Category: Newspaper/Blog Articles/Hansard

Australian Financial Review

16 September 2017

Debra Cleveland

If you’ve set up a binding death benefit nomination in your super fund, you’re probably feeling smug, organised and that you’ll never have to think about it again.

Big mistake, say experts. You can’t “set and forget” as your circumstances may change and in most cases the binding nomination will lapse after three years.

Why is it important? Because it’s a written directive to the trustee of your fund setting out the dependents and/or legal personal representative you want to receive your super in the event of your death.

If you don’t have one, who gets your super will generally be at the trustee’s discretion. This is not so much of a problem if you’re married (and want your husband or wife to inherit) as in most cases your spouse will be the beneficiary, says Colin Lewis, senior manager strategic advice at Perpetual Private.

But it can be a problem if yours is a blended family or you don’t have a spouse or children. Without a valid binding nomination, how can the trustee really know where you wanted your super to go?

To ensure yours is still in working order, here are some areas to watch:

• Time lapse: death benefit nominations need to be renewed every three years in APRA (retail, corporate and industry) funds or SMSFs which contain rules that require the three-year renewal, says Peter Townsend, principal of Townsends Business & Corporate “A number of court cases have resulted from lapsed death benefit nominations where the member didn’t realise their nomination had lapsed,” he adds.
• Check beneficiaries: Lewis says you must nominate a “dependant” under super law – a spouse, child of any age, someone financially dependent on you or in an interdependent relationship – and/or your legal personal representative (LPR), often the executor of your Update your nomination as your family circumstances change. And make sure whoever you nominate falls within the rules. Lewis cites the case of someone single in their 20s who may want to nominate their parents. They are not, however, dependants under super rules.
• Redirect: those who don’t have super dependants or wish to nominate someone else are best off advising the trustee to pay their super to their LPR, says Lewis, and making the necessary

arrangements via their will. This is what the person in the previous paragraph should do. This would be especially important if they’d just moved in with a partner. “While they may not have much in super, their life insurance could be substantial,” he says. “On death, mum and dad may think they’ll receive the super but if the new partner can prove they’re a spouse, they may end up with the death benefit.This may be overcome with a binding nomination to their LPR.”  This plan of action would also work if you’ve changed your family arrangements and want your super to go to a number of people.

• Be consistent: it’s best to use the same author for both your benefit nomination and your will so the message is the same, says He cites Ioppolo’s case [Ioppolo v Conti [2013] WASC 389] in WA where the member got her will prepared by a solicitor and her death benefit nomination by her financial planner. In the will she gave everything to her husband and in the [death nomination] she gave her super to her kids. She and her solicitor didn’t know that the deed of her SMSF required the the nomination to be renewed every three years. “She died just after the renewal date and her husband (not the father of her kids) became the trustee of the fund and gave himself the lot,” says Townsend.
• Income stream: if you’re receiving a super pension, consider seeking advice as to whether a reversionary pension (where your income stream automatically continues being paid to your beneficiary) is appropriate, rather than a binding death nomination as there can be issues around the transfer balance cap under the new super If you have both accumulation and pension interests in superannuation, Lewis says you’ll now need death benefit nominations that deal with both interests.

The Australian

12 September 2017

James Gerrard

The new $1.6 million limit on tax-free superannuation retirement accounts may tempt some self-managed super fund trustees to apply creative valuation methods to maximise their interests. However, the Australian Taxation Office has warned trustees that manipulating valuations will not be tolerated under the new regime.

There are two instances where valuations are important in the context of the super rules that commenced on 1 July. The first is where an SMSF member has moved excess assets from the retirement phase to the accumulation phase due to the $1.6m transfer balance  cap.

If, for example, an SMSF member had $2m in a tax-free super pension account before 30 June 2017, $400,000 was required to be removed before 1 July 2017 in order to keep the pension account under the $1.6m cap. The government provided capital gains tax relief such that assets moved in order to satisfy the $1.6m transfer balance cap had their cost basereset to the marketvalue as at 1 July 2017.

In other words, the $400,000 moved from the pension account to the accumulation account, although it may have accumulated significant capital gains over the years in a pension account, would be deemed to be sold and repurchased with a 1 July 2017 cost base with no immediate tax implications.

In the future however, the capital gains tax rate on the $400,000 in the accumulation account would be taxed at 15 per cent for assets held less than 12 months, and 10 per cent for assets held for more  than 12 months.

Needless to say valuations can affect outcomes. Imagine if the $400,000 transferred from pension to super had its value inflated to

$800,000. Rather than a $400,000 cost base for a $400,000 asset, the cost base is $800,000 for a $400,000 asset. The result — the

$400,000 could increase by 100 per cent in value before any capital gains tax would be payable.

But be warned, the ATO is one step ahead and has warned of those considering manipulating asset values higher to avoid future capital gains tax. SMSF segment assistant commissioner Kasey Macfarlane says: “If we saw an SMSF picking a value at the upper end of the range for the transitional CGT relief, but then picking a value at the lower end of the range for the transfer balance cap, you can be sure that you’ll be hearing from us.”

The second instance where valuations are important is where assets are undervalued to sneak more under the $1.6m tax-free pension cap. Luke Star, Certified Practising Accountant from Star and Associates says: “Some may be tempted to water down SMSF asset valuations to get more inside the $1.6m tax-free pension cap, particularly if their super balance just exceeds the cap and they hold assets that are not priced on a daily basis, such as collectibles.”

But again, the ATO has this covered. Macfarlane says: “The ATO will be monitoring changes in behaviour in relation to SMSF asset valuations as a result of the changes where we see significant reductions in asset valuations in SMSFs, particularly, coincidentally if   it puts somebody just below a particular cap or limit, then that will attract our close scrutiny.”

The ATO talks tough

Some in the industry believe SMSF trustees have been given a raw deal with the recent super changes and the strong-handed compliance approach from the ATO. Tim Ricardo, SMSF specialist from Ricardo Accounting suggests: “It comes as no surprise that taxpayers and pensioners are confused during this disaster of a super policy brought in by a government that was once innovative   and encouraging toward self-funded retirees.”

No wonder some are angered. The new changes come at a time when the accounting industry has been turned on its head after losing the ability to advise its clients about super without more red tape licensing and cost. Any of the remaining accountants that can   advise on super have been dumped with deciphering a quagmire of Law Companion Guidelines, many of which stretch to more than 100 pages each.

The ATO’s response to trustees has been threats of severe penalties and it has backed this up by increasing administrative penalties after 1 July 2017. Current penalties range from $1050 up to $12,600 for certain breaches of the SIS Act.

With the ATO shining a light on valuations given the potential taxation benefits achieved by sliding values either higher or lower depending on the situation, a good way forward for SMSF trustees is to continue with their current valuation methods. The ATO is more likely to step in if different valuation methods are used for different tax purposes to benefit the taxpayer rather than the ATO, or when trustees have not been consistent with their valuation methods. As a broad approach to valuation, Ricardo says: “General valuation principles require demonstration of a fair and reasonable process in obtaining the valuation.”

One last thing, the ATO has valuation guidelines for SMSF’s on its website and all trustees should make it a point to review their SMSF valuation methodology.

James Gerrard is the principal and director of privately owned Sydney financial planning firm FinancialAdvisor.com.au

By Gary Chau (gchau@dbalawyers.com.au), Lawyer, and David Oon (doon@dbalawyers.com.au), Senior Associate, DBA Lawyers

Introduction

A common question we get asked when a client’s self managed superannuation fund (‘SMSF’) is undertaking a limited recourse borrowing arrangements (‘LRBA’) is whether there needs to be a separate bare trustee (usually a company) for each bare trust. The short answer is no. However, it is helpful to also go through the other aspects of LRBAs to give more detailed guidance.

Broadly, SMSF trustees are prohibited from borrowing or maintaining an existing borrowing, unless the borrowing complies with the exception under s 67A of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’). As a simplification, the key features for LRBAs are as follows:

• The SMSF trustee borrows to acquire a single acquirable asset.
• The asset must be held on trust, with the SMSF trustee having a beneficial interest in that asset. This other party is often referred to as either a bare trustee, a holding trustee or a custodian. In this article, this other party will be referred to as the bare trustee. However, technically this is a presumptive name since not all of the trusts for LRBAs are actually bare trusts for tax purposes.
• The bare trustee is the legal owner of the asset purchased.
• The SMSF trustee has the right to obtain legal ownership of the asset by making one or more payments after acquiring the beneficial interest.
• If the SMSF trustee were to default on the loan, the lender’s rights would be limited to the rights relating to the asset.

A crucial feature for an LRBA to comply with the SISA requirements is that the asset must be a ‘single acquirable asset’. Section 67A of the SISA provides that the borrowed money must be used ‘for the acquisition of a single acquirable asset’ and, as noted above, it also provides that ‘the acquirable asset is [to be] held on trust so that the [SMSF’s] trustee acquires a beneficial interest in the acquirable asset’.

This means that when the asset is initially purchased, legal title to that asset must be registered in the name of another entity (ie, the bare trustee).

Since a bare trust must be in respect of a single acquirable asset, let’s now examine what the word single acquirable asset means.

Single acquirable asset

The starting point to this definition is: what is an asset? Asset is defined in s 10 of the SISA to be ‘any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country)’. ‘Acquirable asset’ is defined in s 67A(2) of the SISA, which provides that the acquirable asset must not be money (whether Australian currency or currency of another country) or an asset that an SMSF trustee is prohibited from acquiring. Accordingly, an SMSF cannot borrow to acquire money, or simply ‘borrow money’ without acquiring a single acquirable asset.

On whether an asset is a ‘single acquirable asset’, the ATO state that it ‘is necessary to consider both the legal form and substance of the asset acquired’. Thus, in the typical case, where an SMSF trustee is acquiring real estate and there is only a single title, this property would be a single acquirable asset for the purposes of s 67A of the SISA.

Where there are multiple real estate titles, the ATO in SMSFR 2012/1 adopt the view that multiple real estate titles can be treated as a single acquirable asset only if there is a physical or legal impediment requiring them to be dealt with together. However, this is to be decided having regard to the circumstances of each case. In determining whether multiple real estate titles can be treated as one single acquirable asset, the ATO say the following in SMSFR 2012/1:

12. Factors relevant in determining if it is reasonable to conclude that what is being acquired is a single object of property include:

• the existence of a unifying physical object, such as a fixture attached to the land which is permanent in nature and not easily removed and that is significant in value relative to the value of the asset; or
• whether under a law of a State or Territory the two assets must be dealt with together.

Unless the above factors in SMSFR 2012/1 conclude that what is being acquired is a single acquirable asset, the general rule is that if an SMSF trustee wants to acquire two assets (ie, they are identified in two titles), then two bare trust arrangements and two loans will generally be needed: one for each asset. Ideally, two separate contracts will also exist: one for each asset.

Why does a bare trust have to only contain one asset?

The bare trust should only contain one asset, namely, the single acquirable asset, to ensure that the bare trust itself does not become an in-house asset for the SMSF. If the bare trust contains any other assets — even a bank account — this may give rise to negative in-house asset rule implications (s 71(8)(c) of the SISA).

One bare trustee for multiple bare trusts

Where an SMSF trustee wishes to borrow to purchase multiple assets, a separate bare trust will be required for the acquisition of each single acquirable asset. However, there is no requirement in the SISA or Superannuation Industry (Supervision) Regulations 1994 (Cth) that different bare trustees (usually companies) need to be used for each LRBA.

Thus, one company could be the bare trustee of multiple bare trusts in respect of the same SMSF.

Further, while there is no requirement that the bare trustee has to be a company (ie, you can in theory have individual trustees act as bare trustee), banks will almost inevitably require that the bare trustee is a company before they agree to lend to an SMSF.

Bare trust should play a minimal role

Ideally, the bare trustee should play as minimal a role in the LRBA as possible. For example, any income derived from the asset (such as rent or dividends) should be received by the SMSF trustee directly. The SMSF trustee should also make the loan repayments to the lender.

To maximise administrative efficiencies, the bare trustee should typically not register for a TFN or an ABN. Further, when establishing a new corporate bare trustee, there should be no public officer appointed or bank account opened.

The bare trustee should ideally do nothing more than hold the legal title to the asset.

*        *        *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

DBA LAWYERS

28 August 2017

The Australian

28 August 2017

Editorial

On the positive side, 25 years after the introduction of compulsory employer superannuation contributions, the share of retirees on full pensions is falling. Yet 80 per cent of Australians still retire to at least a part Age Pension or benefits, a position the 2015 Intergenerational Report warned would barely change in the next 40 years.

Conscientious savers planning to be independent in retirement have been frustrated by years of tinkering with the system that has undermined certainty. Most recently, the Turnbull government incurred their wrath when it capped contributions for high-income earners and cut the over-50s concessional (before-tax) contributions cap of $35,000 to $25,000 from July 1.

Revenue and Financial Services Minister Kelly O’Dwyer has promised the government would not make any further changes to superannuation taxation. That remains to be seen. But her pledge to focus on governance of the $2.3 trillion pool of superannuation savings must be followed through to improve oversight of members’ funds.

Since 2004, the value of super assets has more than tripled yet the ­average annual fee as a percentage of assets under management has barely fallen. Last year, it was still more than 1 per cent. That’s more than $20bn a year in fees — about the same as the defence budget — and double what is feasible.

Two months ago, readers focused on retirement were disillusioned by the revelation in this newspaper that a homeowning couple with $400,000 in super, when combined with the Age Pension, could be better off than a couple with $800,000 to $1 million in super, whose assets precluded them from receiving a part pension.

As citizens of a rich nation, Australians deserve a generous social welfare safety net, but the unpalatable truth is that the current system, one of the most generous in the world, is unsustainable. Social security spending, accounts for more than a third of the federal budget, 35.3 per cent. Over time, budgetary pressures should force this or future governments to tighten Age Pension eligibility rules, which is why incentives for workers to save as they aspire to comfortable retirements must be the focus of government policy.

Maximising workforce participation, and therefore increasing retirement savings, and reducing dependence on unemployment benefits and the Disability Support Pension, is also vital. That’s one reason the Turnbull government, staring down hostile reactions from Labor and the Australian Medical Association, has made the right decision to launch a drug testing trial among 5000 new recipients of Newstart Allowance and Youth Allowance over two years in western Sydney, in Logan, south of Brisbane, and in Mandurah, south of Perth.

The aim is not to stigmatise, shame or punish drug users but to help them overcome their problems and secure work. As Human Services Minister Alan Tudge says, about a quarter of unemployed people took drugs last year, with ice usage about 2.4 times higher than in the general community. Such problems, as he said, effectively exclude the unemployed from many jobs. Under the trial, those returning positive tests will be put on to cashless welfare, which limits the amount people can withdraw in cash — a system with a proven track record in limiting substance abuse.

After a second positive test, recipients would have to see a doctor, at government expense, and undergo treatment in order to continue receiving benefits. It is beyond contention that such an approach would serve the best interests of the unemployed as well as taxpayers, whose largesse is not a bottomless bit.

Emphasis added by Save Our Super

The Australian

26 August 2017

Glenda Korporaal

The federal government would not be making any more changes to the tax treatment of superannuation, the federal Minister for Financial Services, Kelly O’Dwyer, said yesterday.

“The Coalition has done the job that we needed to do on the taxation of superannuation,” she said at a speech to the Tax Institute in Sydney. “The job has been finished and legislated.

“We have no further plans.”

The undertaking paves the way for super to become an issue in the next federal election, with O’Dwyer arguing that the government’s opponents will be the ones promising higher taxes on super.

But there is also expected to be some scepticism about the longevity of the promise, given that former Prime Minister Tony Abbott won the 2013 election with a promise of no unexpected negative changes to super — a promise broken by the Turnbull government in the budget of May 2016.

Changes that came into effect this July have cut the annual contributions that can go into super on a concessional basis from $35,000 to $25,000 a year. The amount that can be put into super on a post- tax basis has been cut from $180,000 to $100,000 a year.

The changes also set a cap of $1.6 million on the amount of money that can go into a super account that is tax-free in retirement mode. The changes have also reduced the attraction of transition-to- retirement plans.

While the tougher measures are estimated to raise some $6 billion a year, the package also included a range of concessions worth some $3bn, including making it easier for people with low super balances to add several years’ worth of “catch up” contributions from next year.

The government also removed the “10 per cent rule”, making it easier for people who work part-time or in small businesses to get a tax deduction for their super contributions.

Ms O’Dwyer’s promises of no further tax changes will be welcome by the industry, which has been complaining that constant tinkering has undermined confidence in the system.

She said the federal government “legislated a comprehensive package of structural reforms to the tax treatment of super to improve the sustainability, flexibility and integrity of the system.

“The measures ensure that superannuation tax concessions are well-targeted and balance the need to encourage people to save to become self-reliant with the need to ensure long-term sustainability.”

She said there would be no more changes to taxation of super but other changes to improve governance were planned.

While the government has claimed the super changes only had a negative effect on a small percentage of people, the extent of the changes provoked strong criticism from some people with larger super balances who had been actively putting substantial sums of money into super ahead of their retirement.

Ms O’Dwyer told The Weekend Australian that future governments might look at the five-year intergenerational reports as a platform to examine the sustainability of the super system.

Ms O’Dwyer said the tax undertaking would “give Australians certainty and the industry stability about the Coalition’s superannuation tax policy”. “It stands in stark contrast to the Labor Party and the Greens, who will slug superannuants significantly more in tax as they prepare for their retirement,” she said.

She said the Greens’ “so-called ‘progressive super’ tax plan” would “seek to extract up to $11bn in extra taxes over four years”.

“Labor have admitted that their superannuation policy will cost superannuants an additional $1.4bn,” she said.

Emphasis added by Save Our Super

The Australian

28 August 2017

Letters to the Editor

In light of these gloomy forecasts on retirement income, one would have expected Financial Services Minister
Kelly O’Dwyer to jump to the defence of the government’s super “reforms” by sharing future policy direction
and related modelling illustrating fewer demands on the public purse to fund retirement incomes.
But no. Her only response to the disaster that is the government’s superannuation policy was her quote: “The
job has been legislated. We have no further plans.” Super fail, indeed

David Taylor, Newport, NSW

The Australian

28 August 2017

Letters to the Editor

There is no doubt that saving for one’s retirement is a good thing (“A super fail: 80pc retire on benefits”, 26/8).
But if the aim was to make people less dependent on the age pension, this does not seem to have happened.
For many, meagre personal pension benefits have to be supplemented by the age pension. There are also
those who through divestment or careful planning of their assets succeed in getting part of the age pension.
In addition, all super accounts attract exorbitant fees and thereby reduce the nest egg. A better system would
be for the government to collect the compulsory super payments, invest them, as it does for the Future Fund,
and guarantee retirement pension benefits commensurate with the contributions made during one’s working
life.
B. Della-Putta , Thorngate, SA