WA SMSF Symposium AGENDA Day 1 Agenda Establishing

WA SMSF Symposium

AGENDA Day 1 Agenda ● ● Establishing & Winding up a SMSF Contribution Strategies Accessing SMSF Benefits SMSF Estate Planning Day 2 Agenda ● xxx

Establishing & Winding up a SMSF Shirley Schaefer Director BDO Advisory (SA) Pty Ltd

SETTING UP A SMSF Definition of SMSF ABC SMSF . Member 1 Trustee/Director Member 2 Trustee/Director Member 3 Trustee/Director Member 4 Trustee/Director

SETTING UP A SMSF Definition of SMSF ● ● Less than 5 members Sole purpose – the provision of retirement benefits All trustees must be members (all members must be trustees) No remuneration for trustee services

SETTING UP A SMSF ● SMSF Trust Deed ● ● Trustee ● ● On line providers vs solicitors Corporate vs Individuals Resident Regulated Fund ● ● Central management & control in Australia Non residents are not active

SETTING UP A SMSF Why SMSFs are set up ● ● ● Control Business structures Cost? ADVICE?

SETTING UP A SMSF 6 member funds ● ● Legislation drafted Not supported by the Labor Government

SETTING UP A SMSF 6 member funds - administration Larger Families Corporate FOR trustees Reduces costs Trust deed provisions Individual trustees Control (appoint & remove) AGAINST

SETTING UP A SMSF 6 member funds - investment Pooling of assets Taxation FOR strategies (using franking credits) Decision making Naming conventions Liquidity? AGAINST

SETTING UP A SMSF 6 member funds – benefit payments Intergenerational wealth transfer FOR Relationship breakdowns Efficient estate planning AGAINST

● Current ato activity

COMPLIANCE PROGRAM ATO current compliance risk focus areas: • • • Illegal early release (IER) and promoters Non-lodgement Regulatory contraventions Top 100 SMSFs and tax planning Top 100 auditors High risk auditors Our aim is to promote trust and confidence and encourage willing participation

SMSF ILLEGAL EARLY RELEASE AND PROMOTERS In FY 2018 the ATO disqualified 257 trustees who were trustees of 169 funds • 70% of these cases were for IER of funds and loans to members This financial year of 12, 211 new SMSFs: • 10% of new registrants were reviewed – IER focus • 123 Funds had their registration withheld from Super Fund Look Up • 329 Newly registered SMSFs had their registration cancelled 1/3 of reviews resulted in action $45 m in super was protected

SMSF ILLEGAL EARLY RELEASE AND PROMOTERS Common drivers for illegal early release: • Individuals have a desire to access money due to: ― Financial stress, or ― A desire to spend on a present day benefit • Individuals know little or nothing about setting up or running a SMSF are targeted by unscrupulous promoters The ATO work jointly with ASIC and share of information in relation to mattes that come to their attention, such as organisations or persons who encourage the establishment of an SMSF as the vehicle to invest in their products inappropriately.

SMSF NON-LODGEMENT STRATEGY Non lodgement is a risk flag • Early difficulties are symptomatic of ongoing difficulties • Lapsed lodgement occurs when administrative or regulatory issues arise • First time never lodgers high risk of IER A trustee’s most fundamental obligation is to lodge their SMSF’s annual return after their records have been independently audited.

SMSF NON-LODGEMENT STRATEGY In 2017 the ATO commenced their non-lodgement program which focuses on: • Lapsed lodgers (includes first year non-lodgers) • Never lodgers (includes new SMSFs)

SMSF NON-LODGEMENT STRATEGY – NONLODGERS New SMSFs – First-year never-lodgers So far this year the ATO have: • Identified over 6, 500 SMSFs • There SMSFs registered in 2017 and their first return was due 28 Feb 2018 ü If they have had a rollover asking them to lodge ü If no rollover asking them to cancel their registration as the fund is not operating

SMSF NON-LODGEMENT STRATEGY – NONLODGERS First-year non-lodgers So far this year the ATO have: • Identified 26, 000 SMSFs who have not lodged their 2017 SAR • This population had previous good lodgement history ü Contracting all non-lodgers for FY 17 ü Advising them that if they don’t meet their regulatory obligation to lodge: ― Compliance status at risk ― SMSF will be removed from SFLU, and ― If they are not able to lodge due to a problem, encouraged to use our SMSF early lodgement and voluntary disclosure service

SMSF NON-LODGEMENT STRATEGY – NONLODGERS Approximately 30, 000 SMSFs who have NEVER lodged: • Over 50% appear to have a rollover from an APRA fund • Remainder have not had a rollover • There is an increasing trend over the past 5 years • Average rollover increased over the past 5 years from $78 k to $140 k in FY 17 • Average of members is 36 ü Currently reviewing SMSFs where we know there has been a rollover to determine if the fund is operating or if IER ü For those who have not rolled over, asking them to cancel their registration as the fund is not operating

SMSF TOP 100 & TAX PLANNING ARRANGEMENTS The ATO risk profiled all the top 100 SMSFs representing $7. 9 b of assets • 35% warrant a closer look into: ― ― ― Use of LRBAs Reported contraventions Rapid and excessive asset growth rates Non arm’s length arrangements Previously identified risks The ATO will escalate an SMSF for review where there are transactions requiring formal investigation

WINDING UP A SMSF When to Exit? ● No balance/members left ● SMSF size ● No longer suits ● Relationship breakdown ● Age/capacity ● Surviving spouse When to Exit? ● Time ● SIS – disqualified trustees ● ATO enforceable undertaking ● DBPS solvency issue ● Residency ● “Skeletons in the closet”

WINDING UP A SMSF How to exit? ● ● ● Pay benefits - need to meet a condition of release Rollover to an APRA regulated fund ● Retail, Industry, Government or Corporate fund Small APRA Fund (SAF) Implications ● ● Sale of Assets (liquidity) vs transfer of assets Fund tax payable Capital gains tax (if assets sold & fund not in pension phase) Stamp duty

WINDING UP A SMSF Small APRA Fund (SAF) ● Approved/Regulated trustee appointed ● Generally still member directed ● Will accept most assets (if complying)

WINDING UP A SMSF Small APRA Fund (SAF) Acceptable assets Unacceptable assets Direct property Investments in jointly owned assets Vacant land Business (alone or in partnership) Shares in private companies (member should not be a shareholder or director & dividends must be payable) In house assets > 5% Registered First Mortgages (AET must be shown as the registered mortgagee) Property development (direct or via another entity) Loans to private companies (interest rate must be Overseas direct property commercial & AET must be satisfied the company is viable) Collectables Futures, forwards, written call & put options Shares listed on international exchanges

WINDING UP A SMSF Small APRA Fund (SAF) May accept these assets Wont accept these assets Direct property Overseas property Private, unlisted or closely held unit trusts Futures, derivatives (with a charge over assets) or commodities Private or unlisted companies Direct residential mortgages Private business premises Investments in related businesses or partnerships (or arrangements where the SAF might be running a business) Certain listed international securities & derivatives Collectables, including art, jewellery or antiques or motor vehicles Derivatives with limited investment risk Livestock Illiquid assets with no mechanism to transfer

WINDING UP A SMSF Death • Check trust deed for specific instructions • Who becomes trustee/s? • Who are benefits paid to? • Dependants? • How are benefits to be paid? • BDBNs?

WINDING UP A SMSF Divorce • How does the fund operate – decision making? • Super is a family law property asset • Family court orders/agreements • Multiple members

Winding up a SMSF Divorce – What can go wrong ● ● ● Members try to DIY No court approved financial agreement Members cannot agree, not talking to each other Wont sign off on financial statements One member accesses super A ‘grab’ for assets

WINDING UP A SMSF Dementia (incapacity) • How is loss of capacity determined? • Is there an Enduring Power of Attorney (EPOA)? • EPOA must • consent to act • be appointed • complete all forms

WINDING UP A SMSF Disqualification ● A Trustee is disqualified: • Bankrupt • Civil penalty order under SIS • Convicted of an offence involving dishonesty • ATO determination

Winding up a SMSF Disqualification ● If you cannot be a trustee – you cannot be a member of a SMSF ● ● Must exit the SMSF system Cannot appoint LPR or EPOA to act Cannot act as a trustee (but can undertake administrative functions) ● Have 6 months to remove benefits from the SMSF ●

WINDING UP A SMSF Disqualified Trustees - checklist Check Trust Deed Advise ASIC (if corporate t/tee) Remove Trustee – minutes of meeting Advise ATO Advise ASIC (if corporate t/tee) Advise ATO (immediately) Change Banking Details Consider should monies be - withdrawn - rolled over - SAF Realise assets (? ) Appoint new trustee/director Remove member balance (within 6 months)

WINDING UP A SMSF Departure • For tax concessions must be a resident regulated fund • Be established in Aust or have an asset in Aust • Active member test • Central management & control

WINDING UP A SMSF Residency ● Active member test ● ● 50% of active members balances must be held Aust resident Active members = contributions or rollover; or No Active Members Central Management & Control must be in Aust ● ● ● Formulating investment strategy Reviewing performance Determining how assets used

WINDING UP A SMSF Checklist – Fund pays Tax Select wind up date - minutes agreeing to wind up fund Check the Trust Deed Rollover or Benefit Payment? - preservation status of member balances - minutes to confirm benefit payments/rollovers Deal with assets - Sell assets (even if rollover in specie – it is a sale) - complete OMTs if applicable - collect all income - cease DRPs

WINDING UP A SMSF Checklist – Fund pays Tax Complete interim accounts to wind up date - sell assets - record all income - accrue any expenses for wind up (accounting/audit fees etc) - check ATO portal - calculate final income tax including CGT Instructions to trustees - draw cheques for benefit payments/rollovers - complete rollover forms - pay all expenses (accounting/audit)

WINDING UP A SMSF Checklist – Fund pays Tax Pay income tax; or Complete Trust Account Authority to receive income tax refund to accountant’s trust account Close Bank Account Complete final accounting & prepare final income tax return - trustees to sign off Submit final accounts to auditor final audit Lodge final income tax return - need to note on ITR that return is “final” Advise ATO of wind up (28 days) Deregister corporate trustee

Contributions Strategies Shirley Schaefer Director BDO Advisory (SA) Pty Ltd

CONTRIBUTIONS TO SUPER Total Super Balance (TSB) ● All accumulation balances ● All retirement phase balances ● Rollovers in transit ● Measured as the amount on voluntary exit from super ● Net market value of assets ● After costs to sell & taxes

CONTRIBUTIONS TO SUPER Total Super Balance (TSB) This is the balance per the financial statements – total member balances At Market Value

CONTRIBUTIONS TO SUPER Total Super Balance (TSB) For TSB reporting purposes At Net Market Value (less costs & taxes) Total can be different to total at “S”

CONTRIBUTIONS TO SUPER Total Super Balance (TSB) Contribution maximums TSB @ previous 30 June Non concessional contributions $1, 600, 000 NCCs 12 months post retirement $300, 000 Catch up contributions $500, 000 Govt co-contributions $1, 600, 000 Spouse contributions – tax offset (spouse TSB) $1, 600, 000

CONTRIBUTIONS TO SUPER Concessional Contributions ● Contributions that are included in the taxable income of the superannuation fund ● Generally, the payer has received a tax deduction for making the contribution ● Employer contributions ● Superannuation guarantee contributions (SG) ● Salary sacrifice contributions

CONTRIBUTIONS TO SUPER SG - maximum superannuation contributions ● Employers are only required to provide SG support to a maximum amount per employee Year Per Quarter – Max Salary Equates to annual amounts 2018 -19 $54, 030 $216, 120 2017 -18 $52, 760 $211, 040 2016 -17 $51, 620 $206, 480 2015 -16 $50, 810 $203, 240 2014 -15 $49, 430 $197, 720

CONTRIBUTIONS TO SUPER Concessional Contributions - personal ● Personal concessional contributions ● NAT 71121 ● Notice of intent to claim tax deduction ● Confirmation by super fund that notice has been received ● NOI must be received/dated prior to commencement of pension or a rollover with the relevant contributions

CONTRIBUTIONS TO SUPER Personal Concessional Contributions NAT 71121 received 30/9 Contribution $25, 000 1/7 30/6 Pension commenced 1 July

CONTRIBUTIONS TO SUPER Concessional Contribution Limits Age 2015/16 2016/17 2017/18 2018/19 Age at 30 June < 50 years $30, 000 $25, 000 Age at 1 July 49 – 59 years $35, 000 $25, 000 Age at 1 July > 59 years $35, 000 $25, 000 *Indexed in accordance with AWOTE, in $2, 500 increments

CONTRIBUTIONS TO SUPER From 1 July 2017 - The cap of $25, 000 includes: ● Super Guarantee (9. 5%) & salary sacrifice amounts ● Personal concessional contributions ● Defined benefit fund contributions (notional) ● Contributions to constitutionally protected funds ● This is a significant change – previously did not count towards the caps

CONTRIBUTIONS TO SUPER Constitutionally Protected Funds ● Will now count towards CC cap ● Will not result in an excess concessional contribution in that fund ● But may result in cause excess contribution if there are contributions to other funds ● Note: full amount of contribution counts for Div 293 purposes

CONTRIBUTIONS TO SUPER Constitutionally Protected Funds ● Example 2018/19 CPF SMSF Contribution Made $200, 000 $25, 000 Cap Amount utilised $25, 000 $nil $25, 000 Excess Concessional Contribution

CONTRIBUTIONS TO SUPER Constitutionally Protected Funds ● This means that can only ever have $25, 000 count towards concessional contributions cap ● Cease contributions to SMSF or other fund ● Continue to make larger contributions to constitutionally protected funds

CONTRIBUTIONS TO SUPER TSB < $500, 000 Catch up contributions $20, 000 $45, 000 30/6/19 30/6/20 30/6/21 30/6/22 30/6/23 $5, 00 0 $5, 000

CONTRIBUTIONS TO SUPER Catch up Contributions ● Use when have irregular working patterns ● Use when know that will need a larger tax deduction in future years (to offset a capital gain? )

CONTRIBUTIONS TO SUPER Use of Reserves ● Can use reserves to ‘double dip’ with contributions April $25, 000 June $25, 000 ● Need to lodge ‘request to adjust concessional contributions’ NAT 74851 Taxable 2018 Counts towards caps 2019

CONTRIBUTIONS TO SUPER Use of Reserves ● Use when additional contributions in a year ● 13 x monthly payments ● 5 x quarterly payments ● Use when don’t meet the work test in the next year ● Use when need additional deductions ● Can be used for non concessional contributions ● Can be used in single member funds

CONTRIBUTIONS TO SUPER Reduction in NCC caps 2011 - 2014 2015 - 2017/18 onwards $150, 000 $450, 000 $180, 000 $540, 000 $100, 000 $300, 000 § If TSB > $1. 6 m unable to make NCCs Age > 65 years at 1 July - Annual cap $150, 000 $180, 000 $100, 000 Age < 65 years at 1 July - Annual cap - 3 year cap

CONTRIBUTIONS TO SUPER NCC Cap – transitional limits Triggered in 2014/15 Triggered in 2015/16* Triggered in 2016/17* Year 1 180, 000 Year 2 180, 000 100, 000 Year 3 180, 000 100, 000 3 year b/fwd 540, 000 460, 000 380, 000 * Can make total of $540, 000 if made by 30 June 2017

CONTRIBUTIONS TO SUPER NCC Cap Total Super Balance Maximum NCCs Bring forward years Less than $1. 4 m $300 k 3 $1. 4 m – $1. 5 m $200 k 2 $1. 5 m - $1. 6 m $100 k n/a $nil n/a Greater than $1. 6 m

CONTRIBUTIONS TO SUPER Small Business CGT Concessions ● Contributions can be made to super from the capital proceeds of the sale of CGT assets. ● Lifetime limit CGT contributions ● 2017/18: $1, 445, 000 ● 2018/19: $1, 480, 000 ● 2019/20: $1, 515, 000 ● Included in that lifetime limit is the $500, 000 cap (non indexed) for CGT Retirement Exemption

CONTRIBUTIONS TO SUPER Small Business CGT Concessions - to be eligible for relief ● Pay capital proceeds into super ● Pay the later of 30 days from receipt or before the ITR for the relevant year is lodged ● Complete ATO form NAT 71161 (this advises the super fund not to count the contributions towards non-concessional caps)

CONTRIBUTIONS TO SUPER Downsizer Contributions ● From 1 July 2018 ● Maximum of $300, 000 per member ● Can make contribution even if TSB > $1. 6 m ● NAT Form 75073

CONTRIBUTIONS TO SUPER Downsizer Contributions - Conditions Member age > 65 years The home is your main residence exemption Contract date for sale post 1 July 2018 Provide your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer contribution The home was owned by you or your spouse for 10 years or more prior to the sale Make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement The home is in Australia and is not a caravan, houseboat or other mobile home

CONTRIBUTIONS TO SUPER Contribution splitting ● Contributions can be split from one member to another - 85% of concessional contributions ● Spouse declaration required ● Spouse age < 55 years; or ● Spouse is not retired ● Split occurs in financial year after contribution was made ● NAT 15237

CONTRIBUTIONS TO SUPER Contribution splitting ● Strategies for benefit equalisation Ronald is 55 years of age and employed – he has $1, 000 of super Janet is 46 years of age and has $300, 000 of super Ronald & Janet both have $25, 000 of employer contributions each year Would a contribution splitting strategy be effective over 10 years (Ronald to retirement age 65)?

CONTRIBUTIONS TO SUPER Contribution splitting ● Strategies for benefit equalisation Without split With split Ronald Janet Year 0 $1, 000, 000 $300, 000 Year 5 $1, 513, 389 $592, 237 $1, 372, 438 $733, 188 Year 10 $1, 976, 677 $855, 955 $1, 690, 092 $1, 142, 540 *assumes no other contributions + 4% net growth each year (after all taxes)

CONTRIBUTIONS TO SUPER Contribution splitting ● Strategies for benefit equalisation Without split With split Ronald Janet Year 0 $1, 000, 000 $300, 000 Year 5 $1, 513, 389 $592, 237 $1, 372, 438 $733, 188 Year 10 $1, 976, 677 $855, 955 $1, 690, 092 $1, 142, 540 *assumes no other contributions + 4% net growth each year (after all taxes)

CONTRIBUTIONS TO SUPER Age based tests: Age Contributions Work Test Age < 65 years Mandatory contributions (SG) No Voluntary Contributions - concessional - non concessional No Age 65 – 74 years Mandatory contributions (SG) Voluntary Contributions - concessional - non concessional No Yes 40 hours in 30 consecutive day period

CONTRIBUTIONS TO SUPER Gainfully Employed ● For gain or reward in any business, trade, profession, vocation, calling, occupation or employment ● Envisages receipt of remuneration in return for personal exertion (but is not essential) ● Unpaid work is not sufficient ● Volunteer work is not ‘gainful employment’

CONTRIBUTIONS TO SUPER NCC Cap - Post retirement exemption ● Removal of work test for some individuals between the age of 64 -75 ● Voluntary contributions in their first year of retirement, provided they have a total superannuation balance of less than $300, 000 ● Liberal govt budget announcement ● Removal of the work test for 65 & 66 year olds ● To align to aged pension age

CONTRIBUTIONS TO SUPER If don’t meet age based tests ● Must refund contributions within 30 days of trustees becoming aware ● Age 65 – 74 – don’t meet work test ● Age 75 plus – voluntary contributions

CONTRIBUTIONS TO SUPER Maximising contributions – timing Total Super Balance Limit 1 Voluntary contributions post retirement $300, 000 2 Catch up concessional contributions $500, 000 3 Non concessional contributions 4 CGT contributions n/a 5 Downsizer contributions n/a $1, 600, 000

CONTRIBUTIONS TO SUPER Maximising contributions – timing 30/6/20 Age of member > 65 years 30/6/21 Catch up contributions $75, 000 30/6/22 CC CC (15 june - reserve) Retire (25 june) $25, 000 30/6/23 NCC post retirement Downsizer contribution CC post retirement (15 june – reserve) 30/6/24 CGT contribution Assume no CCs in past 2 years TSB $150, 000 TSB $225, 000 TSB $275, 000 $100, 000 $300, 000 $25, 000 TSB $700, 000 $1, 500, 000 TSB $2, 200, 000

CONTRIBUTIONS TO SUPER Co-contributions ● Now a maximum of $500 Min Income Threshold Maximum Income Threshold 2018/19 $37, 697 $52, 697 2017/18 $36, 813 $51, 813 2016/17 $36, 021 $51, 021 2015/16 $35, 454 $50, 454 2014/15 $34, 488 $49, 488

CONTRIBUTIONS TO SUPER LISTO ● Income < $37, 000, eligible for $500 LISTO Spouse contribution rebate ● Spouse income level increased from $13, 800 to $37, 000 ● Still max $3, 000 contribution & $540 rebate

TOP 10 SMSF QUESTIONS Contributions - Labor Govt Policies ● ● ● NCC cap reduce to $75, 000 pa Re-introduction of 10% test for personal concessional contributions Removal of catch up contribution rules Div 293 tax threshold reduces to $200, 000 SG threshold of $450 pm would be reduced by $100 a year for 5 years (eventually cutting out so SG paid on all wages) Extend SG to parental leave payments

Contributions to Super - Tax Implications Shirley Schaefer Director BDO Advisory (SA) Pty Ltd

CONTRIBUTIONS – TAXES Excess Concessional Contributions ● From 1 July 2013 ● Refunding Concessional Contributions ● Automatically included in personal taxable income ● Taxed at marginal rates + interest charge ● Can withdraw 85% of excess amount from super ● No excess concessional contributions taxes anymore

CONTRIBUTIONS – TAXES Excess non-concessional contributions ● From 1 July 2013 ● Amounts contributed in excess of the cap can be refunded to the member ● Income earned by the excess non-concessional contributions can be refunded to the member and will be assessed as personal income (taxed at marginal rates)

CONTRIBUTIONS – TAXES Excess Non-Concessional Contributions Determination ● Amount your non-concessional contributions exceed your NCC cap for the financial year ● Amount of Associated Earnings

CONTRIBUTIONS – TAXES Associated Earnings ● Amount of excess non-concessional contributions ● x Proxy Rate ● x period from 1 July of year of contribution to date of determination ● Proxy Rate is lower of: ● Average of General Interest Charge (GIC) for the year ● Rate determined by legislative instrument ● GIC for 2018/19 year is 8. 9% pa

CONTRIBUTIONS – TAXES Release of Monies ● Monies are released from: ● From taxable component ● The from tax free component of member’s balance ● Release from Defined Benefit interests are voluntary ● Partial Release of excess non-concessional contributions ● Amount released – calculate associated earnings & include in personal assessable income ● Amount not released – subject to excess non-concessional contributions tax

CONTRIBUTIONS – TAXES Excess non-concessional contributions Frank is under 65 years of age & has $450, 000 in super He is confused about the contribution limits but knows that he hasn’t contributed NCCs in the past He contributes $540, 000 in September 2017 How will the excess contributions be treated?

CONTRIBUTIONS – TAXES Excess non-concessional contributions Excess $240, 000 NCC $540, 000 1/7/1 7 Release Authority Excess + Assoc Earnings $272, 040 30/6/18 ATO Determination Can withdraw from taxable componen t

CONTRIBUTIONS – TAXES Assume 8. 9% @ 18 mths Excess non-concessional contributions Taxed in Super Excess NCC $240, 000 x 46. 5% Earnings on excess NCC $32, 040 x 46. 5% (assume 18 mths) Total Tax Bill Taxed Personally $111, 600 $14, 898

CONTRIBUTIONS – TAXES Excess non-concessional contributions Frank is under 65 years of age & has $450, 000 in super. He is confused about the contribution limits but knows that he didn’t contribute NCCs in the past. He contributes $540, 000 in September 2017 Frank’s balance prior to the contribution in Sept 2017 was 100% taxable component What do his tax components look like after the excess is refunded?

CONTRIBUTIONS – TAXES Excess non-concessional contributions At 30/6/17 NCC $540, 000 Sept 2017 Taxable $450, 000 Excess Wdl $272, 040 Dec 2018 At 30/6/19 Taxable $272, 040 $177, 960 Tax Free $0 $540, 000

CONTRIBUTIONS – TAXES Excess non-concessional contributions At 30/6/17 NCC $540, 000 Sept 2017 Taxable $450, 000 Excess Wdl $272, 040 Dec 2018 At 30/6/19 Taxable $272, 040 $177, 960 Tax Free $0 $540, 000

CONTRIBUTIONS – TAXES Excess non-concessional contributions At 30/6/17 NCC $540, 000 Sept 2017 Taxable $450, 000 Excess Wdl $272, 040 Dec 2018 At 30/6/19 Taxable $272, 040 $177, 960 Tax Free $0 $540, 000

CONTRIBUTIONS – TAXES Excess non-concessional contributions Before After Balance $450, 000 Balance $717, 960 100% Taxable 25% Taxable 75% Tax Free Is this antiavoidance? ? ?

CONTRIBUTIONS – TAXES Div 293 Tax ● If ATI > $250, 000 – additional tax of 15% ● On concessional contributions or that part of concessional contributions over $250, 000 ● Administered by the ATO (similar to excess taxes ) and with a separate tax assessment issued

CONTRIBUTIONS – TAXES Div 293 Tax ● Where ISP-RSC & LTC > $250, 000 ● then the excess will be subject to the 15% tax ● ISP includes ● Taxable income, RFB, investment loss and RSC ● RSC includes ● Salary sacrifice superannuation contributions ● LTC includes ● Concessional contributions less any excess contributions

CONTRIBUTIONS – TAXES From 1 July 2017 - Div 293 Tax David $ ISP Bruce $ Dale $ 281, 000 241, 000 226, 000 RSC 6, 000 LTC 25, 000 300, 000 260, 000 245, 000 25, 000 10, 000 0 7, 500 5, 250 3, 750 ISP – RSC & LTC subject to div 293 Total tax on contributions

CONTRIBUTIONS – TAXES The new tax does not apply to: ● Non concessional contributions or excess concessional contributions disregarded by the ATO Contributions for Judges ● It may apply in some instances to contributions to constitutionally protected funds ●

CONTRIBUTIONS – TAXES Accepting Contributions – when are they received/allocated? ● Contributions are received when the cash is received into the bank account ● PS LA 2008/1

CONTRIBUTIONS – TAXES Accepting Contributions A contribution is made when. . . The cash is received by the superannuation provider. The funds are credited to the superannuation provider's account. The money order or bank cheque is received by the superannuation provider, unless the money order or cheque is dishonoured. The personal cheque is received by the superannuation provider, so long as the cheque is promptly presented and is honoured. The cheque is able to be presented for the payment (that is, the date on the cheque), so long as the cheque is promptly presented and is honoured. The promissory note is received, so long as payment is demanded promptly and the note is honoured.

CONTRIBUTIONS – TAXES Accepting Contributions ● AATA 140 re Peaker v FCT (2012) ● Taxpayers employer mailed cheque on 28 June 2007 ● Received by fund on 5 July 2007 ● AAT agreed contribution ‘made’ when received by fund

CONTRIBUTIONS – TAXES Accepting Contributions ● AATA 179 re Chantrell v FCT (2012) ● Taxpayer tried to transfer $60, 000 on 30 June 2007 ● Trouble was, this was a Saturday ● Amounts credited to SMSF account on 2 July 2007 ● AAT agreed with the ATO practice of treating EFT as ‘made’ on day bank account is credited.

AGENDA Day 1 Agenda ● ● ● IPA Update SMSF Accounting & Administration Accessing SMSF Benefits SMSF Estate Planning/Superannuation Structuring Contributions to Super Day 2 Agenda ● ● Estate Planning ATO Presentation Advising Your Clients SMSF Audit – Horror Stories

Accessing SMSF Benefits - Pensions – How to get the most out of your SMSF Shirley Schaefer Director BDO Advisory (SA) Pty Ltd

When a suitable condition of release is met Unrestricted Non Preserved All super monies must be preserved until a suitable condition of release is met on or after reaching preservation age Restricted Non Preserved PRESERVATION – ACCESS RULES Can access at any time Have met a FULL condition of release

PRESERVATION – ACCESS RULES Date of Birth Year Preservation Age 14/15 or prior 55 1 July 1960 – 30 June 1961 16/17 56 1 July 1961 – 30 June 1962 18/19 57 1 July 1962 – 30 June 1963 20/21 58 1 July 1963 – 30 June 1964 22/23 59 2024 onwards 60 Before 1 July 1960 After 30 June 1964

CONDITIONS OF RELEASE Cashing Restrictions Nil Cashing Restrictions Temporary incapacity Permanent incapacity Severe financial hardship Retirement after preservation age Compassionate grounds Attaining age 65 Transition to retirement pension Terminal medical condition ATO release authority Death (compulsory condition) Can withdraw benefits at any time

CONDITIONS OF RELEASE Severe financial hardship Compassionate grounds Receiving Centrelink support Apply to ATO 26 continuous weeks, or 39 cumulative after PRES age To pay for: - medical treatment - Modifications to residence or vehicle for disabled - Palliative care - Funeral or burial expenses Trustee satisfied, based on evidence Unable to meet reasonable & immediate family living expenses Min $1, 000 Max $10, 000 Loan repayments, - 3 months payments/12 months interest - Foreclosure/forced sale

CONDITIONS OF RELEASE Permanent incapacity Terminal medical condition Due to ill health Death within 24 months Trustee satisfied member unable to work in area qualified 2 medical practitioners, one a specialist Tax - 2 medical practitioners SIS – not in Act, but should still get sign off Permanent incapacity

RETIREMENT v CESSATION OF WORK Tim , aged 62, finished employment with Happy Pants Pty Ltd on Friday and starts with Frankie Pty Ltd on Monday. He continues his part-time job at Muffin Break, where he has worked for the past 10 years Does Tim have full access to his super?

RETIREMENT v CESSATION OF WORK Less than 60 • Arrangement of gainful employment ceases, and • No intention of returning to workforce 60 - 64 • Arrangement of gainful employment ceases, and • Obtains that age before employment ceases, or • No intention of returning to workforce

ACCOUNT BASED PENSIONS Most common pension ● Available since July 2007 ● Minimum based on account balance and members age ● Minimum pro-rated based on commencement date June commencement – no min required for that FY ● ● ● Transition to retirement pension is a type of ABP Post 1 July 2017: “Once a Transition to Retirement Pension, always a Transition to Retirement Pension”.

PENSIONS What is a superannuation income stream? • Arrangement between Trustee & Member (documentation) • Series of periodic payments • Is a financial product • Defined by Deed, Regulations, contract, documentations – rules • Re Narumon highlights importance of pension documentation

PENSIONS Commencement ● TR 2013/5 ● Cannot precede the date of the member’s request application ● Can’t be before all monies have been received ● Rollovers ● Contributions Can start multiple income streams ● Results in multiple interests ● Can produce beneficial tax outcomes ● Estate planning opportunities ● Pensions are a financial product. Who is providing the advice on commencing and commuting pensions?

PENSIONS Pension Interests Accumulation Superannuation Interest Member A Taxable component Tax Free component Member A Pension 1 Taxable component 50% Components established when pension commenced Tax Free component 50% Pension 2 Taxable component 10% Tax Free component 90%

PENSIONS Min Pension Standards ● Minimum Pension to be paid ● Must pay pro-rata minimum before being fully commuted (excluding death of member) ● Pension payments must be taken in cash ● Payment of shares or other asset is considered a superannuation lump sum benefit As of 1 July 2017 ● Lump sum payments no longer count towards minimum pension requirements ●

REVERSIONARY VS NON-REVERSIONARY Reversionary • Pension continues on death of primary beneficiary • Automatically reverts to spouse • Minimum pension in year of death based on primary beneficiary details Non Reversionary • Technically ceases of date of death of primary beneficiary • ECPI entitlement continues though until death benefits paid out • Pro-rata pension not required for period primary beneficiary alive in relevant financial year • New pension interest commenced by beneficiary • Minimum pension based on recipient details

PENSION DRAWDOWNS Age Minimum drawdown Under 65 4% 65 – 74 5% 75 – 79 6% 80 – 84 7% 85 – 89 9% 90 – 94 11% 95 + 14% Maximum drawdown for TRIS = 10% (not pro-rated)

TAXATION - PENSIONS Element taxed in the fund Tax free Taxable 0% Included in income taxed at marginal rates Age 55 – 60 years 0% Included in income taxed at marginal rates 15% pension rebate allowed Age 60+ years 0% Tax free Age < 55 years

LUMP SUMS & COMMUTATIONS Lump Sum Benefits ● A lump sum is a benefit taken that is not an income stream ● No longer count towards minimum pension ● Can only be taken from Unrestricted Non Preserved benefits ● ● Member must request commutation ● Treated as lump sum Election must be made prior to payment ● Same components per member balance on date of withdrawal.

TAXATION – LUMP SUMS 2018/19 Element taxed in the fund Tax free Taxable Age < 55 years 0% 20% plus levies Age 55 – 60 years First $205, 000 > $205, 000 0% 0% 0% 15% plus levies Age 60+ years 0% 0%

BENEFIT PAYMENT Martha is aged 58 and retired. Her $500, 000 SMSF balance is made up; 40% tax-free = $200, 000 60% taxable = $300, 000 She currently has $140, 000 of her LRC remaining. She wishes to withdraw $250, 000. What are the tax implications for taking the amount as either a pension or lump sum?

BENEFIT PAYMENT Taxed Pension Lump sum 40% tax free $100, 000 (40% x $250, 00) 60% taxable $150, 000 (60% x $250, 00) 40% tax free $100, 000 (40% x $250, 000) 60% taxable $150, 000 (60% x $250, 000) $150, 000 Taxed at marginal rates Less 15% rebate $140, 000 – tax free (low rate cap) $10, 000 – taxed at 15%

BENEFIT PAYMENT What if I don’t have the cashflow to pay a pension payment? ● ● ● Can an asset be sold to free up cash? ● on market, or ● to the member What if settlement won’t occur in time? Short term borrowings ● Maximum 90 days ● Maximum 10% of value of fund. MUST SELL & pay pension in cash

FAILURE TO MEET PENSION STANDARDS Pension ceases from commencement of relevant year ● For TBA purposes pension will cease on 30 June of relevant year ● Lose ECPI ● Payments will be treated as lump sums ● Issue for TRIS if no Unrestricted Non Preserved component ● Breach of preservation rules If payments continue into new year will be considered a new pension with new tax-free/taxable proportions calculated. ●

FAILURE TO MEET PENSION STANDARDS Underpayment of Pensions Small Underpayment Circumstances Outside of the Control of the Trustee • Honest Mistake • Less than 1/12 th of minimum • Catch up payment within 28 days of becoming aware • No previous underpayments “first offence” • ? ? ? What is outside of the control of the trustee? • Catch up payment within 28 days of becoming aware • No previous underpayments “first offence” Title

TRIS BEFORE AND AFTER From 1 July 2017 Up to 30 June 2017 TRIS in RP Claim ECPI Elect payment taxed as lump sum 4% min / 10% max pension No ECPI claim Cannot elect payment taxed as lump sum 4% min / 10% min pension ECPI claim Commutation = lump sum Relevant % min pension ( No maximum) Can be reversionary Convert to ABP on condition of release Can be reversionary Does not convert to ABP on condition of release Does not count towards TBC Can be reversionary Does not convert to ABP on condition of release Does count towards TBC (TBAR req’d)

TRIS STRATEGIES Jake is 60 years of age Accumulation balance $500, 000 TRIS balance $1, 000 (will be tax free in Jake’s hands) Rose is 55 years of age Accumulation balance $500, 000 Is a TRIS worthwhile?

TRIS EQUALISATION STRATEGY Jake (60) $1. 0 m in TRIS Pension $500, 000 in Accum Rose (55) $600, 000 in Accumulation Withdraw Max 10% pension Contribute $100, 000 Jake $900, 000 Rose $700, 000 Withdraw Max 10% pension Contribute $90, 000 Jake $800, 000 Rose $790, 000

BENEFIT PAYMENT Maximising the strategy Retiring in 5 years Both working - $25, 000 of concessional contributions each year 3 options No TRIS strategy TRIS Strategy. Jake starts TRIS on $1 m and draws max $100 k. Gives to Rose and she makes $100 k NCC TRIS Strategy with contribution splitting. Uses 6% net return for each of the 5 income years, applied to opening balance of each member account

TRIS EQUALISATION STRATEGY Balance at the end of year 5: Strategy Jake Rose Total No TRIS $2, 127 $922, 723 $3, 049, 850 With TRIS $1, 563, 417 $1, 486, 433 $3, 049, 850 TRIS + cont split $1, 470, 457 $1, 579, 393 $3, 049, 850

PENSION STRATEGIES POST REFORMS SMSF Maximise ECPI claim Pension Draw as a pension Reduces pension balance No impact on TBA Accumulation Lump sum from accumulation account Changes proportion of pension v accumulation of fund Increases ECPI over time Better tax outcome if members < 60 years SMSF Reduce TBA balance Pension Partial Commutation & lump sum payment Is a TBA debit TBAR lodgement required Provides TBA ‘cap space’ for future pension use

MAXIMISING ECPI CLAIM Roger, aged 62, is the only member of his SMSF. His ABP balance at 1 July 2017 was $1. 6 m and his accumulation balance was $400 k. Roger drew $80 k from his fund during 2017/18. He intends to draw $80 k each year for his living needs. How can these payments be treated to benefit Roger?

MAXIMISING ECPI CLAIM ECPI % 83. 00% 81. 00% 79. 00% 77. 00% 75. 00% 73. 00% 71. 00% 2018 2019 2020 ECPI - 1 (P&A) 2021 2022 2023 ECPI - 1 (P) P&A = min pension from pension account, excess from accumulation account. Assumes 6% net earning rate.

MAXIMISING ECPI CLAIM Lump sum 1 July Pension 30 June Lump sum 1 st Then min pension (monthly) Min pension 1 st Then lump sum (monthly) All payments as pension (monthly) To Maximise ECPI Timing is everything! Take payments from accumulation accounts early Delay pension payments to later in the year

PENSION WITH NO ACCUM – REDUCE TBA BALANCE Edward is 60 and commences an ABP with $1. 6 million. He intends to draw $100, 000 per annum over the next 5 years. Over the same period he expects to achieve a return of 6%. He has no other money in superannuation (no accumulation account). How should the pension payment be treated?

PENSION WITH NO ACCUM – REDUCE TBA BALANCE Year Account Balance Return @ 6% Min Pension Additional Drawing Account Transfer Balance Account Balance Alternatives Year 1 $1, 600, 000 $96, 000 $64, 000 $36, 000 $1, 596, 000 $1, 600, 000 $1, 564, 000 Year 2 $1, 596, 000 $95, 760 $63, 840 $36, 160 $1, 591, 760 $1, 600, 000 $1, 527, 840 Year 3 $1, 591, 760 $95, 506 $63, 670 $36, 330 $1, 587, 266 $1, 600, 000 $1, 491, 510 Year 4 $1, 587, 266 $95, 236 $63, 490 $36, 510 $1, 582, 502 $1, 600, 000 $1, 455, 000 Year 5 $1, 582, 502 $94, 950 $63, 300 $36, 700 $1, 577, 452 $1, 600, 000 $1, 418, 300 All wdls = pension pmts Nominating drawings over the pension minimums as lump sum drawdowns will enable potential future pension top ups. Wdls = min pension pmts + partial com

SMSF Estate Planning Shirley Schaefer Director BDO Advisory (SA) Pty Ltd

SMSFS & ESTATE PLANNING Death benefits ● Can be paid as lump sums or pensions ● Must be paid to a SIS beneficiary ● Consider Trust Deed provisions ● Paid to tax dependants are generally tax free ● Paid to non-tax-dependants are taxable

SMSFS & ESTATE PLANNING ESTATE Dependants SIS Dependants Tax Dependants Spouse Child (< 18 years) Legal Personal Representative Financial Dependant Interdependency Relationship

SMSFS & ESTATE PLANNING Dependants SIS Dependants Tax Dependants Spouse Child (< 18 years) Legal Personal Representative Financial Dependant Interdependency Relationship

SMSFS & ESTATE PLANNING Spouse SIS Dependant Married Defacto Same Sex Married - separated Ex Spouse (divorced) – ex defacto � � � Tax Dependant � � �

SMSFS & ESTATE PLANNING Child SIS Dependant Natural issue � Adopted � Foster Child � ? Step Child Tax Dependant Child < 18 at date of death � Pension until 25 years (commute to lump sum) �

SMSFS & ESTATE PLANNING Financial Dependant Occasional support Regular support � � ● Need to be financially dependent at date of death ● Do not need to be fully dependent ● Check trust deed (definition? ) ● Need to prove reliance on support

SMSFS & ESTATE PLANNING Inter-dependency Relationship Dependant Close personal relationship � Living together � One or both provide financial support � One or both provide domestic support & personal care � ● Two way test – both deceased & dependant need to meet all 4 aspects

SMSFS & ESTATE PLANNING Inter-dependency Relationship Issues taken into account Duration of the relationship Dependant Sexual relationship � ? Ownership, use & acquisition of assets � Degrees of Mutual commitment � Reputation & public aspects of relationship � ● Must demonstrate permanency & a commitment to a shared life

SMSFS & ESTATE PLANNING Trustees - Death of a member ● Does another trustee need to be appointed? ● If 2 individual trustees, another trustee will need to be appointed ● If a corporate trustee, no new director (unless a single member fund) ● Have 6 months to ensure trustee / membership is sorted

SMSFS & ESTATE PLANNING Trustees - Death of a member ● Is Legal Personal Representative (LPR) automatically appointed? ● No ● If appointed, must complete appointment, consent & trustee declarations as per normal ● If being appointed as capacity as LPR – appointment will cease when death benefits are paid out

SMSFS & ESTATE PLANNING Trustees - Death of a member ● Automatic trustee appointments ● Deed of appointment, set up before death – automatically appoints a new trustee on death of a member ● Can be drafted to cover consent to act as well as appointment ● New trustees must still sign the ATO trustee declaration after their appointment (within 21 days after appointment – after death)

SMSFS & ESTATE PLANNING Trustees - Death of a member ● Corporate Trustees ● Appointment of new director ● Remaining director can continue to act without further appointment (if they are LPR) ● Power of appointment of directors usually rests with the shareholders ● Who gets the shares of the corporate trustee? • Have they been left in the will? • Consider appointment of additional shareholders to the corporate trustee (children) – they don’t have to be directors • They can then appoint themselves as directors on the death of a single member fund

SMSFS & ESTATE PLANNING Death Benefits ● Need to check trust deed for payment of death benefits ● Are specific beneficiaries named? ● A “Super Will” within the trust deed? ● Does the deed limit the classes of dependants? ● Does the deed define dependants? ● Does the deed define type of payments? ● Need to check any member nominations

SMSFS & ESTATE PLANNING Death of a member ● Watch for specific trust deed provisions ● Power of appointment of trustee rests with the member? – single member fund? The Members and the Employer or Employers shall appoint persons to represent them either as individual trustees or if the Trustee is a company as directors of the Trustee and the number of persons appointed by the Members shall be the same as the number appointed by the Employer(s) ● (1997 deed)

SMSFS & ESTATE PLANNING Death of a member ● Generic deed provisions (better) The Trustee of the Fund may appoint a new Trustee provided the Fund remains a Complying SMSF including a Replacement Trustee or an Additional Trustee. The Trustee, Replacement Trustee or Additional Trustee must consent to their appointment, not be a Disqualified Person unless otherwise allowed by the Regulator or the Superannuation Laws and agree to abide by the Rules of the Fund, the Superannuation Laws and ensure the Fund remains a complying SMSF ● (2009 deed)

SMSFS & ESTATE PLANNING Death of a member ● Trust Deed provisions - Specific deed provisions Subject to the Superannuation Laws and the Fund retaining its Complying SMSF status, when a Member dies: a) The deceased Member's Legal Personal Representative, subject to their consent, is to be appointed as a Replacement Trustee of the Fund or director of the Corporate Trustee if permitted in accordance with the constitution of the Corporate Trustee; b) At the commencement of the payment of the Member's Death Benefits to the deceased Member's Dependants or their Legal Estate the Replacement Trustee appointed on behalf the deceased Member must resign;

SMSFS & ESTATE PLANNING Death of a member ● Trust Deed provisions - Specific deed provisions If the Corporate Trustee has appointed the deceased Member's Legal Personal Representative as a director they are to be removed once Death Benefits commence to become payable to the deceased Member's Dependants or their Legal Estate. If the Corporate Trustee does not remove the deceased Member's Legal Personal Representative upon the payment of the deceased Member's Death Benefits then the Corporate Trustee is to be replaced as Trustee ● (2009 deed)

SMSFS & ESTATE PLANNING Death Benefits ● Binding Nominations - if completed in accordance with the legislation (reg 6. 17 A): ● Made out to valid death benefit dependants ● Witness by 2 people > 18 years (not the beneficiaries) ● Less than 3 years old

SMSFS & ESTATE PLANNING Death Benefits ● Non - Lapsing BDBNs ● SMSF Trust deed clauses must allow for BDBNs to be non-lapsing (or in place until revoked) ● Are there clauses that indicate when a BDBN is invalid • • Individual is no longer a dependant? Member marries or divorces? Nominated dependant dies? A later nomination form exists?

SMSFS & ESTATE PLANNING Katz vs Grossman [2005] NSWSC 934 ● Mr Katz was sole member of the Katz SMSF ● Trustees were Mr Katz & daughter (Mrs Grossman) ● Mr Katz had a non-binding nomination to split his super equally between his 2 children ● Mr Katz died in 2003

SMSFS & ESTATE PLANNING Katz vs Grossman [2005] NSWSC 934 ● Mrs Grossman appointed her husband as the 2 nd trustee on the death of Mr Katz ● Trustees decided to make payment of the whole of the death benefit to Mrs Grossman ● Mr Katz (junior) challenged the validity of the appointment of Mr & Mrs Grossman as trustees

SMSFS & ESTATE PLANNING Katz vs Grossman [2005] NSWSC 934 ● Court upheld the appointment (complied with the law) ● Therefore trustee decision was also upheld ● No binding nomination in place – trustees have sole decision making responsibility

SMSFS & ESTATE PLANNING Donovan v Donovan [2009] QSC 26 ● Mrs & Mrs Donovan had a SMSF ● Mr Donovan wrote a letter to the trustees (2 years before his death) expressing his directions that his member balance was to be paid to his LPR (estate) ● Was this a BDBN?

SMSFS & ESTATE PLANNING Donovan v Donovan [2009] QSC 26 ● Trust Deed allowed for nomination of death benefit dependants in writing to the trustees (in the form the trustees approve) ● Trust Deed allowed for the member to make a binding death benefit nomination in the form required to satisfy the statutory requirements

SMSFS & ESTATE PLANNING Donovan v Donovan [2009] QSC 26 ● Reference to the statutory requirements, inferred that for the nomination to be binding it had to follow the legislative requirements (Reg 6. 17 A) ● Letter was non-binding ● The trustees must make decision about payment of death benefits

SMSFS & ESTATE PLANNING Ioppolo & Hesford v Conti [2013] WASC 389 ● The Contis were husband wife members of an SMSF ● Mrs Conti died on 5/8/10, with probated granted 28/10/10 ● From date of death until 4/2/11 the husband remained sole trustee of the fund, with a trustee company being appointed from this time ● In her will the, deceased had expressed a desire for her death benefit to be paid to her four children ● The husband exercised his discretion and distributed the superannuation benefits to himself

SMSFS & ESTATE PLANNING Ioppolo & Hesford v Conti [2013] WASC 389 ● There is no requirement for the executor of the fund to be appointed as trustee ● Trustee exercised his discretion in a bona fide manner (sought advice from solicitors as to rights & obligations) ● No current/valid binding death benefit nominations in place ● Direction in Mrs Conti’s will was NOT a direction with which the trustee had comply with

SMSFS & ESTATE PLANNING Ioppolo & Hesford v Conti [2013] WASC 389 ● No improper action, therefore no compelling reason to appoint an additional trustee ● No further grounds existed for the trustee's decision to be reviewed

SMSFS & ESTATE PLANNING Wooster vs Morris [2013] VSC 594 ● Husband Wife were the trustees and members of the Morris Super Fund ● Mr Morris died on 27 Feb 2010 ● Mrs Morris appointed her son from her first marriage (Mr Ashman) as the cotrustee of the fund in Oct 2010 ● Previously Mr Morris had executed a BDBN in favour of his 2 daughters (from his first marriage) (BDBN dated Mar 2008).

SMSFS & ESTATE PLANNING Wooster vs Morris [2013] VSC 594 ● The trustees obtained advice (from a solicitor) that the BDBN was ineffective as the BDBN had not be delivered to the co-trustee ● A corporate trustee was appointed to the SMSF on 18 Aug 2011 ● The trustee resolved to pay the death benefits solely to Mrs Morris (and were paid into her account in the SMSF).

SMSFS & ESTATE PLANNING Wooster vs Morris [2013] VSC 594 ● The 2 daughters of Mr Morris sought to have the BDBN upheld ● The court upheld that the BDBN was valid ● Costs were awarded against the corporate trustee, but the court also determined if the corporate trustee was unable to pay the costs, Mrs Morris must meet any shortfall

SMSFS & ESTATE PLANNING Death benefit payments ● A member’s benefits must be cashed as soon as practicable after the member dies ● “as soon as practicable”, within 6 months of death or 3 months after the grant of probate ● “as soon as practicable” could be longer ● Can rollover death benefits to another fund – but they are always death benefits (TBC)

SMSFS & ESTATE PLANNING Form in which benefits may be cashed ● a single lump sum ● an interim lump sum and a final lump sum ● 1 or more pensions ● the purchase of 1 or more annuities

SMSFS & ESTATE PLANNING Pensions can only be paid if the beneficiary is: ● is a dependant of the member; and ● Is a child of the member and under 18 years at date of death ● Is a child of the member and is > 18 years but < 25 years and is financially dependent on the member or has a disability ● Child pensions must be cash and paid as a lump sum on attaining age 25 years, unless the child has a disability

SMSFS & ESTATE PLANNING Death Benefit Pensions ● Reversionary pension ● must be established as reversionary to a SIS dependent at the time of set up ● Death Benefit Pensions ● trustees determine after death to pay benefits as a pension to a SIS dependant.

SMSFS & ESTATE PLANNING Need to evidence trustee decisions ● Minutes of trustee meeting ● Consider all possible beneficiaries ● Consider any nominations or member wishes ● Consider trust deed restrictions ● approval of benefit payments

SMSFS & ESTATE PLANNING Child Pensions ● Deceased leaves super benefits to children under 18 (or 25 & financially dependant) ● Child TBA is proportion of benefits that the child receives ● Value of Child TBA will depend on whether the deceased was in pension phase at the date of death

SMSFS & ESTATE PLANNING Child Pensions ● Child TBA is eliminated at age 25 (when benefits are commuted & withdrawn) ● Child then will have access to full TBA when an adult & in retirement

SMSFS & ESTATE PLANNING Child Pensions ● If parent has a TBA when they die, the child TBA is ● Proportion of benefit received by child (as a percentage of total death benefits) ● Calculated with reference to parent TBA Parent had a TBA of $1, 000 Child receives death benefit pension of 50% Child TBA = $500, 000

SMSFS & ESTATE PLANNING Child Pensions ● If parent is not in retirement phase when they die, the child TBA is ● Proportion of benefit received by child (as a percentage of total death benefits) ● Calculated with reference to general TBC Parent had a super benefits of $2, 000 Child receives death benefit pension of 50% Child TBA = 50% x $1, 600, 000 = $800, 000 $200, 000 will need to be taken as a lump sum benefit

SMSFS & ESTATE PLANNING Taxation of Death Benefits – Lump Sums ● Paid to tax dependants ● Will be tax free ● Paid to non-tax dependants ● Taxable component will be taxable at 15% plus levies ● Untaxed element will be taxable at 30% plus levies ● Untaxed elements will include untaxed elements from constitutionally protected funds ● Untaxed elements can include life insurance proceeds

SMSFS & ESTATE PLANNING Taxation of Death Benefits – Pension ● Paid to tax dependants ● Will be tax free if either the deceased or pension recipient is > 60 years ● If both deceased & pension recipient are < 60 years – taxable component is taxed at normal pension rates ● Paid to non-tax dependants ● Cannot be paid to non-tax dependants

SMSFS & ESTATE PLANNING Taxation of Death Benefits Frank & Betty are members of the Spencer Super Fund Frank dies aged 61 years Betty is aged 57 years Frank has a balance of $500, 000 (50% taxable & 50% tax free) What are the income tax consequences if Betty takes a lump sum benefit vs a pension benefit?

SMSFS & ESTATE PLANNING Lump Sum Benefit Payment of Lump sum benefit Pension Benefit $500, 000 $nil tax payable $25, 000 tax free Included in Betty’s income & taxed at personal marginal rates 15% rebate

SMSFS & ESTATE PLANNING Lump Sum Benefit Payment of Lump sum benefit Payment of a $50, 000 pension each year Pension Benefit $500, 000 $nil tax payable $25, 000 tax free Included in Betty’s income & taxed at personal marginal rates 15% rebate

SMSFS & ESTATE PLANNING Taxation of Death Benefits – Plan for insurance ● If insurance proceeds are part of death benefits, is there an opportunity to plan for payments? ● Is there an opportunity to structure death benefit payment instructions/BDBNs?

SMSFS & ESTATE PLANNING Taxation of Death Benefits – Plan for insurance William is deceased He has $1 m in members benefits (50% tax free) and $1. 5 m in life insurance policy benefits He has a tax dependant (spouse) and non-tax dependant (adult child) Death benefits paid 50% to each as lump sums (assumes all of life insurance = untaxed element)

SMSFS & ESTATE PLANNING Final Benefit Taxable Untaxed element Tax payable Death Benefits - member account - life insurance proceeds Total Benefits paid to: Spouse - member account - life insurance proceeds Adult child - member account - life insurance proceeds 1, 000 1, 500, 000 $2, 500, 000 750, 000 Total 50% 100% 1, 500, 000 0% 0% 50% 100% 750, 000 $37, 500 $225, 000 $262, 500

SMSFS & ESTATE PLANNING Taxation of Death Benefits – Plan for insurance But with a bit of planning, tax can be minimised Before insurance proceeds are received pay an interim benefit to the adult child Then make final payments to child & spouse

SMSFS & ESTATE PLANNING Final Benefit Taxable Untaxed element Tax payable Death Benefits - member account - life insurance proceeds Total 1, 000 1, 500, 000 $2, 500, 000 50% 100% 1, 500, 000 0% 0% 1, 250, 000 Benefits paid to: Spouse - member account - life insurance proceeds (final) 1, 250, 000 Adult child - member account (interim) - life insurance proceeds (final) 1, 000 250, 000 Total 50% 100% 250, 000 $75, 000 $150, 000

SMSFS & ESTATE PLANNING Taxation of Death Benefits – other options ● Pay all benefits to the spouse ● Spouse makes payment (personally) to the adult child

SMSFS & ESTATE PLANNING Taxation of Death Benefits – untaxed elements (life insurance) ● Calculation of untaxed element will depend on the age of the member at death and the number of service days and days to retirement

SMSFS & ESTATE PLANNING TBA Case Study – Fred & Wilma 30 June 2017 Total Fred (85) Wilma (79) Total 2, 750, 000 1, 150, 000 3, 900, 000 ● Background ● Both members are drawing a pension ● The pensions are reversionary to each other

SMSFS & ESTATE PLANNING 1 July 2017 Growth & pension draws 30 June 2018 Fred TBA Fred Pension Fred Accum Wilma TBA Wilma Pension 1, 600, 000 1, 150, 000 200, 000 150, 000 1, 600, 000 1, 800, 000 1, 300, 000 1, 150, 000 1, 200, 000

SMSFS & ESTATE PLANNING 30 June 2018 Fred Accum Death Benefits paid out ‘as soon as practicable’ Fred TBA Fred Pension Wilma TBA Wilma Pension 1, 600, 000 1, 800, 000 1, 300, 000 1, 150, 000 1, 200, 000 50, 000 (1, 300, 000) 50, 000 1, 600, 000 1, 850, 000 0 1, 150, 000 1, 250, 000 1, 600, 000 1, 900, 000 1, 150, 000 1, 300, 000 Fred dies on 16 August 2018 Growth & draws 30 June 2019 Growth & pension draws 16 Aug 2019

SMSFS & ESTATE PLANNING 16 Aug 2019 Fred TBA Fred Pension Wilma TBA Wilma Pension Wilma Accum 1, 600, 000 1, 900, 000 1, 150, 000 1, 300, 000 Wilma commutes her pension to accumulation & Fred’s reversionary pension credits to Wilma’s TBA 16 Aug 2019 Wilma’s commutation (1, 300, 000) 1, 300, 000 (1, 800, 000) 1, 800, 000 1, 900, 000 1, 650, 000 1, 900, 000 1, 300, 000 Fred’s reversion Balance TBC = value at date of death Pension = value at date of transfer

SMSFS & ESTATE PLANNING Case Study – Bedrock Superannuation Fund Asset Cash Shares Managed Funds Property Fred (85) Wilma (79) Total 50, 000 100, 000 1, 000 500, 000 1, 500, 000 200, 000 400, 000 1, 500, 000 Collectables Total 2, 750, 000 1, 500, 000 400, 000 1, 150, 000 3, 900, 000

SMSFS & ESTATE PLANNING Case Study – Bedrock Superannuation Fund Fred Dies & neither members are drawing a pension His wife, Wilma doesn’t want a SMSF – what are the practical implications for the fund & the assets? Property is leased to his daughter, Pebbles’ business Collectables – are surrealist artwork (Wilma doesn’t like them!) Managed funds – are any frozen? Shares – are any unlisted? Who will buy them?

SMSFS & ESTATE PLANNING Assets & Liquidity ● Do assets have to be sold? ● Are there any tax implications of this ● CGT if not in pension phase ● Payment of death or reversionary pensions? ● Does the fund have sufficient liquidity? ● Are asset used by a related business? ● Does this cause operational issues?

SMSFS & ESTATE PLANNING Fred Dies – Options? ● Withdraw benefits – wind up fund ● Rollover to Retail ● SAF

SMSFS & ESTATE PLANNING Fred Dies – Options Wind up Fund ● Take care to only pay interim & final lump sum death benefits ● Wilma’s benefits can be paid out in any manner ● Tax will be payable by the fund on ‘sale’ of assets (CGT) ● No tax will be paid on benefits taken by Wilma (but may be payable if Pebbles is a beneficiary – this will depend on taxable components) ● Can Pebbles afford to buy the property? Asset Cash Shares Managed Funds Property Collectables Total 100, 000 1, 500, 000 Sell? In-Specie? 400, 000 Sell? In-Specie? 1, 500, 000 400, 000 To pebbles? Sell? Sell 3, 900, 000 195

SMSFS & ESTATE PLANNING Asset Fred Dies – Options Rollover to Retail ● Will asset be able to be rolled over in-specie? ● Unlikely to be able to rollover artwork or property ● Do we have to sell assets? ● Wilma’s balance (in cash & shares) could be rolled over ● Commence a death benefit pension from Fred’s account and then Wilma could rollover to another fund ● Pebbles (if a beneficiary) will need to be paid her share of Fred’s balance Cash Shares Managed Funds Property Collectables Total 100, 000 1, 500, 000 400, 000 3, 900, 000 196

SMSFS & ESTATE PLANNING Fred Dies – Options SAF ● Trustee MAY take assets in specie ● Depending on which trustee is used, property & artwork will be acceptable (if all arms length etc) ● No contravention issues ● Will still have the issue of dealing with Fred’s death benefit Asset Cash Shares Managed Funds Property Collectables Total 100, 000 1, 500, 000 400, 000 3, 900, 000 197

SMSFS & ESTATE PLANNING Super has a “use by date” ● At some point all benefits will need to exit the super system (when there are no longer tax dependants) If SMSF is not ideal option ● Rollover monies to a APRA regulated fund ● Removes administration and obligations on members

SMSFS & ESTATE PLANNING How to ‘avoid’ death taxes ● Make payments to chosen beneficiaries (adult children or other non-tax dependants) before death ● This will reduce the SMSF ● Need to plan for living needs ● May impact Centrelink benefits if existing SMSF pensions are grandfathered from Centrelink tests

SMSFS & ESTATE PLANNING Monies outside super ● Not eligible for tax concessions (15% or nil tax) ● Consider what are other assets outside super ● What are income levels outside super? ● What are costs of maintaining SMSF vs personal tax affairs?