How to generate more business from SMSF trustees Why not to die in a SMSF

Nigel Smith, Technical Services

• SMSF’s – the panacea for all?

• Anti-detriment. A Super benefit to die for!

• Dying as the ‘last man standing’ in a SMSF

• Anti-detriment and your practice

• Implementation strategies for you

• Time for an anti-detriment health check?

• Live Q&A

*1 CPD point available

SMSF are great investment vehicles…

Strategic flexibility – Better integration of business and lifestyle goals – Great for small business owners – Greater individual control

Investment flexibility – Greater choice - real property, collectables, unlisted – Limited recourse borrowing arrangements

Cost efficiency at higher asset values

Greater family involvement and privacy

BUT, they do have dangers …

× These include: – Lack of trustee administration, managerial and investment skills – Lack of initial capital – starting a SMSF too early – Potential lack of diversification – increasing single asset funds – Potential cash flow issues – over geared – Increasing regulatory oversight and penalty regime

× The greatest danger of all …. – Staying too long in a SMSF – Dying as the “last man standing” in a SMSF

Are there any alternatives or ‘fine-tunings’

possible?

Dying as the “last man standing” in a SMSF

Typically, elderly husband & wife are only members

Income streams & no tax payable One dies, so pension reverts or

continues to survivor – Opportunity for survivor to take tax

free death benefit

Last survivor dies – Death benefits paid to adult children – Tax payable at 15%

SMSF wound up – Costs involved – Carry forward losses lost

Anti-detriment. A Super benefit to die for!

What is it? ‐ Refunds all super tax on death ‐ Only on lump sum death benefit component

Who pays the extra benefit?

‐ Ultimately, the ATO Why?

‐ Compensation for potential reduction in death benefits due to tax on contributions and income introduced on 1 July 1988 (S295-485)

‐ Income/Contributions tax sold as ‘bringing forward lump sum tax’ on end benefits and no-one would be worse off

‐ Certain death benefits were tax free prior to introduction of new tax and therefore reduced by introduction of contributions tax

‐ To restore previous position of no tax impact on death benefit

Anti-detriment. A Super benefit to die for!

Who is entitled? ‐ Spouse or former spouse ‐ Child (any age) of deceased

Trustee considerations

‐ No age restriction for death ‐ Possible to paid via testamentary trust ‐ May require stat declaration (“reasonable basis”)

When is it paid?

‐ Unfortunately, only on death of member

The fund MUST pay out the extra benefit and then only ‘recover’ by way of a tax deduction from the ATO

Assessment

• Trustee assesses if extra benefit payable

• Trust deed must allow for payment

Calculation

• The calculated amount is paid as ‘extra benefit’

• Amount calculated by a formula

• Additional to account balance death benefit + any insured amount

Payment

• Payment to benefit to beneficiary first

• Cannot use other members vested balance

Tax deduction

• Increased amount ‘reclaimed’ from ATO through a tax deduction to the fund

• Tax saving amount/15%

Other considerations

Only on lump sum death benefits only Not available if beneficiary receives a pension

Tax treatment of ‘extra benefit’ exactly same for death benefit

– Subject to usual tax rules for non-dependents Doesn’t matter if deceased in accumulation or pension phase

‐ So long as paid as a lump sum death benefit ‐ Payable only on taxable component (excluding any insured

amount) Can be done even if reversionary pension, so long as:

‐ Commute by later of: ‐ 6 months of death of original pensioner ‐ 3 months of probate

Calculating the benefit Most common method – ATO formula

Anti-detriment benefit (Tax saving amount) =

C x (0.15 x P) R - (0.15 x P)

C - taxable component of lump sum (excl. insurance) R - number of days in service period after 30 June 1983 P - number of days in component R that occur after 30 June 1988

Calculating the benefit (example)

John is aged 60 and has $500,000 in an account based pension, of which $450,000 taxable component. • John’s service period commenced 1 July 1985 • John dies on 1 January 2010

C = $450,000 P = 7,855 days (since 30 June 1988) R = 8,951 days (since 1 July 1985)

Benefit = $450,000 x (0.15 x 7,855) 8,951 - (0.15 x 7,855)

= $68,214

To die with the benefit or without?

– Eligible service date 01/07/1990 Est Anti-Detriment increase $88,235 – Date of payment 01/10/2014 Allowable tax deduction $588,235 – Super death benefit (L/S) $500,000 – Tax Free component $ NIL – Insurance proceeds $ NIL

Spouse Adult Child

Do nothing

D/Ben L/Sum $500,000 $500,000 Tax nil $85,000

Net $500,000 $415,000

With Anti-detriment benefit

D/Ben L/Sum $500,000 $500,000 Anti-detriment $88,235 $88,235 Total $588,235 $588,235 Tax nil $100,000 Net $588,235 $488,235

Benefit $88,235 $73,235

Which funds can pay the benefit?

Any continuously complying superannuation fund (including SMSF) ‐ Trust deed must provide for payment ‐ Fund must have funds available to pay entire benefit

(reserves/insurance)

No legislative compulsion on trustee to pay anti-detriment benefits ‐ Payment is not compulsory ‐ Many retail funds do, but not all ‐ Industry funds?

How well can SMSF handle anti-detriment? Dying as the “last man standing” in a SMSF

Assessment

• SMSF trust deed must provide for payment of anti-detriment benefit

Calculation

• Calculate “extra” benefit

Payment

• Fund must have ability and $$$ to pay benefit • Reserves • Life

insurance • Problem

with allocation from reserves

Tax deduction

• SMSF must have taxable income • No benefit

to fund in pension phase

• No benefit to fund that pays little or no tax in the future

Anti-detriment only works well in large funds

Assessment

• Needs the member to die in the large fund • Rollover

before death

Calculation

• Calculate “extra” benefit

Payment

• No problem with reserving

• Able to pay immediately

• How are we able to pay with no reserves?

Tax deduction

• Fund can recover full value of tax deduction

• Able to recover immediately, assessable income absorbs deduction

SMSFs have a use-by-date

Small contributions and small balances Starting out in life

Growing but still a 2nd priority Other priorities Mortgage & young children

Salary sacrifice and gearing Merging of business & lifestyle goals

Young middle age Major earning potential or small

business owner

More investment opportunities Middle age More surplus income

Final strategic planning opportunity to drive final balance Transition to retirement

Pension phase - switch to "income" strategies Early years of retirement

Pension phase-increased estate planning focus Later retirement years

Maximising the cash to beneficiaries Death

Suitable?

Wrap SMSF

Anti detriment and your practice There are many great angles!

Anti ‘estate and death’ duty ‐ Refund of ‘overpaid’ PAYG contribution tax

Additional death ‘insured benefit’ for those not insurable Super- truly the vehicle with potentially no tax!

‐ The ultimate onshore tax haven

Your elderly SMSF clients

Roll-over to a retail super fund that pays anti-detriment

Ask them a series a

questions. “YES”

•Are they making full use of the SMSF or would a wrap be as effective?

•Do they want to give away the compliance responsibilities?

•Are they interested in maximising the benefit to their estate by getting a significant tax refund?

• If the answer is “YES”

Before you speak to the

client

•Check the liquidity of the investments

•Check the current investment strategy

•Check taxable/tax free split

•Calculate the potential anti-detriment benefit

Ongoing and new business opportunities

Can the cycle continue? – What about their children?

How old are they?

– Where about in the life cycle are they? – Probably prime SMSF opportunity

Make use of the parents SMSF shell

– Save the adult children SMSF set costs? – “Inherit” any losses that the parents couldn’t use?

Action

– Referral to the adult children – Possible new clients for you?

Accountant not keen?

Set-up; Accumulation

phase

Transition to retirement

Retirement phase; Pension

Intergenerational transfer

• Super Wrap • Anti-detriment

SMSF

SMSF

SMSF

• Age up to 65 • Contribution • Earnings • Insurance

• Age 55 - 70 • Contribution • Earnings

• Age 60-85 • Rollover • Liquid assets

• Age 40-60 • Kids contribution • Earnings • Insurance

Is it time for an anti-detriment health check?

Anti-detriment benefits are significant ‐ Belongs to client and should be claimed ‐ If passed to non dependents, helps offset the 16.5% tax ‐ Tell your clients that super provides potentially a 0% tax

environment

Anti-detriment is an important consideration in selecting

a fund Self managed funds just simply not ideal to claim the

benefit

Q&As

Natalie, NSW Q: How come some retail funds offer anti detriment and some

don’t? A: Anti-detriment is not compulsory – it is at the trustee’s

discretion. Therefore there is no technical or legislative reason for them not to offer anti-detriment, it is simply a trustee choice.

Claus, ACT Q: When rolling at a late stage in life. will the wrap trustee pay

the full anti detriment amount or limit payment to tax paid by that trustee only.

A: The full amount will be paid.

Contact the netwealth Technical Services team on 1800 888 223.

Q&As

Arthur, VIC Q: What is the minimum clients should have to set up an SMSF? A: Depends on the circumstances of the client. Electronic and web

based administration systems have certainly reduced SMSF administration costs to a point where a lower initial capital sum is economically viable. I believe the generally accepted benchmark would be around the $200,000. This could be lower where the client has the capacity to make larger on-going contributions to bring the capital balance higher over a relatively short time frame.

I would have thought the more relevant questions are whether the client’s circumstances will allow them to make full use of a SMSF’s flexibility – for example real property, integration of business goals, limited recourse borrowing arrangements – and whether they want the take on the compliance responsibilities.

Contact the netwealth Technical Services team on 1800 888 223.

Q&As

Arthur, VIC Q: If the children are not members, can they wind up the

fund once the 2 members (the parents) are dead? A: Yes – with no members, the SMSF would normally be

wound up. Q: Could you please send an appropriate website for the

Anti-detriment calculation? Thanks A: I have found the following calculator to be suitable:

http://www.netactuary.com.au/calculators/AntiDet/Default.aspx

Contact the netwealth Technical Services team on 1800 888 223.

Q&As

Aaron, QLD Q: Does a 'child' of the deceased included a step child for the Anti-detriment benefit? A: The anti-detriment provisions are found at section 295-485 of the ITAA 1997 and the definition of “child” for tax purposes can be found in Volume 8 – Div 995 – Definitions: child: without limiting who is a child of an individual, each of the following is the child of an individual: (a) the individual’s *adopted child, stepchild or exnuptial child; (b) a child of the individual’s *spouse; (c) someone who is a child of the individual within the meaning of the Family Law Act 1975.

Contact the netwealth Technical Services team on 1800 888 223.

Q&As John, VIC Q: Can an SMSF borrow to pay an ADB? A: Section 67 of the Superannuation Industry (Supervision) Act covers borrowings. It says: Borrowing Prohibition (1) Subject to this section and section 67A, a trustee of a regulated superannuation fund must not: (a) borrow money; or (b) maintain an existing borrowing of money. Exception—temporary borrowing to pay beneficiary. (2) Subsection (1) does not prohibit a trustee of a regulated superannuation fund from borrowing

money if: (a) the purpose of the borrowing is to enable the trustee to make a payment to a beneficiary

which the trustee is required to make by law or by the governing rules and which, apart from the borrowing, the trustee would not be able to make; and

(b) the period of the borrowing does not exceed 90 days; and (c) if the borrowing were to take place, the total amount borrowed by the trustee would not

exceed 10% of the value of the assets of the fund. The payment of an anti-detriment payment is a payment to a beneficiary BUT is the trustee required to make it by law (given that it is discretionary) or by the governing rules (Deed)? Even if you could answer this in the affirmative, then there are “time and amount” limitations to be met. I suspect the practical answer is that borrowing money to pay anti-detriment is not an option. That said I will do some further research and let you know.

Contact the netwealth Technical Services team on 1800 888 223.

Q&As

Hein, VIC Q: Is it fair to say anti-detriment only applicable for a service

date before 1988? A: No. It is applicable over the full service period but it is

maximised for those with a service period post 30 June 1988. For someone with a service date of 1 July 1988 or later, the taxed component of the death benefit is increased by approximately 17.64%. This drops incrementally to 14.34% (and then remains steady) for someone with a service date of 1 July 1983 or earlier.

Contact the netwealth Technical Services team on 1800 888 223.

Q&As

Fatma, VIC Q: Anti detriment: What if you don’t have death benefit insurance? A: The issue with anti-detriment is threefold – sourcing the money to pay it,

getting it into the deceased members account and claiming the deduction from the ATO. Having death benefit insurance on a member MAY provide a solution for a SMSF to the first issue but only if it is structured correctly. If the insurance benefit is paid into the deceased members account, it has simply increased the deceased members account balance (but not the anti-detriment amount as insurance proceeds are excluded) but has not given the trustees the money to increase the death benefit. Therefore, the trust deed must allow that the insurance proceeds on death are paid to the trustees who can distribute them at their discretion. In this way, the trustees can pay all or part of the proceeds to a reserve account and then use this money to pay the anti-detriment uplift to the members account. However, you still have the other two issues to resolve – the fact that the transfer from reserves is treated as a concessional contribution if outside certain limited guidelines and the ability of the SMSF to claim the deduction from the ATO.

A larger retail fund has none of these problems.

Contact the netwealth Technical Services team on 1800 888 223.

Disclaimer

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