SUPERANNUATION STRUCTURE & USES IN ESTATE PLANNING. Colin Lewis Perpetual Private

Transcription

1 SUPERANNUATION STRUCTURE & USES IN ESTATE PLANNING Colin Lewis Perpetual Private

2 Agenda Dealing with superannuation Who can receive a death benefit? How are death benefits paid? Ensure effective succession of SMSF trustee Form of death benefit Taxation of death benefits Strategies to manage death benefits tax Impact of Federal Budget

3 What is a super fund? Concessionally taxed savings vehicle providing benefits on: Retirement Age 65 Death Ceasing employment Disablement Other Core purposes Ancillary purposes Sole purpose test NB. Death benefit must be paid out no journal entries

4 Who can receive a death benefit? Beneficiary who is a DEPENDANT under SUPER LAW AND/OR Deceased s LEGAL PERSONAL REPRESENTATIVE (LPR), i.e. generally the executor

5 Who is a dependant under super law? Dependants Spouse Ex-spouse Child < 18 Child 18 Financial dependant Interdependant SIS Yes No* Yes Yes Yes Yes * Unless a financial dependant or interdependant

6 Who is a spouse? Legally married De facto same or opposite sex No minimum timeframe to meet SIS definition only need to live with person on a genuine domestic basis in a relationship as a couple Contrast with most state-based succession laws min. 2 yrs co-habitation or child of relationship Another person (same or opposite sex) with whom person is in a prescribed registered relationship under State or Territory law (ACT, VIC, NSW, QLD)

7 Who is a child? Adopted child Stepchild Unless legally adopted, the stepchild/step-parent relationship ends if person divorces the child s biological parent or biological parent dies Ex-nuptial child Child of the individual s spouse Child of the individual within meaning of Family Law Act (child of de facto, child born under surrogacy arrangement, etc)

8 Who is a financial dependant? ATO Ruling IT 2168 a beneficiary, unless within the specific inclusions of the definition [e.g. spouse], is a dependant only if he or she was actually dependent upon the deceased taxpayer for maintenance or support. ATO ID 2002/731 (Withdrawn) it is considered that financial dependence occurs where a person is wholly or substantially maintained financially by another person. The test to be applied is: if the financial support received by the person were withdrawn would the person be able to meet his daily needs.

9 What is interdependency? Two people have an interdependency relationship if: they have a close personal relationship, and they live together, and one or each of them provides the other with financial support, and one or each of them provides the other with domestic support and personal care

10 What is interdependency? Difficult to meet if family members expectation they have a close personal relationship and provide support and care Generally... it is not expected that children will be in an interdependency relationship with their parents. Explanatory statement to Income Tax Amendment Regulations 2005 (No.7) which inserted Reg. 8A into Income Tax Regulations 1936 Most parent/child scenarios fail as they cannot demonstrate a commitment to a shared life together

11 No SIS dependant / at risk dependant / wish to nominate someone else Advise trustee to pay your death benefit to your LPR AND Make necessary arrangements in your will

12 McIntosh v McIntosh Facts Mr and Mrs McIntosh divorced in Son, James lived with his mother for most of his life In 2013, James died intestate and without a surviving spouse or children. Under intestacy rules, James estate to be distributed equally between his parents Mother was granted Letters of Administration She personally received James death benefits from Hostplus, Intrust Super and HESTA having described the interdependency relationship between them

13 McIntosh v McIntosh Held Clear conflict of duty Mother acted in breach of her fiduciary duty as administrator of the estate and was required to account to the estate for the super death benefits Important reminder of how strict the fiduciary duties are for LPRs

14 Learnings Make sure you get it right! In all likelihood, this would not have happened if there had been a binding death benefit nomination (BDBN) in favour of the mother personally A will is important. If James had a will appointing his mother as executrix, there s a fair chance the court would have decided differently Where a willmaker imposes a duty inconsistent with a preexisting interest the LPR has in another capacity, then they may be able to validly pursue their personal interests

15 How are death benefits paid Various nomination options No nomination Non-binding nomination Binding nomination Reversionary (income streams only) Payment at discretion of trustee If fund does not offer binding nominations Where fund offers binding nominations and no nomination, or invalid nomination

16 Binding nominations If valid nomination, trustee is bound to pay nominated dependant or estate Only SIS dependant(s) and/or LPR can be nominated SCT Determination D13-14\144 trustee invalidated BDBN, as nominated beneficiary wasn t living with deceased in an interdependency relationship as defined in SIS, and paid the benefit to the LPR as required by the deed If SIS dependant(s) nominated directly = non-estate asset Non-SIS dependant(s) can receive death benefit via estate

17 What makes a BDBN valid? Most generic BDBNs require: Must be signed and dated by member in presence of 2 witnesses, each of whom is 18+ and not a nominated beneficiary Must have a declaration, signed and dated, that the nomination is signed in presence of 2 witnesses < 3 yrs old, unless trust deed permits otherwise, i.e. nonlapsing nominations Both lapsing and non-lapsing BDBNs can be problematic for members who lose mental capacity

18 Binding nominations Determines beneficiary and percentage only SMSFs can be more flexible, e.g. may specify the form in certain circumstances and provide for future contingencies like you might in your will cascading nominations Greatest certainty that benefit will end up in the right hands Difficult to challenge a valid nomination Consider implications of notional estate provisions in NSW Must be drafted in accordance with the form and procedure in the deed Donovan v Donovan and Munro v Munro

19 Donovan v Donovan Facts Mr Donovan wrote a letter to himself as trustee of his SMSF, advising of his wish that his estate receive his death benefits Mr Donovan died. His daughter sought a Court Order as to whether it constituted a binding nomination that the trustee must give effect to Deed required a valid BDBN in the form that complied with the statutory requirements of the SIS Regulations

20 Donovan v Donovan Held Letter did not constitute a binding nomination as it did not manifest an intention to make a [BDBN] and only expressed a wish Trustee had full discretion and Mr Donovan s spouse received the entire death benefit instead of it being split 50% to her and 50% to the daughter as per his will

21 Donovan v Donovan Held Another issue (assuming the nomination was binding) was whether the nomination was defective because the nomination was not made in the manner set out in SIS Regulations Deed expressly incorporated the criteria in SIS and that nomination would have been defective if it had been binding, i.e. it did not constitute a valid BDBN as it failed to meet the requirements of SIS Reg 6.17A

22 Munro v Munro Facts Mr Munro (solicitor) survived by his 2 nd spouse and 2 daughters from previous marriage After death, Mrs Munro appointed her own daughter as co-trustee and having considered Mr Munro s BDBN invalid, wished to exercise their discretion in paying his death benefit

23 Munro v Munro Facts Dispute revolved around validity of his BDBN BDBN form stipulated, when nominating your executor you should enter (LPR) Mr Munro nominated Trustee of Deceased Estate and relationship of the beneficiary as Trustee

24 Munro v Munro Held BDBN form did not comply with the deed as the nomination was not to his executor Deed did not invoke any BDBN criteria in SIS Reg 6.17A As form was not binding under the deed, the death benefit could be paid out by exercise of trustee s discretion

25 Munro v Munro Held SIS definition of LPR specifically includes executor of will which was replicated in the fund s deed Although terms executor and trustee are used interchangeably, the roles are distinct executor only becomes a trustee after an estate has been administered

26 Learnings Make sure you get it right! Death benefit nominations must be strictly in accordance with the requirements of the deed SIS Reg 6.17A does not apply to SMSFs unless governing rules invoke it An SMSF BDBN can be non-lapsing if the deed is worded correctly Consistent with ATO view in SMSFR 2008/3 Even where there s a valid BDBN, life may not be easy! Wooster v Morris

27 Wooster v Morris Facts Mr Morris and Mrs Morris (2 nd wife) were trustees/members of an SMSF Mr Morris died. His BDBN left his entire interest in the fund to his 2 adult daughters from a previous marriage Probate was granted to the daughters (executors) After death, Mrs Morris appointed her son as co-trustee Later, the trusteeship was changed to a corporate trustee with Mrs Morris as sole director and shareholder

28 Wooster v Morris Facts Trustee decided BDBN was not binding and to pay the entire death benefit to Mrs Morris Daughters claimed the BDBN was valid and binding Special referee held that the BDBN was valid and binding and daughters were entitled to the full benefit plus interest Trustee paid substantial legal fees in defending the claim from Mr Morris accounts Trustee and Mrs Smith argued the daughters should be paid only from Mr Morris interest in the fund

29 Wooster v Morris Held All monies in the SMSF (including Mrs Morris member accounts) were available to meet payments Trustee and Mrs Morris personally were jointly and severally liable to pay all outstanding money Whilst BDBN was valid, daughters had to spend > 3½ yrs in legal battles!!

30 SMSFs what really matters Who holds the purse strings? Whoever controls the fund after death determines how and to whom benefits are paid Katz v Grossman and Ioppolo & Hesford v Conti Ensure effective succession of trustee

31 Defining characteristics of an SMSF s.17a, SIS Act must satisfy four conditions 1. Must be < 5 members 2. All members must be trustees and all trustees must be members. If the trustee is a company, each member must a director of the company and each director must be a member. If there is only 1 member, there must be either a corporate trustee (of which the member is the sole, or one of 2 directors), or 2 individual trustees (one being the member) Under trust law it s not possible to be the sole beneficiary of a trust and also the trustee 3. No member can be an employee of another member, unless they re related 4. No trustee can be remunerated for their role as trustee

32 What can go wrong? Definition is clear on face value, but what happens on: relationship breakdown overseas deployment business failure loss of mental capacity death Estate planning involves both If an SMSF fails the definition at any time during the year, then it fails to meet the definition of a super fund that s entitled to tax concessions Simply, the fund s ineligible for tax concessions for the year!

33 Trusteeship Individual v corporate trustee Individual trustee Corporate trustee Estate planning Actions & decisions on death If fund has 2 members & 1 dies replacement trustee required Doesn t have to be a member Same issues as Changing member/trustee apply on death No administration disruption on death If fund has 2 members & 1 dies replacement director not required (constitution permitting) Can pass control of SMSF to estate s beneficiaries by willing the shares in the company to them

34 Trusteeship Individual v corporate trustee Individual trustee Corporate trustee Changing member/trustee New member must become trustee Leaving member must resign as trustee In accordance with trust deed & SIS Act ATO must be notified within 28 days Requires change in ownership of assets to new/remaining member(s) Time consuming & costly New member must become director Leaving member must resign as director No change to trustee company ATO & ASIC must be notified within 28 days No change in ownership of assets, as assets in name of company

35 Trusteeship Individual v corporate trustee Address this issue at outset as it can be very cumbersome to replace individual trustees with a corporate trustee mainly due to change ownership of all fund s assets ASIC Information Sheet 205 Advice on self-managed superannuation funds: Disclosure of risks

36 Trusteeship death of member Member s LPR may stand in as trustee/director following member s death until the death benefit commences to be payable LPR (executor) does not automatically become a trustee/director Wooster v Morris and Ioppolo & Hesford v Conti After the death benefit commences to be payable, the LPR must resign as trustee and the trustee structure must meet s.17a there is a 6 month grace period for restructuring the fund

37 Trusteeship death of member If an LPR is not appointed e.g. there s no LPR or the LPR doesn t accept the appointment fund s trustee structure must meet definition from date of death (DOD), but there s a 6 month grace period

38 Katz v Grossman Facts Mr and Mrs Katz were trustees/members of an SMSF Mrs Katz died and Mr Katz appointed his daughter, Mrs Grossman as co-trustee Mr Katz died. He had a non-binding nomination dividing his death benefit equally between his son and daughter Mrs Grossman appointed her husband as co-trustee Trustees decided to pay the entire death benefit to Mrs Grossman, refusing to follow the nomination

39 Katz v Grossman Facts Son challenged the appointment of his sister and her husband as trustees Held Both Mr and Mrs Grossman were validly appointed as trustees

40 Ioppolo v Conti Facts of Ioppolo & Hesford v Conti Mr and Mrs Conti were trustees/members of an SMSF Mrs Conti died. Her will stated that all entitlements in the SMSF to go to her 4 children specifically stating that none of it was to go to Mr Conti (2 nd husband) Deed provided that death benefits be paid at trustee s absolute discretion unless there was a BDBN. Mrs Conti didn t leave a valid BDBN Upon death, Mr Conti arranged for a corporate trustee to be appointed with him as sole director and shareholder

41 Ioppolo v Conti Facts of Ioppolo & Hesford v Conti Trustee paid the death benefit to Mr Conti (after seeking legal advice) Mrs Hesford and Mrs Ioppolo (daughters) failed to argue: 1. As Mrs Conti s LPRs, they are entitled to step in as trustees and have a say in the payment of the death benefit 2. Trustee had not exercised it s discretion in a bona fide manner

42 Ioppolo v Conti Court of Appeal Dismissed appeal by Mrs Conti s executors/children Upheld trustee s decision to pay entire death benefit to Mr Conti s.17a does not require executor of deceased member to be appointed as trustee/director Merely provides that if executor is appointed, the fund will not fail to meet the definition of an SMSF during the period from DOD to payment of the death benefit

43 Ioppolo v Conti Court of Appeal No evidence that: decision to pay the entire death benefit to Mr Conti was defective trustee did not consider the interests of the children The conflicts rule (applying to fiduciaries) was expressly excluded in the deed and thus the payment of the entire benefit to Mr Conti (by himself as trustee) was not ineffective by reason of the self-interested appointment

44 Learnings LRP does not automatically become trustee/director On death, identity of trustee determined by the deed Ensure certainty over control of fund after death by: making provision in the deed/constitution for the automatic appointment of successor trustee(s)/director(s) ensuring the member s will deals with their shares in the corporate trustee These measures are aimed at avoiding instances where surviving trustee/director determines not to pay the death benefit in accordance with the deceased s nomination

45 Ensure effective succession of trustee SMSF succession planning is critical Particularly with blended families Whoever controls the fund after death determines how and to whom benefits are paid Executor(s) are not automatically appointed as trustee(s) / director(s) Corporate trustee may provide greater control but still no certainty SM SF disputes are costly No access to Superannuation Complaints Tribunal Consider appropriateness of SMSF for client s with complex estate planning needs

46 Form of death benefit Deceased in accumulation phase Lump sum* Pension^ Deceased in pension phase Lump sum* Pension^ Reversionary pension * Single lump sum, or an interim & final lump sum ^ Only to a dependant under tax law

47 Who is a dependant under tax law? Dependants SIS Tax Spouse Yes Yes Ex-spouse No* Yes Child < 18 Yes Yes Child 18 Yes No* Financial dependant Yes Yes Interdependant Yes Yes * Unless a financial dependant or interdependant NB. Child death benefit pensions must be commuted to tax-free lump sum by age 25, unless child is permanently disabled

48 Reversionary pension Contract between trustee and member to automatically continue paying the income stream upon the member s death to a nominated dependant beneficiary Pension does not cease Can a reversionary beneficiary be added to, or removed from, an existing pension? Before 1 July 2007 no From 1 July 2007 depends on fund s trust deed

49 Reversionary pension Advantages Binding on trustee Peace of mind grieving beneficiary doesn t do anything Maintains grandfathering of an account-based pension (ABP) for Social Security purposes Any life insurance proceeds added to a reversionary pension retains tax components of the pension, rather than being added to the taxable component of the death benefit

50 Reversionary pension Limitations Like any death benefit pension, cannot be paid to a nontax dependant beneficiary, e.g. adult child or LPR Only one reversionary beneficiary can be nominated Anti-detriment payment cannot be made

51 Commuting a death benefit pension Limited opportunity to commute pension to lump sum and have it treated as a super death benefit Later of: 6 months from date of death 3 months from grant of probate/letters of administration Subsequent commutations are standard lump sum benefits Tax-free for child-related pensions if commuted < age 25

52 Tax lump sum death benefits Beneficiary Tax com ponent Tax Tax dependant Tax-free & taxable nil Non-tax dependant Tax-free nil Taxable (taxed element) Max. 15% Taxable (untaxed element) Max. 30% Plus 2% Medicare levy, unless paid to estate Estate tax depends on ultimate beneficiary (no Medicare levy)

53 Tax pension death benefits Deceased in accumulation phase depends on age of beneficiary Aged 60+ Tax-free < age 60 Taxable (taxed element) MTR less 15% tax offset Deceased in pension phase depends on age of deceased or beneficiary Either 60+ Tax-free Both < age 60 Taxable (taxed element) MTR less 15% tax offset In the case of a taxable (untaxed element) Aged 60+ MTR less 10% tax offset < age 60 MTR Plus 2% Medicare levy & 2% TBRL where applicable

54 Anti-detriment payment Refund of contributions tax Service > 30/6/88 payment is 17.65% of taxable component less insurance Available when lump sum death benefit paid to: spouse child (any age) deceased estate trustee where beneficiaries as above Added to taxable component of death benefit may be subject to tax (depending on end beneficiary)

55 When a pension ceases When there is nil balance in the account Minimum annual pension payment not met Full commutation On death of pensioner unless it s a reversionary pension

56 Non-reversionary pensions on death Continuation of pension exemption on death Tax exemption on income derived from assets supporting a pension continues until the death benefit is paid, provided it is paid as soon as practicable Provides certainty for people concerned with the impact of tax on the amount of death benefits payable to their beneficiaries

57 Non-reversionary pensions on death Example Ron has a non-reversionary ABP. The assets supporting his pension have significant unrealised capital gains When he dies, his pension ceases. However, the tax exemption for earnings and capital gains on assets supporting the pension continues until his death benefit is paid, provided the benefits are paid as soon as practicable Thus, no CGT liability arises in the fund on the disposal of assets supporting Ron s pension

58 Non-reversionary pensions on death Calculating the tax-free and taxable components Tax-free and taxable components of original pension continue to apply to earnings derived after death of the pensioner Insurance payments and anti-detriment payments are specifically excluded from this calculation

59 Non-reversionary pensions on death Example cont. Assume on death the balance of Ron s ABP is $500,000 (100% tax-free component) After his death, the trustee added earnings of $10,000 and insurance proceeds of $300,000 Trustee resolves to pay a lump sum death benefit to Ron s estate of $810,000, comprising a tax-free component of $510,000 and taxable component of $300,000

60 Re-contribution strategy Tax Increases tax-free portion of lump sum benefit and/or incomer stream < age 60 Estate planning Increases tax-free portion of death benefit to non-tax dependant, e.g. adult independent child ATO Media Release 2004/58 Straight forward recontribution strategies are not caught by Part IVA ATO Simpler Super Industry Stakeholder Q&A Commisioner is very unlikely to apply Pt IVA

61 Re-contribution strategy Social Security Increases entitlements by moving monies from an older spouse to younger spouse in accumulation phase (assets test exempt < Age Pension age), i.e. sheltering strategy

62 Re-contribution strategy Example from age 60 Simon (61) has retired and wishes to commence a pension with his super benefit of $700,000 $140,000 tax-free component $560,000 taxable component Before starting the pension, Simon withdraws an amount equal to the maximum he can contribute after-tax, i.e. $540,000 He contributes the whole amount back as a nonconcessional contribution (NCC)

63 Re-contribution strategy Example Taxable Tax-free Total Original amount $560,000 $140,000 $700,000 Withdrawal $432,000 $108,000 $540,000 Balance $128,000 $ 32,000 $160,000 Re-contribute $540,000 $540,000 Balance $128,000 $572,000 $700,000

64 Re-contribution strategy Example Change in taxable component of pension On Simon s death Any payment to a non-tax dependant 18.3% (previously 80%) is taxed at 17%* Assuming a death benefit of $700,000, this is $21,760 in tax compared to $95,200 a saving of $73,440! Any payment to a tax dependant tax-free * 15% if paid via the estate

65 Re-contribution strategy Caution!! ATO ID 2006/132 benefit MUST be paid Journal entries are insufficient Preservation applies to re-contribution Assessable income < age 60 even though no tax may be payable on withdrawal, it may impact tax offsets, government co-contribution and income support payments and benefits Anti-detriment payment may be reduced/eliminated as it reduces the taxable component of the death benefit

66 Re-contribution strategy Example cont. $700,000 lump sum death benefit paid to spouse Before re-contribution strategy $560,000 taxable component Anti-detriment payment of $98,840 ($560,000 x 17.65%) After re-contribution strategy $128,000 taxable component Anti-detriment payment of $22,592 ($128,000 x 17.65%) Simon s spouse is $76,248 worse-off!!

67 Re-contribution strategy Example Lump sum death benefit paid to adult son Anti-detriment payment before re-contribution strategy $98,840 Forms part of taxable component taxable component becomes $658,840 ($560,000 + $98,840) Trustee withholds tax of $112,003 ($658,840 x 17%) Death benefit is $686,837 ($700,000 + $98,840 - $112,003)

68 Re-contribution strategy Example Anti-detriment payment after re-contribution strategy $22,592 Taxable component becomes $150,592 ($128,000 + $22,592) Trustee withholds tax of $25,601 ($150,592 x 17%) Death benefit is $696,991 ($700,000 + $22,592 - $25,601) Simon s son is $10,154 better off!!

69 Using multiple pensions Superannuation interests and proportional rule Superannuation interests can be accumulation or pension Each interest can have a tax-free and/or taxable component Under proportioning rule, tax components are calculated just before a lump sum is paid or an income stream commences SMSF members can have multiple pension interests but only one accumulation interest

70 Using multiple pensions Why have multiple pension interests? Tax advantages < age 60 Social Security, e.g. maintain grandfathered ABP Estate planning Multiple pensions are an effective way to quarantine a tax-free component and reduce tax payable by non-tax dependant beneficiaries

71 Using multiple pensions Example estate planning strategy Ryan is 60 Account balance of $360,000 (100% taxable component) Sold an investment property and plans to make a $540,000 NCC to super Ryan s only beneficiaries are his adult independent children What are his options?

72 Using multiple pensions Example Option 1 single pension strategy Ryan contributes $540,000 to his SMSF and starts an ABP with $900,000 Tax components are: 60% tax-free and 40% taxable (taxed element) If Ryan dies with a $900,000 balance, tax payable by a non-tax dependant beneficiary is $61,200 (17% x $360,000 assuming no anti-detriment payment)

73 Using multiple pensions Example Option 2 multiple pension strategy Ryan starts pension (P1) with $360,000 (100% taxable component) He then makes the NCC before commencing a second pension (P2) with it (100% tax-free) Ryan draws the minimum from both pensions and if more income is required, additional amounts are drawn from P1 Aim on death, majority of benefits come from P2 which is payable tax-free to an adult child

74 Impact of Federal Budget These measures are merely proposals, are not yet law and we have an upcoming election!! From 3 May 2016 Lifetime NCCs cap of $500,000 (indexed) introduced Contributions since 1 July 2007 taken into account Contributions in excess of this cap before 4 May are unaffected Additional CGT cap ($1.415 million in ) for eligible small business owners remains

75 Impact of Federal Budget From 1 July 2017 Lifetime $1.6 million balance transfer cap from accumulation phase to retirement phase introduced How does this cap apply when a member dies where the surviving spouse takes the death benefit as a pension? Watch this space!! Anti-detriment payments abolished Without these payments and limited ability to implement a re-contribution strategy, effectively means that death taxes are back for non-tax dependants, e.g. adult children

76 Disclaimer: Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. The information in this document reflects our understanding of existing/proposed legislation as at 27 th May While it is believed the information is accurate and reliable, this is not guaranteed in any way. Colin Lewis is a representative of Perpetual Trustee Company Limited, ABN , Australian Financial Services Licence (AFSL) No Please go to if you wish to view our Financial Services Guide.

77 Colin Lewis Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.