Tax and Estate Planning for SMSF Income Streams

February 29th, 2012 by topdocs

I am not worried about the tax on my super benefits when I am gone – my children will need to worry about that.” Have you ever had a client make a similar statement when you were suggesting strategies to reduce tax payable on the death of the SMSF member/client?

There may be a number of reasons why the client made that statement, such as:

  • they are over age 60, so are not taxed on their pension; or
  • they consider it to be a fee generating exercise; or
  • they either do not see the benefit or, if they do, are genuinely prepared to leave the problem to their children; or
  • a combination of some or all of the above.

Cost of doing nothing

Each of those ‘objections’ may be real – what the client may not understand is the amount of tax which planning now may save in future.

Alternatively, they may consider that the cost of taking action now, so as to obtain a benefit at a later date, may be wasted if, for example, they are able to plan the withdrawal of all of their superannuation prior to their death.

The issue really is not so much for the client, but for those left behind and, unfortunately, given the litigious society we live in, the adviser may be the one most impacted by the lack of planning, despite their best endeavours.

There have been cases in the courts in recent times where children of a deceased member of a SMSF have initiated action against their parent’s adviser, to recover ‘lost’ entitlements. As the parent is not around to blame, and as the adviser will have insurance cover, the adviser represents a relatively easy target. Read the rest of this entry »

SMSF Income Streams – Priority of cashing of benefits & other options

February 29th, 2012 by topdocs

Tax and Estate Planning for SMSF Income Streams – Case Study 1 – Priority of cashing of benefits & other options

Bryce has turned age 55 and has decided to commence a Transition to Retirement Income Stream. He has a balance of $400,000 in the accumulation account in his SMSF, and he decides to apply the total amount to commence his TRIS.

As a result of commencing contributions to superannuation at an early stage in his working life (he is still with the same employer he commenced with out of Uni), Bryce’s balance of $400,000 is comprised of each of the 3 separate preservation components, namely:

  • Unrestricted non-preserved benefits      $65,000
  • Restricted non-preserved benefits         $50,000
  • Preserved benefits                              $285,000

To meet his lifestyle needs, Bryce has calculated he will need slightly more than the (normal) minimum, which would be $16,000 ($400,000 @ 4%) in the 1st year, so he has asked the trustees of his SMSF to pay him $20,000 for that year.

Over the next 3 years, Bryce draws $21,000, $23,000 and $25,000, respectively. Those amounts were within the minimum and maximum limits for a Transition to Retirement Income Stream each year.

At the end of the 4th year, when Bryce has turned age 59, he decides to purchase a new car and take an overseas trip. He estimates that the total cost of both will amount to $40,000, an amount that exceeds his maximum payment limit under the terms of his Transition to Retirement Income Stream. Read the rest of this entry »

SMSF Income Streams – Reversionary Pensions & Estate Planning

February 29th, 2012 by topdocs

Tax and Estate Planning for SMSF Income Streams – Case Study 2 – Reversionary Pensions & Estate Planning

Joe is a single parent who has recently turned 60 years of age. He has 2 adult children, Peter & Claire, from his first relationship, both of whom have generated significant wealth from owning and operating successful businesses, and a 15 year old son, Tim, from a relationship which has also ended. Joe has full custody of Tim.

Joe has a significant balance in his superannuation, which forms a large part of his overall wealth. He is the sole director of the corporate trustee of his SMSF. He has been advised to commence drawing a Transition to Retirement Income Stream, particularly as the pension payments will be tax free.

Because of different financial positions between Peter & Claire and Tim, Joe’s adviser suggests to him, as part of an estate planning exercise, to:

  • establish the Transition to Retirement Income Stream with an automatic reversion to Tim, on the basis that Tim will receive the balance when he turns 25; and
  • prepare a Will leaving the remainder of his estate to pass equally between all 3 children.

Joe is pleased with the suggestion, as he feels that divides his wealth in quite appropriate proportions, based on individual needs. He proceeds with:

  • the commencement of the Transition to Retirement Income Stream;
  • the automatic reversion of the Income Stream to Tim; and
  • the drafting of a Will, with Peter & Claire as Executors.

He then forwards copies of all documents to his adviser for his records. Read the rest of this entry »

Child Account Based Pensions & Testamentary Trusts

February 29th, 2012 by topdocs

Understanding the range of options available in proper estate planning is vital to ensuring that the client’s needs are met.  In this article, the advantages and disadvantages of considering either superannuation child account based pensions or using the Will to create testamentary trusts are considered.

Who will be the death benefit beneficiaries?

Superannuation legislation changes from 1 July 2007 have redefined which beneficiaries can receive death benefits as income streams.

The “sole purpose test” determines that a superannuation fund, including an SMSF, is to be maintained so that retirement benefits are to be provided to a member or to the dependants of a member upon the death of that member.  The definition of the “dependants” of a member has been expanded by the Same-Sex Relationships (Equal Treatment in Commonwealth Laws–Superannuation) Act 2008 to include same-sex couples and children of same-sex relationships.

Therefore, a superannuation “dependant” now includes the following:

  • a spouse (which includes, a person who, although not legally married to the member, lives with the person on a genuine domestic basis in a relationship as a couple, and whether same-sex or mixed-sex couples);
  • a person in an interdependency relationship with the member;
  • a child (including an adopted child, a step-child or an ex-nuptial child, regardless of whether they were financially dependent on the member);
  • any person who is financially dependent on the member (includes persons who are fully or partially dependent upon the member).

Read the rest of this entry »

Income tax deductions for superannuation funds – Total and Permanent Disability (TPD) premiums

February 7th, 2012 by Michael Harkin

TR 211/D6

Income tax: deductibility under subsection 295-465(1) of the Income Tax Assessment Act 1997 of premiums paid by a complying superannuation fund for an insurance policy providing Total and Permanent Disability cover in respect of its members.

Income tax deductions for superannuation funds – Total and Permanent Disability (TPD) premiums

In December 2011, the ATO released a Draft Taxation Ruling TR 2011/D6, titled Income tax: deductibility under subsection 295-465(1) of the Income Tax Assessment Act 1997 of premiums paid by a complying superannuation fund for an insurance policy providing Total and Permanent Disability cover in respect of its members.

Currently in draft form, the ruling provides direction as to when a superannuation fund may claim a tax deduction for premiums paid to provide TPD cover for members.  The draft ruling replaces an earlier draft ruling, TR 2010/D9, which has now been withdrawn. Read the rest of this entry »

Refund of Excess Concessional Contributions Draft Legislation

February 7th, 2012 by Michael Harkin

In the 2011 Federal Budget, the Government announced it would legislate to allow the refund of excess concessional contributions in specific instances. In December 2011, the Government released draft legislation to allow the announcement to be made law.

Legislation

The draft legislation, titled Tax Laws Amendment (2012 Measures No. 1) Bill 2012: refunded excess concessional contributions, provides for the refund by the ATO (‘Commissioner’) of excess contributions, within limited circumstances. Those limitations are:

  • the Commissioner is satisfied the individual has excess concessional contributions for a particular financial year;
  • the amount of the excess concessional contributions is $10,000 or less;
  • after 1 July 2011, the individual has had no prior excess concessional contributions;
  • the individual has lodged an income tax return for that particular financial year, either within 12 months of the end of that year or longer if permitted by the Commissioner; and
  • the individual accepts an offer from the Commissioner to have the excess contributions returned.

Read the rest of this entry »

ATO Draft Ruling TR 2011/D3 – Income tax: when a superannuation income stream commences and ceases

July 27th, 2011 by Michael Spakman

Super Fund Pension draft ruling will apply from 2007 – will your Superannuation Pensions comply?

The ATO has recently released draft ruling TR 2011/D3 – Income tax: when a superannuation income stream commences and ceases.  This ruling is proposed to apply from 1 July 2007 and its relevance for advisers and trustees is high, as it has taxation implications for both superannuation funds and their members.

The first aspect of this ruling is the determination of when a superannuation income stream commences.  In order for a superannuation pension to be deemed as ‘commencing’, and consequently in order for the member to receive concession taxation status via their superannuation pension account, there are a number of requirements that must be satisfied.  These requirements are largely manifested in the documentation that needs to be put in place for the pension commencement.

The key requirements of documenting your client Superannuation Pensions include:

  • The terms of the pension need to be set out in the superannuation fund’s trust deed.  This means your superannuation trust deeds need to provide the terms of the pension in detail, not just in a general pension clause.
  • The member and the trustee need to have agreed to the terms and conditions that will govern the superannuation income stream. This means a comprehensive pension agreement must be put in place.
  • The pension documents need to show the requirements for pension payments, partial or full commutations, that pensions can’t be added to, what happens on death and when the pension ceases.
  • SMSF Trustees need to be aware that if any of the payment standards under the Superannuation Industry (Supervision) Act 1994 are not met, the pension will be deemed to not exist.

Read the rest of this entry »

Topdocs Super Fund Borrowing Webinars – July 13 and 21 2011

June 23rd, 2011 by Jake Spakman

Get practical information from the experts in Super Fund Borrowing

Register Now!

Duration: 1 hour (45 minute presentation, 15 minute question time)
Cost $55.00

With Super Fund borrowings continuing to increase, your clients will be looking to you for advice and assistance with their SMSF Borrowing transactions.

To provide the best advice to your client’s you need to be aware of the ATO and lender requirements pertaining to these transactions as well as the steps required to ensure your client’s borrowing is a smooth and successful process.

This comprehensive and practical presentation will arm you with the knowledge and tools required to ensure your clients receive the maximum benefit from this investment strategy.

Some of the Topics covered will include:

  • The practical steps required to facilitate the acquisition of an asset via a SMSF Borrowing;
  • The legislative and structural requirements, including the Bare Trust and the Super Fund;
  • The ATO’s views on assets that can be acquired, refinancing, guarantees and more;
  • The requirements of the bank lenders as well as related party loans;
  • Practical issues you should be aware of, such as who should be the Bare Trustee and who should sign the contract for purchase.

If you haven’t participated in a webinar before, a webinar is a presentation over the internet, where you see the presentation on your computer, and listen in via telephone. Read the rest of this entry »