Failing the Australian residency requirements for the SMSF: these require the SMSF to be established in Australia, the Central Management Control (‘CMC’) to be ordinarily situated in Australia and to pass the active members test.
• The active members test: broadly speaking there must be no or only a minority of overseas members making contributions to the SMSF during the financial year.
• CMC ordinarily in Australia: a majority of the trustees/directors must ordinarily reside in Australia. This test involves looking at where the strategic & important decisions of the trustee/s are taken (i.e. in Australia or overseas).
  • The trustee/s’ intention at the time of the departure is an important factor – i.e. at the time of leaving Australia, was the intent to be away temporarily for a period of not more than 2 years? If yes, then they may pass the CMC test, if no, they fail even if they do come back within 2 years.
  • If the SMSF is found to be non-complying, its taxable income will be taxed at the highest marginal tax rate for the whole of the financial year.

Plan in advance of travel

Trustee/s should to start planning for the management of their SMSF before leaving Australia for various reasons, including:

• If any documentation such as Enduring Powers of Attorney (EPOAs) have to be signed overseas, stringent rules apply to their execution in order for them to be valid in Australia. It may be very difficult or even impracticable to find an eligible witness.
• Some documents (such as EPOAs) will require that the original document be sent back in hard copy by post to someone in Australia to sign (e.g. the appointed attorney) with the risk of document being lost during international transit.
• Also easier if clients are in the country at the time the strategy is implemented in case documents which are only in the trustee/s’ possession are needed by the adviser/lawyer.

If the trustees know they won’t satisfy the CMC requirements:

If trustees will be unable to satisfy the CMC requirements but want to maintain their SMSF: each departing member will need to execute an enduring power of attorney to appoint one or more attorneys and effect the necessary change of trustees/directors.

It is also recommended to have EPOA anyways in case anything happens to any of the members/trustees while overseas. Plus, check trust deed and constitution of corporate trustee (if applicable) to confirm the appointment of the appointed attorney is permitted.

If the SMSF has a limited recourse borrowing arrangement in place, review terms & conditions of loan to check the change of directors of the corporate trustee will not cause any issues with the bank and whether their prior consent is required.

Also, if the SMSF has individual trustees and owns real estate, it will need to be transferred into the name of the new trustees while the members are overseas – this involves verification of identity checks and execution of a transfer form as well as production of the certificate of title and documentary evidence in relation to the acquisition of the property by the trustees.

As this transfer would need to be undertaken again once the trustees are back acting as trustees in Australia, may be more cost effective to appoint a special purpose company as trustee before departure so only a change in directors is required when the members return.  Any real estate would need to be transferred in the name of the new corporate trustee.

As always with major plans, there are other issues to consider:

• The members are handing over control & management of the SMSF to someone else – do they have someone they can trust? Will that person accept the role? Are they eligible?
• The appointed attorney is not acting as an agent of the member, they are appointed in their own right, effectively taking on the responsibilities, duties and liabilities of a trustee/director of a corporate trustee and can be found personally liable for breaches committed while in that office.
• Trustees will generally need to resign from the office of trustee.
• The members may not be able to make contributions during their absence (active members test).
• Are the members’ estate planning strategy and binding death benefit nomination in order?
• Consider setting up an industry or retail fund to contribute to while overseas and then rollover amount into SMSF once back to Australia (rollovers count as contributions for the active member test).

If properly planned, then the only left to do is enjoy the holiday or overseas posting knowing the documentation is in place to protect your superannuation and financial assets.

By Julie Hartley, Associate

The post Keeping your SMSF compliant when overseas appeared first on AdviserVoice.

Megan is a wealthy widow whose only family is a brother (Andy) she is not particularly close to.  Her closest friend is Jonathan, though they are not romantically involved and do not live together.

Megan and Andy own a property together and split the income it’s generating 50/50 however Megan has also been giving Andy $1,000 a month for the last five years in addition to this income.

Megan told Jonathan she has had a Will prepared by an estate planning lawyer, nominating him as her executor and leaving him most of her substantial estate. She added she made a small bequest to her brother of $50,000.

While grateful for the substantial gift, Jonathan is concerned about Andy’s entitlement to challenge Megan’s Will, which may reduce his inheritance from the estate.

On what grounds could Megan’s Will be challenged?

Andy could challenge Megan’s Will in two separate ways:

Firstly, he could challenge it under the Family Provisions law enacted in the State or Territory where the estate is located.

He would argue that he is eligible to receive a larger sum of money from her estate as she has not adequately looked after him in her Will.

If the Court found that Andy was not adequately provided for under Megan’s Will, the Court could increase the amount Andy is to receive from the estate, thereby reducing Jonathan’s entitlement.

Secondly, Andy could challenge the validity of the Will saying that, because of their very close relationship, the Will was created as a result of the undue influence Jonathan exercised over Megan.

If Andy was successful with the latter claim and the Will held to be invalid, Megan would have died intestate and the intestacy provisions of the local legislation could likely make her brother her effective next-of-kin for the purposes of receiving her estate.

Ground 1 – Family Provisions Claim

Only eligible persons can make a family provision claim under the legislation. Generally the list of eligible persons is very similar in all States but there are differences at the margin so you need to check your local State law.

Eligible persons generally include the expected categories of ‘spouse’ (including current, former and de facto) and ‘child’ but also, among others, ‘a person wholly or partly dependent on the deceased’ and /or who lived as part of the same household at the time of death or at any other time.

Siblings are often not automatically considered eligible to make a claim under the legislation but could Andy claim he fit into the definition of ‘dependant’ given the regular payments he has been receiving from his sister?

The question of whether he was ‘wholly or partly dependent’ on Megan is one of fact and degree, and the answer can only be determined on a case by case basis.

Would the fact that the $50,000 gift amounts to only 4 years’ worth of the money Megan had been regularly giving her brother be sufficient to demonstrate he was not adequately provided for under the Will?

What if Andy had only been receiving $1,000 a year (as opposed to a month) and therefore the gift amounted to 50 years’ worth of such payment? Would that be seen as a more ‘adequate’ provision in respect of the brother?

What can Jonathan do in these circumstances?

Short of Megan completely stopping her regular payments to her brother, Jonathan’s options may be limited.
Jonathan may suggest that Megan and her estate planning lawyer review the Will in light of Andy’s circumstances to determine whether she has made an adequate and reasonable provision to him and if not, amend the Will accordingly.

If Megan and Andy’s plan was to eventually sell the property they co-own, it may be possible for Megan to make it clear that her regular payments to Andy were in fact only an advance to him from his 50% share of the sale proceeds of the property and therefore were technically not gifts, but rather loans.  Documentation could be drawn up now, depending on how conciliatory Andy is willing to be, to confirm or formalise that arrangement, which may have the effect of undermining his ability to make a family provision claim.

Ground 2 – Undue influence

Undue influence is more than mere pressure or persuasion; instead it occurs when a Will does not reflect the testator’s true intentions because someone influenced or coerced the testator into favouring them in their Will to the detriment of others.

It can be extremely difficult to establish as, for example in this scenario, it would fall on Andy to prove undue influence in circumstances where Megan would no longer be available to testify in court about her reasoning and motivations behind her bequests.

Other witnesses (such as her doctors, healthcare providers, family members, lawyers, etc.) would need to testify about their knowledge of the relationship between Megan and Jonathan to help the Court determine whether Megan was the victim of undue influence on Jonathan’s part.

Megan’s estate planning solicitor would most likely be a compelling witness if their evidence were that Megan appeared to understand the terms of the Will when they were explained to her (without Jonathan being present) and that lawyer did not sense any sign or any evidence of undue influence on Jonathan’s part.

By Julie Hartley, Solicitor

The post When inheriting from friends not family appeared first on AdviserVoice.

Julie Hartley

Would an SMSF trustee decision not to adopt the safe harbour terms from the ATO’s Guidelines in relation to a related party loan breach the Superannuation Industry (Supervision) Act SIS (Act)?

The ATO’s Practical Compliance Guidelines PCG 2016/5 (“Guidelines”) provide safe harbour terms which, if complied with, mean the related party loan will be treated as commercial by the ATO and accordingly the trustees can be assured the ATO will not apply the non-arms’ length provisions of the Income Tax Assessment Act to the arrangement.

In April 2016, the ATO assistant Commissioner stressed the fact that adoption of the safe harbour terms was not compulsory, they were simply a safety net for trustees. As far as we are aware, the ATO’s position on this issue remains unchanged (see PCG 2016/5 frequently asked questions page on the ATO website).

If a trustee opts not to follow the Guidelines, they must be ready to demonstrate the loan was entered into and maintained on terms consistent with an arms’ length dealing and present documentary evidence.

Surprisingly, we have recently been made aware by one of our clients that an auditor listed the failure to follow the Guidelines as a breach of s109 of the SIS Act in their contravention report.

So what should an SMSF trustee do in this situation?

Firstly, an auditor should notify the trustee as soon as they detect a contravention so the trustee may respond to the issue and, if possible, rectify or have a plan in place to rectify the contravention before the auditor finalises the audit.

This means the trustee can ask the auditor their reasons for noting the issue as a breach and attempt to change their mind. Is the auditor following some internal auditing rules or policy that all related party loans must abide by the Guidelines? Is the auditor reading too much into the Guidelines? Do they simply (mistakenly) believe adoption of the Guidelines to be mandatory?

Secondly, the trustee may decide to wait and see what action the ATO takes (if any). While an auditor is required to report ‘contraventions’ which meet the reporting criteria set out by the ATO, it is ultimately the ATO who decides whether any further action is required. If the auditor reports the failure of the trustee to follow the Guidelines as a breach of s109 and the ATO’s view is that this position does not in and of itself automatically mean the arrangement is deemed not to be commercial, it is possible the ATO will determine that no contravention has, in fact, occurred.

A word of caution though, it is still possible for the ATO to deem the arrangement not to be at arms’ length if the trustee is unable to demonstrate the loan was otherwise entered into and maintained on commercial terms.

If the auditor stands by their assessment, the trustee may decide to vary the terms of the loan to mirror the Guidelines (and make all relevant catch up payments if the variation is to take effect from the start of the financial year or start of the loan for instance) so the breach is noted as ‘rectified’ on the report.

This option would only be available where the asset which is subject to the limited recourse borrowing arrangement falls within the two categories of assets the Guidelines apply to (i.e. real property and stock exchange listed shares or units). The trustee should first check with the auditor the proposed course of action would satisfy them the breach has been remedied.
Once this has been confirmed, the variation of the loan agreement must be carefully documented and will generally be effected on a retrospective basis.  Trustees should speak to their adviser before proceeding.

Another option is for the trustee to terminate the auditor’s engagement before they issue their report, however this is not the best solution for two reasons.

Auditors still have to report breaches and lodge their Auditor Contravention Report (‘ACR’) with the ATO even if they are no longer the auditor for the fund.
The auditor will notify the ATO via their ACR that the trustee cancelled the audit, which is likely to be frowned upon by the ATO and result in further investigation.  The trustee is free to use the services of another auditor for the following year’s audit.

How do trustees avoid this heartache?

They can follow the Guidelines (if applicable) from the start of the arrangement.

They may obtain a loan offer to the SMSF from a bank or other commercial lender in relation to the particular asset and benchmark the terms of the related party loan to the loan offer.  The loan offer should be safely kept on the Fund register so it can be readily produced to the ATO or auditor as evidence if requested.

If a trustee is thinking of entering into a related party loan and is still unsure whether the proposed terms would be commercial, they may apply for a private binding ruling to the ATO.  A private binding ruling is an advice from the ATO that outlines how a tax law (in this instance the non-arms’ length income rules) applies to an SMSF in its particular circumstances. Once issued, the ruling is binding on the ATO. The downside of this is if the trustee chooses not to rely on the private binding ruling and ends up breaching the rules, they will be required to pay any underpaid tax (and interest) as well as a penalty.

By Julie Hartley, Solicitor

The post Auditor says ‘safe harbour’ terms are mandatory – what now? appeared first on AdviserVoice.

Julie Hartley

We recently had to consider a scenario where a Financial Manager considered establishing an SMSF on behalf of a heavily disabled client (“Individual”) and act as the sole director of the corporate trustee.

A Financial Manager (as defined in the relevant Guardianship Act) is a person appointed by the Civil and Administrative Tribunal (“Tribunal”) to manage the financial and legal affairs of a person who lacks the capacity to do so.  The Financial Manager then has the authority to deal with that person’s financial affairs, such as operating bank accounts, dealing with their assets, paying bills, etc.

The above scenario raised some interesting questions.

Should the Individual even have an SMSF?

As with mentally competent persons, the answer to this question is best answered by a properly licensed financial adviser who reviews all of a client’s circumstances.

The main complication is deciding who would take on the role of trustee.  As a person under a disability, the Individual would be unable to act as trustee or director of a corporate trustee and would need to find someone willing to take on that role as the Individual’s legal personal representative (‘LPR’).

This may be easier said than done as an LPR does not simply act as an ‘agent’ for the Individual; instead they take on all the obligations and liabilities of the role.  In light of the increasingly onerous responsibilities and obligations that come with running an SMSF, a person willing to take on that role may be difficult to find.

Would it be appropriate to appoint the Financial Manager as the sole director of a corporate trustee?

The Tribunal has a duty to appoint someone they consider suitable for the role of Financial Manager and may not necessarily appoint the person suggested in the application.  Generally, the Tribunal will appoint the Public Trustee for the relevant State/Territory in that role.

The Public Trustee would then most likely have to approve the appointment of the trustee.

In the event that the Tribunal agrees that the nominated person is capable to be appointed, would it be appropriate for the Financial Manager to act as the sole director of the corporate trustee?

A Financial Manager has a duty to act in the Individual’s best interest when making financial decisions, which is consistent with the duty of a trustee to act in the best interest of the member(s) of an SMSF.  However, as the sole director of the corporate trustee, the Financial Manager would have complete control over the SMSF and its resources.  Unlike powers of attorney, the Individual is not the one appointing the person who will control their affairs, creating a risk for abuse.  However, as it is likely that the Financial Manager would have to report to the Public Trustee on the running of the SMSF, this may mitigate the risk.

In circumstances where the Financial Manager acts as a licensed financial adviser and recommends that an SMSF be set up for the Individual, is there a conflict for the Financial Manager to implement their own advice?

The Financial Manager cannot be remunerated for their work as financial manager (unless approved by the relevant Public Trustee or Supreme Court), nor can they can be compensated for their role as trustee.  As the Financial Manager would not derive any personal or financial benefit, there does not appear to be any conflict of interest, provided it is all done in the Individual’s best interest.

By Julie Hartley, Solicitor

The post Can a financial manager be involved in client’s SMSF? appeared first on AdviserVoice.