Michael Hallinan

The ATO has confirmed the long held view that a rollover/benefit transfer to an SMSF in respect of a member will be treated as a contribution for the purpose of applying the active member test.

This test is one of three tests which is used to determine whether a complying superannuation fund has lost its residency status and transformed from an Australian superannuation fund to a non-resident superannuation fund.  The loss of residency status will cause a special tax to be imposed on the fund at the rate of 47% on the asset value of the fund (less undeducted contributions).

In short, once a member of an SMSF becomes a non-resident – no contributions, rollovers or benefit transfers by or in respect of the member should be received by the SMSF.

If not, the SMSF may fail the active member test and therefore cease to be a complying superannuation fund.

By Michael Hallinan – Special Counsel at Townsends Business & Corporate Lawyers

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• More onerous revenue claims against wills/estates have led to the increasing desire to protect estates from future claims
• ‘Blended families creates potential for unhappy spouses and step children contesting the will

Anecdotal evidence suggests 2/3rds of Australians do not have a will: Townsend lawyers.

The current available survey evidence is that many adults in America do not have a will^[1].  Anecdotal evidence suggests the same in Australia.  Combine this statistic with the estimated two thirds of existing wills likely to be out-of-date owing to an individual’s changed circumstances, this leaves around 85% of adults without any means of adequately allocating assets in the event of death.

This is a tragedy.  Many of these people will let their families down by not having in place the proper arrangements to protect family members and minimise tax on both the estate and the family member.

There have been a number of significant social and regulatory changes which have led to the situation that even if one does have a current will in place, it may no longer suffice to cover all future eventualities.

What has changed?

Previously, the will was used to ensure certainty in the transfer of assets on a person’s death to their family, and to avoid any disputes arising from this process.

Now a number of factors have complicated the process:

• There has been a massive growth in the uptake of financial products such as discretionary and superannuation trusts and funds, that fall outside the parameters of a will.  One of the drivers of this growth has been changes in superannuation law making this vehicle so much more attractive from a tax point of view and as a safe haven from bankruptcy trustees.  A will cannot regulate how these trust assets will be distributed
• There has been substantial growth in litigation disputing the allocation of assets upon death by beneficiaries. Lawyers are even now specializing in estate challenges.  Courts have ruled that solicitors owe a duty of care to the deceased’s beneficiaries so that if the will has not been properly drawn those beneficiaries can sue the solicitor who prepared it
• The growth in the incidence of divorce and partnership breakdowns, leading to what is now called the ‘blended family’, has created the potential for unhappy spouses and step children to contest the will
• More onerous revenue claims against wills and estates have led to the increasing desire to protect estates from future claims
• Growing levels of wealth in baby-boomers sometimes held across different countries, in different structures, and even subject to claims by disparate beneficiaries from different families!

The result is that a significant proportion of ordinary people now need a comprehensive range of documents in an estate planning package to cover all eventualities after their death. A will has become only one of the documents a person needs to have in their portfolio to protect their assets for future generations.

An effectively drawn will and the other estate planning documents need not cost a fortune and will repay the set up costs many times over.

[1] http://west.thomson.com/about/news/2008/06/30/findlaw-survey.aspx

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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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Land tax on SMSF assets.

Land tax is a tax payable by owners of land on the value of all taxable land they own as at midnight on 31 December of each year in NSW.  The rate for the 2014 tax year is $100 plus 1.6% of the land value between the threshold ($412,000) and the premium rate threshold ($2,519,000) and 2% of the land value above the premium rate threshold. No land tax is payable on the combined value of land below the threshold.

SMSF & Holding Trust

Trustees of superannuation funds fall under the category of ‘owners’ and may be liable to pay land tax on land owned directly by the Fund.  On the plus side, complying SMSFs are entitled to the zero rate threshold.

As for holding trusts, they are treated as fixed trusts for land tax purposes which means the land tax threshold is also available on properties held by a holding trustee.

It is also worth noting that while both the holding trustee and the SMSF trustee will be considered taxpayers, the SMSF trustee generally pays the land tax assessment of the holding trustee.  This payment then results in a credit for the amount of tax paid on behalf of the holding trustee which in turn will be applied against the tax assessment payable by the SMSF trustee.

Trust

For a trust to be able to enjoy the benefit of the Land Tax threshold it must qualify as a fixed trust as defined in section 3A(3B) of the Land Tax Management Act 1956 (NSW).

If you want to know whether your trust meets the necessary requirements, the first step is to look at the provisions contained in the trust deed and consider whether the following criteria are met:

• the beneficiaries are presently entitled to the income of the trust (subject only to the payment of proper expenses by and of the trustee relating to the administration of the trust);
• the beneficiaries are presently entitled to the capital of the trust, and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property, and
• the beneficiaries cannot have their income, corpus and winding up entitlements removed, restricted or otherwise affected by the exercise of any discretion or by the failure to exercise any discretion.

In short, the trust needs to be a passive trust whose sole purpose is to hold real estate.

Discretionary and Family Trust

Because the trustee has a discretion in allocating income and corpus in a discretionary or family trust these types of trusts do not qualify for the land tax threshold.

Unit Trust

A unit trust is capable of qualifying for the benefit of the threshold but only if the trust deed is clear on the eligibility factors.  The NSW Office of State Revenue has given guidance on how the deed can be amended if necessary.

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Not all trusts are the same…

All deeds are not the same.  A deed to establish a discretionary trust is different to a deed to establish a unit trust.  A deed to establish a family trust is different to a deed to establish a superannuation fund.

Sometimes unit trust deeds have to be crafted for their particular purposes.  A vanilla unit trust deed may not provide the best land tax outcome for NSW land tax purposes.  A vanilla unit trust deed may not be the best form of a deed for SMSF investments, as the unit trust may not be a fixed trust for non-arm’s length income purposes.

A recent case has illustrated the downside of simply selecting a deed based solely on price.  The taxpayer wanted to invest in real estate and, for asset protection purposes, have the real estate held in trust for the taxpayer.

The taxpayer acquired a discretionary trust deed.  This type of deed was used as it was the least expensive way of acquiring a trust deed.  The taxpayer wished to on-lend to the trust borrowed money and also to claim a tax deduction for his interest expense.  The taxpayer was aware that he could not claim a deduction for the interest merely because he was one of the beneficiaries of the trust.

Consequently, the taxpayer had prepared a document which was signed by the trustee of the trust by which the trustee was bound to allocate all trust distributions to the taxpayer unless the taxpayer “renounced” the distributions.   This document was signed immediately after the trust deed was signed.

The taxpayer borrowed the money and on-lent the borrowed money to the trustee of the discretionary trust.  The taxpayer claimed a deduction for these interest expenses and also received distributions from the trust.

The ATO challenged the taxpayer’s entitlement to claim deductions for the interest expense. The issue turned upon the nature and effect of the document which was signed after the trust was established.  In the AAT, the Tribunal held that the document was neither an effective amendment to the discretionary trust deed nor could it be treated as an effective exercise of the trustee’s discretion to allocate trust distributions to the taxpayer.

This finding by the Tribunal broke the nexus between the interest expense incurred by the taxpayer and the trust distributions.  In short, the taxpayer was not entitled to a deduction for the interest he incurred.

The decision does show that not all deeds are fungibles and sometimes deeds must be specially crafted for their intended purpose.  The result for the taxpayer would have been different if either the trust deed was not a discretionary trust deed or if the document which was signed after the trust was established did constitute a valid amendment to the trust deed.

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SMSFs – The top ten post-July 1

After surviving June 30 there are changes aplenty in the superannuation arena, says Michael Hallinan special counsel superannuation Townsends Business & Corporate Lawyers:

1.    New powers for the ATO – the ATO will have the power to make mandatory directions in relation to education of trustees, directions to rectify contraventions in a specified period of time, issue administrative penalties against trustees for contraventions occurring from 1 July 2013.  Trustees will be able to appeal penalties issued by the ATO through the Administrative Appeals Tribunal.

2.    Superannuation Guarantee contributions increase – the minimum SG contribution will be raised from 9 per cent to 9.25 per cent.  The first increased payments are for the September 2013 quarter which is due by 28 October 2013.

3.    Superannuation Guarantee contributions for the over 70s– there will be an obligation for employers to now contribute for employees who are 70 years and over as the upper age limit for SG contributions is removed.  Also worth noting that as a result, employers may now be able to claim SG contributions as a deduction where an employee is over 75 and not covered by an industrial award.

4.    Higher concessional contributions cap – for those aged 60 and over at any time during 2013-14, the cap increases from $25,000 to $35,000.  Previous indications of a required balance of $500,000 to be eligible for the higher cap have been abandoned.  (The increase does not apply to concessional contributions made by 50-59 year olds until 1 July 2014.)

There is no change to the non-concessional contribution caps.

5.    Ability to withdraw excess contributions – individuals can withdraw excess concessional contributions made to their SMSF made after 1 July 2013.  Clarification on this process is still to come.

6.    Auditors must be registered – SMSF auditors must be registered with ASIC from 1 July 2013.  Auditors have been able to register since 31 January 2013 and will be issued with an SMSF auditor number (‘SAN’).

7.    Ban on off-market transfers abandoned – the ‘on again’ ‘off again’ ban has now been removed from the draft legislation before Parliament, so off market transfers for listed securities remains in place.

8.    Pension minimums increased – the Government’s relief on the required minimum pension payments will end with the minimum percentages returning to their ‘pre market-downturn’ rates.  This will impact upon both Transition to Retirement and Account Based Pensioners, resulting in higher minimum pension payments for the 2013-14 financial year.

9.    NSW Stamp Duty on Mortgages to continue – another ‘on again’ ‘off again’ and now ‘on again’ situation. Despite promising for years to abolish mortgage duty as part of the original GST deal with the Commonwealth government, NSW just can’t bring itself to give up the revenue and yet again looks likely to defer the abolition which was meant to start from 1 July 2013. SMSFs with corporate trustees who use a limited recourse borrowing arrangement to purchase property in NSW will continue to pay state duty on their mortgage documents for the foreseeable future – the only State or Territory still imposing that duty.

10. Check SMSF trust deeds – Ensure SMSF trust deeds are up-to-date and compliant with the above changes and other recent legislation which may affect transactions that trustees are contemplating.

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