Planning for SUCCESSion. NATHAN PAPSON Principal Lawyer Papson Legal. (03) , 97618: _4

Transcription

1 NATHAN PAPSON Principal Lawyer Papson Legal (03) , 97618: _4

2 CONTENTS Planning for Introduction Conditions of release Contributions Strategies Estate and Succession Planning Summary Disclaimer : _4

3 1. Introduction Planning for The purpose of this paper is to accompany the presentation Planning for that will be presented at that 2015 SPAA SMSF National Conference. The presentation itself is meant to cover a number of different aspects that SMSF trustees and advisers should consider as an SMSF member approaches retirement. Three main considerations for an SMSF member approaching retirement are: Conditions of release (how and when can money be taken out of super) Contributions (limits on contributing to super as a member approaches retirement) Estate and succession planning There is no one ideal strategy for dealing with a person s retirement. As advisers will appreciate, any retirement strategy will depend on the client s current circumstances and goals. For example, a person who has assets in various structures outside of super will have a different strategy to someone who has the majority of their assets within the super environment. That being said, the three main considerations identified above will help shape strategies associated with a person s retirement. Conditions of release are important in determining when (and under what circumstances) an SMSF member can access their benefits. The presentation and paper focusses on some of the more common conditions of release associated with retirement, as well as tax consequences of making a benefit payment from super. The rules in relation to contributions are two-fold. Firstly, there are contribution limitations and requirements outlined in the Superannuation Industry (Supervision) Regulations 1994 (Cth) ( SISA ) that place restrictions on when a member can make contributions (depending on their age). A separate set of rules exist in the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) that outline contribution limits for tax purposes (eg, excess contributions tax). For the most-part, these two sets of rules exist in harmony, but there may be instances where they clash and need to be distinguished. Finally, the presentation will focus on estate and succession planning. It is an area that is not understood as well as it should be by both lawyers and financial services (and accounting) professionals. The presentation will outline a few key concepts in relation to how super can 1

4 integrate with a person s estate planning, and some key pitfalls - particularly in relation to documentation and capacity (powers of attorney). The presentation and paper assume some knowledge in relation to various aspects, but still aim to explain concepts clearly. Examples will be given where possible, but rather than delve into one of the three topics in great detail, the aim of the presentation and paper is to provide advisers and SMSF trustees with a flavour of where these topics may affect their clients. 2. Conditions of release 2.1 Three main conditions of release Conditions of release are outlined in Schedule 1 of the SISR. There are over 20 in total, but some will be more well known than others. Three relevant conditions of release for SMSF members leading up to their retirement are: Retirement Attaining preservation age Attaining age 65 These conditions of release have one point in common - that generally they can be planned for better than other conditions of release Retirement The definition of retirement is given by reg 6.01(7) of the SISR. There are two limbs to the definition: If person is between preservation age and 60 they end an arrangement of being gainfully employed AND the trustee of the fund must be satisfied that the person intends to never be gainfully employed again (on either a full-time or part-time basis). If a person is aged 60 or over they end an arrangement of being gainfully employed OR the trustee of the fund must be satisfied that the person intends to never be gainfully employed again (on either a full-time or part-time basis). Regardless of which limb is met, retirement can only happen at a person s preservation age (between 55 and 60 years). If a person retires from their employment between their preservation 2

5 age and 60, there is an additional criteria in relation to the definition being met - that is, the trustee of the SMSF must be satisfied that the person intends to never be gainfully employed again. In practice, it has always been puzzling how this criteria can be met prospectively. For example, if a person genuinely retires from their employment (between their preservation age and age 60), and then a short time after they return to work - does this return to work automatically cancel their previous condition of release? I believe that the answer is no, but it potentially opens up an opportunity for manipulation. When a person retires, there is no restriction on how their benefits are taken. They can be taken either as a pension or lump sum Attain preservation age When a person attains their preservation age, they will be entitled to start one of a number of income streams - the most common being a transition to retirement income stream ( TRIS ), which has a cap on the maximum payments that can be made in a financial year. Preservation age is defined in reg 6.01 of the SISR, and will depend on the date of birth of the SMSF member. The following table provides a summary of preservation age. Date of birth Preservation age Before 1 July July June July June July June July June From 1 July

6 Up until the time of writing, preservation age has been taken to be 55, due to SMSF members being aged before 1 July 1960 and dealing with their retirement accordingly. However, this year will see the preservation age of member start to creep up in accordance with the table. For example, a person born on 1 July 1960 will attain age 55 on 1 July however, their preservation age will be 56 (so they will not meet the condition of release until 1 July 2016). This is a unique period that advisers should take note of Attain age 65 This is self explanatory - a condition of release is when an SMSF member attains the age of 65. Upon attaining the age of 65, there is no restriction on how their benefits can be paid (lump sum or pension). 2.2 Other conditions of release The above three conditions of release are featured in this presentation, however there are a number of other conditions of release that may be relevant for SMSF members approaching retirement. It may be harder to plan for these conditions of release, as they relate to an unforeseeable event. These include: Death Permanent incapacity Severe financial hardship Terminal medical condition 2.3 Cashing of benefits There are provisions in the SISR (reg 6.18) which explain how a benefit can be cashed once a condition of release is met. This is either by lump sum or pension. 2.4 Slides example of condition of release The slides outline an example involving Walter, a member of the Walter SF, who is currently 59 years old and working full time. The example is meant to demonstrate how conditions of release can apply to someone in their late 50s and approaching retirement. In Walter s example he has attained his preservation age, so can commence a TRIS immediately. He also can retire and have less restriction on benefits that are paid to him. Additionally, when he attains the age of 65, these restrictions will also be lifted. 2.5 Taxation of super benefits 4

7 The ability to meet a condition of release alone may not be enticing for an SMSF member or adviser. Tax consequences associated with when a benefit is paid can affect a person s retirement strategy. A brief outline of the tax consequences associated with super benefits are outlined below Lump Sums A lump sum benefit will consist of a tax free component and a taxable component. The tax free component of a lump sum benefit will always be tax free. The taxable component will be taxed as per the table below. Age Tax Treatment Component Less than preservation age Between preservation age at age 60 Marginal tax rate or 20% plus Medicare levy, whichever is lower Marginal tax rate or 30% plus Medicare levy, whichever is lower Marginal tax rate or 15% plus Medicare levy, whichever is lower** Marginal tax rate or 30% plus Medicare levy, whichever is lower** Taxed element Untaxed element Taxed element Untaxed element Age 60 and over Benefits are tax free Taxed element Marginal tax rate or 15% plus Medicare levy, whichever is lower Untaxed element ** The tax treatments shown in the table as in relation to where the lump sum is above the Low Rate Cap Amount. If the lump sum is below the Low Rate Cap Amount, then the lump sum will be more concessionally taxed. For example, the taxed element of the taxable component will be nil tax if below the Low Rate Cap Amount. The Low Rate Cap Amount for the income year is $185,000. The taxed element and untaxed element refer to whether the fund has paid tax on those taxable components. The taxed element is an amount that the fund has paid tax on, the untaxed element is an amount that the fund has not paid tax on Pensions As with lump sum payments, the tax free component will always be tax free. A summary of how the taxable component of pension payments are taxed is outlined in the table below. For simplicity, the taxed/untaxed elements of the taxable component have not been broken down in the table (and therefore may require specific investigation). 5

8 Age Tax Treatment Between preservation age at age 60 Age 60 or over Taxed at the member s marginal rate less a 15% tax offset Generally received tax free 2.6 Observations and example in slides Based on the rules outlined in the tables above, advisers and SMSF trustees should be aware that generally there will be some tax payable on lump sums and pensions (the taxable component) if the SMSF member makes a benefit payment before they reach the age of 60. However, if an SMSF member makes a benefit payment to themselves after reaching the age of 60, then this is more likely to be tax free. A key point is that the conditions of release outlined above do not align with the optimal tax consequences associated with super benefits. Even though a TRIS can be commenced from preservation age, the tax consequences become significantly better after the member turns 60. The example in the slides illustrates this using a pension payment. 3. Contributions 3.1 SISR requirements for contributions As mentioned in the introduction, there are two separate sets of requirements in relation to contributions. One is from the SISR Restriction on contributions The SISR (reg 7.04) outlines when a regulated superannuation fund will be restricted from accepting contributions. Under 65 unrestricted. 6

9 Aged under 65 but under 70 either mandated employer contributions; or contributions made where the member has been gainfully employed on a least a part-time basis during the financial year. Aged not under 70 but under 75 either mandated employer contributions; or contributions made where the member has been gainfully employed on a least a part-time basis during the financial year. Aged 75 or over - mandated employer contributions only Gainfully employed From the above restriction, it is essential to look at what the definition of gainfully employed is. According to reg 7.01 of the SISR - A person is gainfully employed on a part-time basis during a financial year if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial. I have heard this referred to as the 40/30 rule in practice. But essentially it will require an SMSF member to work for at least 10 hours a week for one month. The concept of being gainfully employed refers to being employed for reward (reg 1.03, SISR). The ATO website, in relation to gainful employment, states that unpaid work does not count towards the definition. Therefore, the following would not be considered as being gainfully employed: A person held a voluntary position on a not for profit board Assisting with sporting or social club activities of a voluntary basis Volunteering for a charity Other restrictions in the SISR Reg 7.04 of the SISR also contains provisions that limit the amount of non-concessional contributions that can be made to a regulated superannuation fund. If a member is aged 64 or less on 1 July of the financial year the restriction is a contribution that is three times the amount of the non-concessional contributions cap; or If the member is 65 but less than 75 on 1 July of the financial year the restriction is the non-concessional contributions cap. These restrictions are separate to the contributions caps themselves. Rather, for example, if a member makes a contribution more than one of the amounts prescribed above (as a single payment), the fund is under an obligation to release additional excess back to the member. 7

10 3.2 Contributions caps Distinct from the SISR provisions are the contributions provisions in the ITAA These provisions purely have a tax focus, and are not necessarily focussed on superannuation compliance (ie, what the SMSF trustee can and cannot do). Type of contribution income year income year Concessional contributions - under 50 years old Concessional contributions - between 50 and 60 years old Concessional contributions - 50 years and older $25,000 $30,000 $25,000 $35,000* $35,000* $35,000* Non-concessional contributions $150,000 $180,000 Bring forward rule $450,000 $540,000 Excess contributions tax rules have changed regularly over the last few years. However, the table above represents the caps for the current and prior income years. From 1 July 2014, the concessional contributions cap has increased to $30,000. In turn, this means that the non-concessional contributions cap also increases to $180,000 (due to it being 6 times larger than the concessional contributions cap). The bring forward amount also increases to $540,000. *The $35,000 increased contributions cap (marked with *) is due to additional changes to the contributions caps that were introduced in Taxation of excess concession contributions (ECCs) New regime of taxing excess concessional contributions 8

11 The slides outline an example with Henry, an SMSF member who has accidently been paid concessional contributions ( CCs ) by his employers in excess of his concessional contributions cap. From the income year onwards, the ECC tax regime in relation to CCs has changed. Now, CCs are taxed at the taxpayer s marginal rate, less a 15% offset to account for contributions tax paid on the way into the fund. In addition to the tax payable, there is an ECC charge, which is essentially interest payable. This is likely to span at least 12 months - because the ECC charge is payable from the first day of the financial year where the breach occurs up until the due date of payment. There is an administrative process to enable money to be paid from the fund to pay ECC tax and ECC charge. The example in the slides outlines this process in more detail Offer to refund Due to time restraints, the slides do not mention the ATO s offer for the and years to treat an ECC of $10,000 less as taxable at a person s marginal tax rate, and also refunded from the fund. In hindsight, the tax treatment of excess contributions tax for those two income years represent a transitional period into the current rules for taxing ECCs. 3.4 Non-concessional contributions Taxation of non-concessional contributions ( NCCs ) has remained largely unchanged over the past few years. The current rate that NCCs are taxed at is 47%. Because of the high tax rate, there is still the risk that if contributions are not planned for correctly, the bring forward rule (where 3 years worth of NCCs can be made in a single financial year) may be triggered incorrectly. A strategy that has been widely used is for an SMSF member to make their CC payment just prior to 1 July (in the first income year ), and then after 1 July ( second income year ) use the bring forward rule to make 3 year s worth of contributions in one hit. However, the strategy is flawed if during the first income year the SMSF member s concessional contributions cap has been breached. This would 9

12 result in concessional contributions being counted towards the NCC cap, causing the bring forward rule to be triggered in the first income year. As such, a large proportion of the contribution made in the second income year would be subject to excess NCC tax. As a worst case scenario, tax payable could be in excess of $80,000. The importance of monitoring contribution sources (such as government pensions, or multiple employers), as well as leaving a buffer below the contribution caps, will help ensure that the caps are not breached in accordance with the example above. 3.5 In specie contributions The slides contain an example of an in specie contribution scenario involving Jack. In practice, may SMSF members who are running their own business may find it appealing to contribute their business property into super (with little to no tax payable) and in the future use their SMSF for succession planning purposes Timing of in specie contribution Compared with the timing of other transactions, the timing of an in specie contribution is slightly unusual. There are a number of points in time where an in specie transfer of property to an SMSF could be considered as a contribution. For example, the time that the transfer is agreed/decided, when all documents are ready for the transfer to be registered, or the date of registration. The ATO in TR 2010/1 states that they are willing to accept an argument from a fund trustee that a contribution of property will occur when beneficial ownership passes to the fund. The ATO views the concept of beneficial ownership arising at a time when the SMSF trustee: obtains possession of a properly executed transfer that is in registrable form together with any title deeds and other documents necessary to procure registration of the superannuation provider as the legal owner of the land Practically, this occurs before the transfer of land is registered, at a time when the SMSF trustee has the signed transfer of land. The timing of an in specie contribution is crucial, because (as shown in the example), if the bring forward rule is used to transfer tranches of the property to the fund, it is essential that the SMSF arranges for the relevant documentation to be prepared at correct times. An incorrect strategy could cause severe contribution cap breaches. It is important to note that the above position by the ATO is not in line with other legal or tax consequences in relation to the transfer of the property. For example, from a legal point of view, a purchase will obtain an equitable interest in property once a contract of sale is signed. From a CGT 10

13 point of view, the CGT event for the disposal of property (eg, CGT Event A1) will happen when the contract of sale is signed Other considerations In specie transfers of property require advice in a number of areas including stamp duty, CGT small business concessions (that can affect contribution caps), contribution cap management, as well as property law (conveyancing). It is possible to have a property transferred to an SMSF in specie with little to no tax consequences, however specific advice should be sought before embarking on such a transaction. 3.6 Contribution reserving In ATO ID 2012/16 and TD 2013/22, the ATO outlined that personal (concessional) contributions could be made before year end to an unallocated contributions account (contributions reserve) and then allocated to a member s account in the following financial year. The ATO s treatment of the above is that the contribution will be counted as a deduction in the prior income year, and the contribution will be counted in the following income year (the year which it is allocated). In 2014, the ATO clarified their position that in order to achieve this result, the fund s annual return would need to reflect the contribution being made in the prior year, and then a process of amending the annual return would need to be undertaken. This may be a barrier for many SMSFs and advisers practically the cost of implementing the strategy may outweigh the benefits of the deduction. 3.7 Observations Contributions have been included in this presentation and paper due to their importance leading up to retirement. Many SMSF members and advisers may use retirement as a way to pump up a member s superannuation balance in order to provide them with a more tax effective way of investing in the future. Care should be taken in relation to restrictions on contributions being made (particularly whether the work test is satisfied), as well as successful navigating contributions caps, as outlined above. 4. Strategies This section of the paper will briefly run through two strategies that can be considered by SMSF members leading up to their retirement. 4.1 withdrawal and re-contribute This strategy is mentioned in the slides. It essentially involves withdrawing superannuation benefits while in a transition to retirement phase, such as when a TRIS is commenced, and then recontributing these payments back to the fund. 11

14 When these payment re-contributed back into the fund, they will form the tax free component of the superannuation interest (eg, accumulation or pension) and as such this interest will be more tax effective in the future. The tax consequences of withdrawing super benefits during a person s life have been extensively covered in this paper. However, the withdrawal and re-contribute strategy will also help the tax effect of super benefits made to beneficiaries after a person has passed away. The mechanics of this strategy are beyond the focus of this presentation. However, an increase of the tax free proportion can result in significant tax savings moving forward. Additionally, the ATO has analysed this issue at an NTLG meeting and deemed that is not subject to Part IVA of the Income Tax Assessment Act 1936 (Cth) 4.2 SMSFD 2014/1 A recent SMSF Determination by the ATO has highlighted an important quirk for SMSF members who may have balances comprised of unrestricted non-preserved benefits, as well as be eligible to commence a TRIS. SMSFD 2014/1 uses an example to demonstrate that a partial commutation of a TRIS using unrestricted non-preserved benefits will count towards the TRIS s minimum annual payment, but not count towards the maximum (usually 10% of the balance at the start of the financial year). As such, a commutation of this type can be made without restriction in relation to the rules of the TRIS. For SMSF members who are eligible, this represents a good opportunity for flexibility with payment of benefits. 5. Estate and Succession Planning 5.1 Estate planning overview The opening slide of this part of the presentation contains a diagram that shows that superannuation is not automatically linked with a person s estate. Regs 6.17 and 6.21 of the SISR outlines how super benefits are to be cashed to beneficiaries after a member dies. There is a restriction on whom can receive a super benefit - only a superannuation dependant (spouse, child, or person in an interdependency relationship - see s 10 of the Superannuation Industry (Supervision) Act 1993 (Cth)( SISA )), or the person s legal personal representative (estate). 12

15 There are even further restrictions in relation to who can continue to receive a pension as a reversionary beneficiary - usually a spouse, child under 18 or child (over 18) with a disability. An SMSF member should weigh up the above framework in accordance with their personal circumstances when deciding how they wish for their superannuation benefits to pass to their beneficiaries. 5.2 Tools - binding nominations and reversionary pensions Two useful documents to ensure that succession is achieved are binding death benefit nominations ( BDBNs ) and reversionary pensions. There is a strong argument that a person s BDBN will usually be more powerful than a reversionary pension. This is because generally the BDBN will seek to bind the trustee (in accordance with wellestablished trust law principles), whereas the reversionary pension simply makes a request of the trustee to pay the member s benefits in a certain way. The discussion above is dependent on the fund s governing rules. The governing rules will confirm what status a BDBN has in relation to the fund, as well as whether the trustee is restricted from making decisions regarding payment of death benefits. 5.3 Importance of a BDBN - including cases Without a valid BDBN, the trustee usually has the discretion to choose where a member s benefits will be paid upon death. These legal principles have been exploited in a number of cases (outlined below) Katz v Grossman - the seminal case A case that illustrates how a trustee s discretion can be used to disadvantage certain beneficiaries is Katz v Grossman [2005] NSWSC 934. A summary of the case and decision is outlined below. Mr and Mrs Katz were individual trustees and members of an SMSF Mrs Katz died and Mr Katz was the sole surviving trustee and member He appointed his daughter, Linda Grossman as a trustee in place of his wife Mr Katz also signed a non-binding death benefit nomination Non-binding nomination not discussed in detail in judgment Likely that nomination did not comply with relevant provisions of SISA (s 59) 13

16 Nomination was probably similar to the standard pro forma non-binding nomination handed out by public offer funds needs to say it is binding and be properly witnessed! Mr Katz intended for both his daughter (Linda) and son (Daniel) to benefit from his superannuation assets When Mr Katz passed away, Linda was left holding office as the sole trustee of the fund Linda appointed her husband, Peter, as a second individual trustee of the fund Linda and her husband then resolved to pay Mr Katz s death benefits entirely to her NSW Supreme Court held that Linda s appointment of her husband was valid The result of Katz v Grossman is that when one particular beneficiary is put in the driving seat of their parents succession, there is a risk that they can (legally) exclude the other beneficiaries More recent cases The cases of Ioppolo & Hesford v Conti [2013] WASC 389 and Wooster v Morris [2013] VSC 594 are further examples of a scenario where one beneficiary has control over the fund and, because there is no BDBN to bind them, they have made a decision to pay the deceased s super benefits to themselves McIntosh v McIntosh The case of McIntosh v McIntosh [2014] QSC 99 involves a similar scenario in relation to a deceased estate. However, in McIntosh the mother of the deceased was appointed as a trustee of the deceased s estate by the Court (due to there being no will to appoint her). The mother convinced the deceased s three super funds to pay the deceased benefits to her directly rather than the estate. The Court held that because she had applied to be the executor of the deceased s estate, she was in conflict of her duty as an executor by requesting that the super assets are paid to her directly. As such, the super assets were ordered to be paid to the estate. If the mother was not appointed by the Court as executor, then the outcome may have been different Importance of BDBN in the above cases In all of the cases mentioned above, a valid BDBN that binds the trustee to follow the deceased member s wishes would have prevented any (costly) legal action, as well as any opportunity for a beneficiary to take the money and run. 14

17 As such, all SMSF members should ensure that they have a valid BDBN in place. 5.4 Powers of attorney Equally important as a BDBN is for a member to have a valid enduring power of attorney. An enduring power of attorney enables another person (the attorney) to make decisions on behalf of a member, including when the member is not capable of making decisions while they are alive. Three distinct advantages associated with a power of attorney are outlined below. The SISA has framework that enables a person holding an enduring power of attorney to step into the member s shoes (s 17A). If a person does not have a power of attorney, and they were not able to make decisions, the only way to appoint an attorney is via local tribunal (for example, in Victoria we have VCAT). This process is timely and costly compared with executing a power of attorney whilst they are capable. If an SMSF has two members (and therefore two individuals controlling the trustee position), if one of those members is unable to make decisions, the fund become stifled. This may affect tax return lodgements, investment decisions and day to day running of the fund. To draft an enduring power of attorney is relatively cost effective, and should be considered by all SMSF members when they join as a member of a fund. 6. Summary The aim of this presentation and paper is to raise awareness of various issues that SMSF members approaching retirement should consider. There is no ideal strategy for members - each will have a personal set of circumstances that may warrant different strategies to be employed. Nevertheless, by having a good understanding of conditions of release, contributions and estate planning aspects, SMSF members and advisers can be thoroughly prepared to tackle the next phase of an SMSF member s life - retirement. I hope that the presentation and paper have imparted some new knowledge, or alternatively highlighted some familiar points. If you would like to contact me in relation to anything in the paper then please feel free to do so. 15

18 7. Disclaimer This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author. 16