Planning for an adult disabled child. Bryce Figot Director, DBA Lawyers

Transcription

1 Planning for an adult disabled child Bryce Figot Director, DBA Lawyers

2 Overview Benefits of SMSFs for adult disabled children When to set up the SMSF? What to do upon disablement? How to treat roll overs How to structure SMSF Conclusion

3 Benefits of SMSFs for adult disabled children

4 Benefits Benefits can involve tax Certain things can reduce tax Therefore, be mindful of: Pt IVA and Promoter penalties If there is any doubt whatsoever, seek advice and prospective ATO input

5 Benefits: case study Mr Bennet is aged 60+ Mr Bennet has $2.5M in an SMSF Mr Bennet has a daughter, Lydia Lydia has impaired decision making ability resulting in a disability described in s 8(1) of Disability Services Act 1986 (Cth) Mr Bennet dies If death benefits paid to Lydia as a pension: how much income tax does the SMSF pay (ITAA subdiv 295-F) and how much income tax does Lydia pay on receipt of each pension payment (ITAA s )? How long can death benefit pension to Lydia go on for (SISR reg 6.21(2A)(b)(ii))?

6 Benefits: case study Lady Catherine de Bourgh Would answer change if Mr Bennett has not $2. 5M in SMSF but??? Any possible changes on the horizon? ALP s policy ( From 1 July 2017, future earnings on assets supporting income streams will be tax-free up to $75,000 a year for each individual Earnings above the $75,000 threshold will attract the same concessional rate of 15 per cent that applies to earnings in the accumulation phase

7 When to set up the SMSF?

8 Vote - When to set up the SMSF? Fitzwilliam and Lizzie (both 40) have collectively $150,000 in APRA funds Worthwhile setting up an SMSF? Probably not Q: Does your answer change if they have a disabled son, Timmy (6)? Option A: Yes establish SMSF right now Option B: No wait until later

9 When to set up the SMSF? Assume Fitzwilliam dies (jumps into a pond clothed and drowns) Fitzwilliam s superannuation account increases by $3M due to insurance Do all APRA funds pay death benefits as pensions to children? Can death benefits be rolled to an SMSF so that SMSF commences paying a death benefit pension?

10 When to set up the SMSF? [I]t is sufficient if, instead of being cashed, the [death] benefits are rolled over as soon as practicable for immediate cashing (SISR reg 6.21(3)) The answer therefore appears to be a simple yes However, the complete answer is more involved why? Consider: What do these answers suggest? TD 2013/11: is a payment of a deceased member s benefits in a fund to another fund a roll-over superannuation benefit as defined in the [ITAA]? TD 2013/13: is a payment by a fund to another fund of a lump sum arising from commutation of a [pension] of a deceased member a roll-over superannuation benefit for the purpose of section of the [ITAA]?

11 When to set up the SMSF? These answers in conjunction with ATO s responses in certain private binding rulings suggest that a roll over of Fitzwilliam s death benefits to new fund will mean: If Fitzwilliam died not receiving a pension or died receiving a pension which was moved to new fund within certain time frames probably massive excess nonconcessional contribution issues If Fitzwilliam died receiving a pension which was moved to new fund after certain time frames pension from new fund won t have special death benefit treatment I stress above aren t definitive (they re merely what determinations and my experiences with somewhat analogous private binding rulings suggest)

12 When to set up the SMSF? Moral of story? If you want to pay death benefit pension to adult children, might want to set up SMSF sooner rather than later possibly even now!

13 What to do upon disablement?

14 Vote - What to do upon disablement? Consider the following situation: Mr Bingley has an adult son, Charles (who has $200,000 all taxable component in a fund) Charles benefits include $600,000 of TPD insurance Charles is viciously mauled by a pride of lions As a result, the TPD insurance pays out to the fund Which of the following is accurate? Scenario 1 Scenario 2 $600,000 TPD proceeds: taxable component $800,000 interest (100% taxable component) $200,000: taxable component $800,000 $600,000: interest tax (75% free tax component free component; 25% taxable component) $200,000: taxable component

15 What to do upon disablement? Key question: when an SMSF receives an insurance payout, does it form part of tax free component or taxable component? Sub-questions: Q: How is the taxable component determined? A: Essentially, anything that is not the tax free component, namely (ITAA 1997 s ): The taxable component of a superannuation interest is the value of the interest less the tax free component of the interest Q: How is tax free component determined? A: At risk of oversimplifying, it is (ITAA 1997 s ): total amount of the contributions to the interest to the extent that they have not been and will not be included in the assessable income of the superannuation provider in relation to the superannuation plan in which the interest is held Therefore, it appears that in order to be the tax free component, an insurance payout must constitute a contribution consider TR 2010/1

16 What to do upon disablement? Consider private binding ruling authorisation dated 16 July 2015 It considered following question: Does the TPD payment received by the SMSF constitute a tax-free [sic] component of the contributions segment of the fund? Response: Yes As the TPD payment from the Insurer is not assessable to the SMSF in this case, the TPD payment amount will constitute the contributions segment of the SMSF Section of the ITAA 1997 states that the tax free component of a superannuation interest is comprised of the sum of the contributions segment and the crystallised segment In other words, the amount of the TPD payment will be a tax free component of the Member's superannuation interest in the SMSF

17 What to do upon disablement? Can your client rely on private binding ruling authorisation ? Instead, what should you do if a client is in a similar position?

18 How to treat roll overs

19 How to treat roll overs Consider Wickham, age 22 he has only small amount ($5,000) in an APRA fund Should he have an SMSF now? However, he also has $500,000 of TPD insurance Wickham is mercilessly beaten by an unknown assailant Wickham now satisfies the definition of TPD Insurance pays to the APRA fund (Will APRA fund show Wickham s $505,000 balance as being 100% taxable component?) With $505,000, should Wickham start an SMSF now?

20 Vote - How to treat roll overs Assume APRA fund treats TPD pay out as forming part of taxable component (despite private binding ruling ) When Wickham rolls his $505,000 to an SMSF, how much should APRA fund show as forming part of taxable component? Option A: approximately 100% taxable component Option B: approximately 0% taxable component (ie, almost all tax free component)?

21 How to treat roll overs Key legislation is as follows (ITAA s ): Is a roll over a disability superannuation benefit? (1) Work out the tax free component of the *superannuation benefit under subsection (2) if the benefit is a *superannuation lump sum and a *disability superannuation benefit. (2) The tax free component is the sum of: (a) the *tax free component of the benefit worked out apart from this section; and (b) the amount worked out under subsection (3). (3) Work out the amount by applying the following formula: [Amount of benefit] x [Days to retirement] [Service days + Days to retirement] What does the key question then become?

22 How to treat roll overs So is the roll over a disability superannuation benefit? Can it be said that the roll over is paid to Wickham? The disability superannuation benefit is defined as (ITAA s 995-1(1)): disability superannuation benefit means a *superannuation benefit if: (a) the benefit is paid to a person because he or she suffers from ill health (whether physical or mental); and (b) legally qualified medical practitioners have certified that, because of the ill health, it is unlikely that the person can ever be *gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training. Section : A payment is treated as being made to you, or received by you, if it is made: (b) to another person or to an entity at your direction or request. Note: Paragraph (b) would cover, for example, a direction by you that a payment be rolled over from your original superannuation fund into another superannuation fund

23 How to treat roll overs What do ATO think? Private binding ruling number 94869: Does a roll-over (either a partial or full transfer of a member's superannuation benefits) from the Plan to another superannuation fund result in the modification of the tax free component under section of the ITAA 1997? Answer: Yes. Further, NTLG (Superannuation Technical Sub-committee) minutes for September 2007: Question: Could the Tax Office please confirm that a superannuation benefit... rolled over may be treated as a disability superannuation benefit? The ATO response: The Tax Office confirms that section of the Income Tax Assessment Act 1997 (ITAA 1997) is used to calculate the tax free component of a lump sum superannuation benefit that meets the requirements for a disability superannuation benefit even if the lump sum is rolled-over to another superannuation provider

24 How to treat roll overs So modification should apply This means, when APRA fund rolls to SMSF, APRA fund should advise SMSF that tax free component of roll over is: (Assume Wickham (22) only just start his first job and so Service days are say 100 whereas Days to retirement are say 43 x 365 = 15,695) $505,000 x 15,695 [ ,695] = $501, Will APRA funds always know to do this or will you need to have pro-active input?

25 How to structure SMSF

26 How to structure SMSF If a minor child is a member of an SMSF, can he or she be a trustee/director of trustee? No who must do it instead? Generally, parent or guardian (SISA s 17A(3)(c)) What happens when disabled child turns 18? Within 6 months of child s birthday either: Option A: child must become trustee or director; or Option B: child s legal personal representative must become trustee or director What are problems with each of these options? If fail to do this within 6 months of 18 th birthday, is there any discretion for auditor to not lodge auditor contravention report? (See test 1 of reporting criteria) Q1: What level of capacity is needed to do this? Q2: Who is a legal personal representative? (Hint: definition does not include parents or guardians)

27 How to structure SMSF Q1: What level of capacity is needed to become a trustee/director? For full details, see the excellent and free 740 page book Capacity and the Law ( At risk of oversimplifying, to have capacity for a decision, need to be able to: understand the specific situation, relevant facts or basic information about choices evaluate reasonable implications or consequences of making choices use reasoned processes to weigh the risks and benefits of the choices and communicate relatively consistent or stable choices Capacity is not a unitary concept for example, consider a very old Mr Bennet Sr: Mr Bennet Sr might have capacity to make this will Will (simple) I, Mr Bennet Sr, give everything to my son Mr Bennet Sr might not have capacity to make this will Last will and testament (complex) I, Mr Bennet Sr, devise my estate at Longbourn to my son, Mr Bennet Jnr, however, I do not devise the fee simple to Mr Bennet Jnr, but rather if Mr Bennet Jnr has no male heir upon his death, the estate is entailed upon the next closest male relative and

28 How to structure SMSF Q2: Who is a legal personal representative of an adult child? (Hint: definition does not include parents or guardians) Section 10(1) of the SIS Act defines legal personal representative as: the executor of the will of a deceased person Irrelevant in this context the administrator of the estate of a deceased person Irrelevant in this context a person who holds an enduring power of attorney granted by a person and Need capacity to do this the trustee of the estate of a person under a legal disability. What is a problem with this? Adult disabled children might have an administrator appointed by a State or Territory administration tribunal to manage their plenary estate What did ATO say in However, this is technically different to a trustee of their estate ATO ID 2010/139? Practically, what does this mean?

29 How to structure SMSF Case study Mr and Mrs Gardiner are very sensible people They have an adult disabled child Child does not have capacity to be trustee / director Upon their death, they wish to provide a tax efficient pension to that child What needs to happen? Mr and Mrs Gardiner start SMSF now and have in SMSF all benefits (including insurance policies) that are to form capital of child s death benefit pension

30 How to structure SMSF Case study (contd) Within 6 months of child s 18 th birthday, Mr and Mrs Gardiner get appointed as administrator to manage child s plenary estate However, when Mr and Mrs Gardiner die, how will the fund be structured? Mr and Mrs Gardiner have another adult child Can Mr and Mrs Gardiner bequeath administratorship of the disabled child s estate to other child? Therefore, who will be running the SMSF upon death / loss of capacity of Mr and Gardiner?

31 How to structure SMSF Case study (contd) Implicit risk in this structure is uncertainty of who will run fund upon death / loss of capacity One solution is to convert the fund from an SMSF to an small APRA fund

32 Conclusion

33 Conclusion Benefits can include tax efficiencies so be mind of pt IVA and promoter penalties... if there's any doubt whatsoever, seek advice and prospective ATO input Probably need to die with benefits in the fund that will pay the pension (ie, start SMSF sooner rather than later) Upon insurance pay out, ask ATO if private binding ruling authorisation applies If rolling over benefits for disabled person, ask paying fund if the modification applies SMSFs are not necessarily good for disabled children if want certainty on who will run upon death / loss of capacity of parents: might consider converting to a small APRA fund

34 Legal notice These slides are a general guide only based on our view of the law as of January They are no substitute for expert advice. Anyone seeking to rely on these slides should obtain expert advice to confirm particular issues especially as the law is subject to ongoing changes and substantial penalties can be imposed. As a law firm DBA Lawyers Pty Ltd is not licensed to provide financial product advice under the Corporations Act 2001 (Cth). Copyright resides in DBA Lawyers Pty Ltd unless another source is noted.

35 Disclaimer SMSF Association 2016 This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. 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.