SUPERCentral’s online Estate Planning Guide designed for advisers.

Trustees must now pay attention to ownership details and their adviser can help guide them through the process with expert estate planning support.

SUPERCentral’s flagship online Estate Planning Guide and Testamentary Manual has been designed specifically to assist advisers in guiding their clients through the intricacies of their testamentary requirements and to gather the information necessary for the formulation of an estate plan suitable for every client, regardless of the size or complexity of their financial affairs.

It is a holistic, cost effective online program that enables the adviser to maintain close contact with their clients, from the initial client briefing through to the signing of their clients’ estate planning documents.

The commentary accompanying the questions in the Estate Planning Guide and Testamentary Manual inform both the adviser and their clients about the important things that need to be considered in respect of each of the topic areas.

“You know your clients need advice on their estate planning. As their trusted adviser, you have helped them to nurture and build their wealth over the years through good times and bad, advised them how to grow and manage the investments in their SMSF, and implemented their retirement strategy.

“They now need to think about the transfer of the ownership and control of their wealth, not just on death but also in the event of physical or mental incapacity,” said Brian Hor, Special Counsel, Superannuation & Estate Planning at SUPERCentral.

Getting the estate planning strategy right is too important to simply refer out to a lawyer who may or may not understand how your client’s overall wealth is structured, who doesn’t have the necessary knowledge of taxation and superannuation, and whose advice and documentation may not reflect the best possible result for the client in terms of protecting the inheritances of their family and accessing valuable taxation concessions.

Plus, there is the loss of control of the whole process – you don’t know what the lawyer will produce for your client, when it will get done, and what it will cost. And if the lawyer gets it wrong, will your client (or their family) end up blaming you instead?

“What an adviser needs is an estate planning offering that seamlessly dovetails in with the way you run your practice. That allows you to take the lead in terms of the design and implementation of an appropriate estate plan for your client. That understands your client’s SMSF and tax effective retirement strategies that you have carefully crafted for your client.

“That allows you to integrate estate planning as both a risk management and client relationship building tool, plus become a profit centre for your practice,” said Mr Hor.

The Townsends / SUPERCentral Estate Planning service is different from any other legal service. Our specialist knowledge and experience as expert superannuation and estate planning lawyers is directly accessible to you as the client’s trusted adviser through the power of modern technology.

In particular, the Estate Planning Guide and Testamentary Manual is designed specifically for advisers to guide their clients through the intricacies of their testamentary documents and gather the right information to formulate an estate plan suitable for every client, regardless of the size or complexity of their financial situation. Some of the important benefits to your practice include:

• providing the means by which you can systematically and methodically guide your clients through their estate affairs, leaving nothing to chance;
• ensuring that you are seen to have pro-actively advised your client in this area and thereby satisfied your professional duties as your client’s adviser;
• giving you access to a streamlined process for referring the pure legal work to expert superannuation and estate planning lawyers who will provide you with an upfront proposal for the preparation of any estate planning documentation, fixed estimate of legal fees, and realistic and reliable turnaround times;
• enabling you to charge an appropriate fee to your client for providing a valuable service; and
• helping you to deepen the relationship with your client and with your client’s next generation.

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The Draft Ruling primarily deals with two simple questions: what is a single asset?  And when is an asset transformed into another asset?  These simple questions arise because the limited recourse borrowing rules revolve around the concepts of a “single asset” and “replacement asset”. 

This article is intended to highlight some of the more interesting aspects of the Draft Ruling.  It is not a complete and exhaustive commentary on the Draft Ruling.  While the Ruling is draft, SMSF Trustees and advisers should exercise caution in relying on the Ruling or the reasoning underlying the Ruling. 
 
Single asset
The Draft Ruling takes the position that the meaning of “asset” should be given, in certain situations, a practicable meaning rather than a purely legal meaning.  Normally, “asset” will be taken as having the sense of “legal title”.  However, “asset” will be taken as consisting of 2 or more legal titles where these titles are linked: either legally or physically.

If a vendor wishes to sell one 2 acre block which consists of two titles, there will be two assets for the purposes of limited recourse borrowing rules.  However, if there is a structure which sits on both titles (thus physically linking to the two titles), so that it is not practicable to sell each title separately, then the Draft Ruling provides that there is a single asset.  

Another example is where there are two titles but those titles must by law be sold together.  In this case, the link between the two titles is a legal link. 

Where the vendor insists on selling two or more titles as a job lot, the vendor’s insistence will not be a sufficient link.  Equally, a lender’s requirement that a mortgage be taken over all titles will not be a sufficient link. 
 
Repairing, maintaining & improving 
The limited recourse borrowing rules (at least since July 2010) permit the SMSF Trustee to use borrowed funds to repair and maintain assets.  However, these rules will not permit the SMSF Trustee to improve the asset thereby transforming the asset into a different asset. It is not necessarily easy to distinguish between repairing and improving an asset.  

In relation to “maintaining” an asset, the Draft Ruling provides that this term means work done to prevent defects, damage or deterioration of an asset. The Draft Ruling provides that “repairing” is usually the restoration of an asset to regain the asset’s previous functional efficiency. 

Improving an asset is by contrast to substantially increase its functional efficiency or value through the addition of new and substantial features or bringing the asset into a more desirable form, state or condition.  In short, improvements are matters of degree.  A minor increase in functional efficiency or value will not amount to an improvement.  

The Draft Ruling provides a number of examples where changes are merely repairs as against improvements (and vice versa). Applying the Draft Ruling the following are likely to be repairs:

• Replacing a damaged kitchen with a new kitchen
• Replacing roofing with new roofing
• Painting the exterior of a house
• Resurfacing a swimming pool.

The following are likely to be improvements and thereby transform the existing asset into a different asset

• Adding a second storey to a singal storey residence
• Adding a swimming pool
• Adding one or more rooms.

Clearly changes which are repairs do not cease to be repairs because modern materials are used or the changes are made to confirm to current building standards – replacement of concrete tiles with ceramic titles or steel roofing. Also, it seems updating a kitchen or bathroom would not be material improvements – as the increase in the cost of the underlying asset is not necessarily significant and there is no increase in functionality. Further it seems that a series of discrete improvements made over an extended time period will not amount to a material improvement.

The interesting question is whether replacing an existing house with a new house on the same block amounts to sufficient improvement to constitute a transformed asset.  Possibly replacing an existing house with a modern house with the same number of bedrooms and living areas may not constitute a transformed asset.  The Draft Ruling does accept that replacing a house completely destroyed by fire (or flood etc) with an equivalent house (ie with the same functionality) will not constitute a transformed asset.  It would be irrelevant that modern building materials are used (and the new structure satisfies modern building standards as to energy efficiency, building materials).  

Adding additional bedrooms or adding a swimming pool may be too much and the new house may constitute a transformed asset.  If a replacement house (with equivalent functionality) will not constitute a transformed asset then it seems irrelevant that the reason for the building of the replacement house is fire, destruction or owner’s choice.  The reason that the replacement house is not a transformed asset is that there is no change in functionality: there is no exception for houses destroyed by fire or flood in the legislation. 
 
Off the plan purchasers
The Draft Ruling provides that a SMSF Trustee can enter into an off the plan purchase and use borrowed monies to complete the purchase. 

Typically, in an off the plan purchase arrangement, a contract to purchase is entered into and a small deposit, say, 1% of the contract price, is paid at the time of signing the contract.  The contract is an agreement to purchase a strata unit if and when the strata unit is constructed.  Once the strata unit is constructed, the purchaser must then provide the balance of the purchase monies. 

The Draft Ruling provides that so long as the trustee finances the deposit from its own resources, the trustee could enter into a limited recourse borrowing arrangement for the balance of the purchase price. 

There was previously some speculation that such an arrangement did not satisfy the “single acquirable asset” requirement.  The concern was that the trustee acquired on signing the contract one bundle of property rights and then once the unit was constructed, the bundle of property rights was replaced by the physical structure.  The better view is that an off the plan purchase is a contract to buy property if and when the property comes into existence (ie is constructed). 
 
Apartment & separate car park
In most cases the apartment and its car space are on separate titles.  Consequently in buying the apartment two assets will be acquired.  However these assets will be linked in that they cannot be separately sold and will also be linked in a practical sense in that they form one dwelling.  

The Draft Ruling confirms that if the two titles cannot by law be separately sold, then for the purposes of limited recourse borrowing they are treated as a single asset. 
 
Multiple titles
The Draft Ruling also treats two or more titles as being a “single asset” for the purposes of the limited recourse borrowing rules where the multiple titles are linked because they cannot in practice be sold separately. 

If a dwelling sits on two contiguous titles, then there is one single asset.  For example, a public house which sits on 3 or more titles (because the public house grew by additions and extensions as adjoining strips of land were acquired) will constitute a single asset. 

Unfortunately, the linkage must be by law (ie titles cannot be separately sold) or physical structures.  Where multiple title are used in the same enterprise  – for example a farming enterprise which is carried on over a number of titles – there will be no linkage.  This follows as each title can be separately sold and there will be no physical structures affecting all of the titles. 
 
Development of vacant land
The Draft Ruling however maintains that the development of a vacant block of land will not constitute a single asset.  The development will cause the nature of the property to be fundamentally changed thereby transforming the asset. 

Consequently, an SMSF trustee cannot develop vacant land which has been acquired by a limited recourse borrowing arrangement.  It is irrelevant whether the cost of the redevelopment is financed by the fund’s own resources or by borrowed monies.  Once the borrowing on the vacant land has been paid off (and the title transferred to the SMSF trustee), the SMSF trustee could, using its own monies, redevelop the property. 
 
Sub-divison of land
The Draft Ruling clearly states that a sud-division of land from one legal title to two or more titles will not be permissible while the land is subject to a limited recourse borrowing.  The creation of new legal titles by the sub-division amounts to a transformed asset.

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