16 Jul 2015

Super Snippets: July 2015

As a special this month we're making Super Snippets – our monthly report on developments affecting SMSF trustees – available to all members.

Snapshot

  • Court decision highlights the need for a binding death benefit nomination
  • Preservation age (for accessing super) starts to increase
  • ATO focuses on non-arms length income from private companies and trusts

It’s been a quiet month in the world of super with no significant announcements to concern SMSF trustees. But there has been yet another court case on binding death benefit nominationsAlso known as BDBNs. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. (BDBNs) – or the lack thereof – and several communications from the ATO.

Federal Court decision: Stock (as Executor of the Will of Mandie) v NM Superannuation Pty Ltd

The recent Federal Court decision in the Mandie case ([2015] FCA 612) is the latest to highlight the importance of a properly executed BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. as part of your overall estate planning.

The basic facts of the case were that:

  • Mr Mandie passed away in 2011, leaving three adult children;
  • at the time of his death he had an account with an external super fund, but had no BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. in place;
  • two life policies had been taken out in the super account which provided for the payment of substantial death benefits; and
  • the trustee (who was independent) decided to pay the super death benefits to each of three adult children equally.

One of the three adult children (the daughter) argued that the death benefit should have been paid to Mr Mandie’s estate, which would have resulted in the entire amount going to her. The daughter was the sole beneficiary under Mr Mandie’s will, in part at least because of a financial settlement that had been made with the other two adult children (his sons) years earlier.

However, the trustee argued that their decision to distribute the death benefits to each of the three children was in accordance with their standard practice and was therefore ‘fair and reasonable’ – the standard required of it by the Superannuation (Resolution of Complaints) Act.

The Federal Court dismissed the appeal of the daughter and confirmed the earlier finding of the Superannuation Complaints Tribunal, that the trustee’s decision was valid.

This is consistent with previous cases where failure to complete properly executed binding death benefit nominationsAlso known as BDBNs. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. has led to outcomes that are arguably inconsistent with the wishes of the deceased.

Another interesting point highlighted by this case is the potential estate planning benefits of an SMSF. If Mr Mandie had an SMSF, with a corporate trustee, and left the shares to his daughter via his will, she would have had control of the SMSF and been in a position to determine how the death benefits were paid.

Action point: We cannot emphasise enough how important it is that you have a valid binding death benefit nominationAlso known as a BDBN. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. that reflects your wishes, and that it has been properly executed. If you are in any doubt you should have your trust deed and BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. reviewed by an estate planning lawyer.

Preservation AgeThe age at which you can generally access your super (subject to satisfying a condition of release). A person's preservation age depends on their date of birth. For those born before 1 July 1960 it's 55, but it will gradually increase to 60 over coming years. See the ATO website for more information.

For many years, the preservation ageThe age at which you can generally access your super (subject to satisfying a condition of release). A person's preservation age depends on their date of birth. For those born before 1 July 1960 it's 55, but it will gradually increase to 60 over coming years. See the ATO website for more information. of those super investors seeking to access their super (assuming they're otherwise entitled to) has been 55. However, on 1 July 2015, the ‘date of birth’ based preservation ages finally came into effect.

If you were born on 1 July 1960 or later (in other words, you turn 55 after 30 June 2015) your preservation ageThe age at which you can generally access your super (subject to satisfying a condition of release). A person's preservation age depends on their date of birth. For those born before 1 July 1960 it's 55, but it will gradually increase to 60 over coming years. See the ATO website for more information. will now be 56 and this will continue to increase in coming years (see Table 1). So you can no longer assume that you’re entitled to access your super if you have turned 55. It will also be a question of your date of birth.

This change has the potential to affect:

  • the commencement date for transition to retirement pensions;
  • the ability to commence an account based pensionThe 'usual' superannuation pension you receive on retirement. Your account contains an amount from which you can make withdrawals (subject to set minimums). These withdrawals (the pension) are generally tax-free for those over 60. on meeting a full condition of release through permanently retiring;
  • strategies accessing the CGTCGT (capital gains tax) is the tax payable on capital gains. Where assets are held 12 months or more, individuals are entitled to a 50% discount when calculating the taxable amount of a capital gain. Super funds are entitled to a 33.33% discount. Where assets are held less than 12 months, capital gains are taxed at normal rates. Note also that some assets are exempt from CGT. exemption for small business on retirement.

While the age referred to in the CGTCGT (capital gains tax) is the tax payable on capital gains. Where assets are held 12 months or more, individuals are entitled to a 50% discount when calculating the taxable amount of a capital gain. Super funds are entitled to a 33.33% discount. Where assets are held less than 12 months, capital gains are taxed at normal rates. Note also that some assets are exempt from CGT. exemption remains at 55, you may have to wait longer to access any amount contributed to superannuation (to access the concession) if you are born on 1 July 1960 or later.

Action point: Even if you use an accountant or adviser, be aware of this change and the impact it may have on you. Accessing super early is a serious breach of the SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs). and we suspect even professional advisers will make mistakes.

Non-arms length income of SMSFs

In Super Snippets: May 2015 we discussed Taxpayer Alert TA 2015/1 on dividend stripping from private companies (by transferring shares to an SMSF). The ATO has now published a case study explaining how their views apply in practice and when a dividend will be treated as ‘non-arms length income’ and taxed at the (much higher) top marginal tax rateYour marginal tax rate is the tax rate that applies to the last dollar of your income. Australia has a progressive tax system where the marginal tax rate applied to individuals increases as your taxable income decreases. Current individual tax rates can be found at the ATO website..

We also understand the ATO is reviewing SMSFs that have received trust distributions. Generally, income from publicly listed or widely offered unit trusts (managed funds) will be treated as normal income of an SMSF.

However, where income is received from a discretionary trust (including any trust containing a non-fixed entitlement) or where the trust interest wasn’t acquired at arms length (which can often occur with related party transactions), the income is treated as ‘non-arms length income’ and, again, taxed at the top marginal rate.

A potential trap for SMSF trustees is that many smaller unit trusts will be categorised as having a ‘non-fixed entitlement’ (and regarded as discretionary) because, for instance, the trust deed gives the trustee the power to accumulate income or issue special units.

Action point: If your SMSF owns shares in a private company or units in a trust (apart from a managed fund) we recommend seeking professional advice on the ‘non-arms length income’ issue if you haven’t already done so.

Other developments and reading material

Eviser members may also be interested in the following:

  1. Low income superannuation contribution (LISC) calculator. The ATO has updated the LISC calculator available on its website.
  2. ATO conference comments. At a recent SMSF conference, an ATO representative highlighted the importance of an up to date SMSF trust deed. The ATO have come across many deeds that won’t, for instance, allow certain types of super pensions to be paid.
  3. Productivity Commission research paper. On 7 July, the Productivity Commission released a new research paper, ‘Superannuation Policy for Post-Retirement’. One finding picked up by the media is the revelation that transition to retirement pensions are mainly being used by relatively wealthy people to minimise tax. We’ll keep an eye on any further developments in this area.
  4. Intimate with Self-Managed Superannuation. The 2015 report prepared for the SMSF Association and NAB Trade (download here).
  5. Platinum Asset Management views and insights. Platinum has recently published an article on the potential impact of a Greek default (The Greek Conundrum) and a market update from CEO Kerr Nielsen (The Chinese Stock Market Cascade).
  6. Magellan Annual Investor Report (June 2015). Magellan has just published the latest annual investor report by CEO, Hamish Douglass.

 

All Eviser content is covered by our Terms and Conditions.