SMSF trouble shooting

Transcription

1 Advice Exchange Presented by Kate Anderson National Manager Technical Services November 2015

2 Advice Exchange Presented by Julie Steed Senior Technical Services Manager November 2015

3 General advice warning This is for financial adviser use only it is not to be distributed to clients. IOOF Investment Management Limited (IIML) ABN AFSL , Australian Executor Trustees Limited (AET) ABN AFSL and IOOF Ltd ABN AFSL , are each responsible for the information in this presentation relating to financial products issued by each of them respectively. IIML, AET and IOOF Ltd are all companies within the IOOF group of companies, comprising IOOF Holdings Ltd ABN and its related bodies corporate. IIML and AET are Responsible Entities of managed investment schemes, trustees of superannuation entities and operators of Investor Directed Portfolio Services (IDPS). IIML is the Trustee of the IOOF Portfolio Service Superannuation Fund ABN AET is the Responsible Entity of IDPS like schemes, the Trustee of a number of Small APRA Funds and the provider of a number of small and self-managed superannuation fund solutions and estate planning services. IOOF Ltd is a Friendly Society and the issuer of IOOF Wealth Builder Investment bonds. Neither IIML or IOOF Ltd are registered Tax Agents. You should consider the appropriateness of this information having regard to your individual situation and seek taxation advice from a registered tax agent before making any decision based on the content of this presentation. All assumptions and examples are based on current laws (as at 2 November 2015) and the continuance of these laws and IOOF s interpretation of them. IOOF does not undertake to notify its recipients of changes in the law or its interpretation. All examples are for illustration purposes only and are subject to the assumptions and qualifications disclosed. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Neither IIML, AET, IOOF Ltd nor any company within the IOOF group guarantees the performance of any fund or the return of an investor s capital. 3

4 Agenda 1 Pensions 2 Estate planning 3 Property and SMSFs 4 In-house assets and related party transactions 4

5 Pensions 5

6 Pension problems Structuring pensions Pensions and preservation Minimum pensions Exempt current pension income 6

7 Structuring pensions A pension cannot be added to by way of contribution A pension is commenced with the tax components of the accumulation account Component percentages calculated on commencement Component percentages only changed by Insurance proceeds are 100% taxable component Anti-detriment payment is 100% taxable component There may be tax reasons for having multiple pensions 7

8 Combining pensions Multiple pensions can be combined Move back to accumulation phase and restart pensions Take care if there is a desire not to contaminate tax free pensions Take care if attempting to rollover death benefit pensions Greatly assisted by professional administration 8

9 Pensions and preservation Must have met a condition of release commence a pension Or unrestricted non-preserved benefits from a previous a condition of release Cannot select tax components to commence a pension Can select preservation components to commence a pension Priority in cashing pension benefits Unrestricted non-preserved Restricted non-preserved Preserved 9

10 TTRs and preservation If TTR contains UNPB then commutation can be made Total withdrawals may exceed 10% of account balance May consider commencing TTR with preserved monies Leave UNP available for lump sum withdrawal 10% Start a separate pension with UNPB 10

11 Commutation counting as minimum pension payment Requires unrestricted non-preserved benefits Condition of release met Ability to make tax free commutation to low rate cap Currently $195,000 Make use of low rate cap indexation Commutation may count towards minimum pension payment Election required Mismatch between tax and super definitions Super Total payments in any year SISR 1.06(9A)(a) Tax Payment from a superannuation pension Unless an election is made ITAR ITAR (b) 11

12 Case study pension commutation Retirement Amount 1 July 2015 account balance $900,000 Tax free percentage 55% towards her annual minimum pension Taxable percentage 45% Minimum annual pension $36,000 $195k tax-free withdrawal Anne (56) If she makes an election before receiving the payment it can count towards the minimum 12

13 Commutation counting as minimum pension payment Generally not an option in retail offering Tips and traps Review SMSF trust deed and pension provisions Need to consider Impact to tax offsets, rebates and Government incentives Excess pension payment re-contributed back into super Unused indexed low rate threshold 13

14 Exempt current pension income Funds can claim a tax exemption for ECPI Number of requirements to meet If fail any then ECPI not allowable and assets subject to tax Applies from the beginning of the financial year Assets to be valued at market value Non arm s length income not included in ECPI Minimum annual pension payments Ensure calculations are correct Maximum annual pension payments Transition to retirement pensions and allocated pensions 14

15 Estate planning 15

16 SMSF issues SMSF is often a source of significant trouble on death Trust deed Clauses related to death benefits - make sure you understand them and know what they do What type of nomination do we have? Trusteeship LPR may stand in the shoes Fund may have alternative to LPR 16 16

17 Trust deeds and super law Trustees cannot be subject to a direction SISA section 58 Excludes small funds Therefore ok for an SMSF trustee to be subject to a direction ie not a breach of superannuation law for an SMSF trust deed to stipulate that the trustee shall make a payment to a dependant or a legal personal representative per a member s written nomination Not ok for a large fund to be subject to a direction 17

18 Nominations and super law Only a trustee can exercise a discretion SISA section 59 Unless the governing rules require the consent of the trustee to the exercise of the discretion [59(1)(a)] or Unless the member gives the trustee a notice (in accordance with the regulations) to require the trustee to pay a benefit to a dependant or LPR upon the member s death [59(1A)] The relevant regulation is SIS Regulation 6.17 Excludes small funds 18

19 Directed nominations SMSFs Trust deed clause If a member nominates a valid dependant under superannuation law then the benefit shall be paid to them If there is no nomination or the nomination is invalid The benefit shall be paid to the legal personal representative or The trustee shall have discretion 19

20 Binding nominations and SMSFs Not necessary in an SMSF if a properly drafted trust deed clause is used ATO determination SMSFD 2008/3 Binding nominations don t apply Must refer to trust deed Donovan vs Donovan Estate planning certainty Use power of the trust deed 20

21 Inadequate trust deed clauses Recent cases highlight the importance of understanding the deed Ioppolo v Conti Wooster v Morris LPR not appointed as executor Deed allowed surviving trustee to appoint new trustee Trustee successfully paid benefit to spouse - not children from first marriage LPR not appointed as executor Deed allowed surviving trustee to appoint new trustee Trustee paid benefit to spouse rather than children from first marriage Court held not ok and changed payment Took three years and great expense 21

22 Property and SMSFs 22

23 Property asset features Require advance planning for an exit strategy Consider the ability to make benefit payments Consider the ability to pay death benefit as a lump sum versus a pension Not accepted by retail funds 23

24 Trouble shooting events Potential events requiring advance consideration for property assets Death Divorce Loss of capacity Bankruptcy Non-resident 24

25 Forced sale considerations Asset retention Tax implications Fund viability 25

26 Asset retention Gold Coast apartment? BRP the family dental surgery is run from? 26

27 Tax implications Capital gains tax (CGT) Timing of disposal of assets Capital gains crystalised Losses unable to be carried forward Pension or accumulation phase Are there unused or available tax credits to pass to the next generation? Anti-detriment Deduction for future liability to pay benefits 27

28 Fund viability Ability and desire All trustees are created equal but Will the surviving member/s want to continue the fund? Will the surviving trustee/s have the necessary skills and interest? It may have been a great adventure together but a burden alone Trustee structure Privacy 28

29 Investment strategy requirements The investment strategy must consider Risks and likely returns Diversification Liquidity Ability to discharge liabilities For SMSFs insurance Whether the trustees should hold policies of insurance for one or more members 29

30 Investment strategy considerations Diversification Risk of not having cash flow to pay an unexpected death or disability benefit Liquidity May need to sell property Delays in making benefit payment May receive fire sale price Difficulties if running a business from the property Ability to discharge liabilities Desire to retain the property Running a business Timing of capital gains Is there a limited recourse borrowing arrangement? Ability of remaining member/s to service loan Amount of loan outstanding 30

31 Liquidity options Option to hold insurance outside of superannuation Make non-concessional contributions Consider cap issues Death benefit as an income stream Upon death of the member their benefit is paid to a spouse as an income stream Member has an insurance policy based on loan amount Premiums deducted from member account Premiums deductible to the fund 31

32 Public liability insurance Important to ensure that any property has adequate public liability insurance Often well considered for commercial property Often overlooked for residential property Case of an electrician who died in the roof cavity of a residential rental property Property owner found negligent If in an SMSF and no insurance then trustees personably liable 32

33 Group discussion Lifecycle of the family home 33

34 Case study review Lifecycle of the family home 34

35 In-house assets and related party transactions 35

36 SMSF contraventions Contravention type Number % Value % Loans to members/financial assistance 21.5% 15.0% In-house assets 19.0% 28.8% Separation of assets 12.7% 25.4% Administrative type contraventions 10.8% 1.6% Operating standard type contraventions 8.0% 6.1% Borrowings 7.8% 7.4% Sole purpose 8.0% 4.9% Investments at arms length 7.7% 7.5% Other 3.1% 1.0% Related parties acquisitions 1.4% 2.4% Total 100% 100% 53% by number 69% by value Source - ATO publication Self-managed super funds: A statistical overview

37 SMSF penalties SIS section Rule Penalty units Penalty amount S 35B Failure to prepare financial statements 10 $1,700 S 65 Prohibition on lending to members and relatives 60 $10,200 S 67 Prohibition on borrowing 60 $10,200 S 84 In-house assets 60 $10,200 S 104A Failure to sign trustee declaration within 21 days and keep for 10 years 10 $1,700 S 106 Failure to notify ATO of significant adverse event 60 $10,200 S 106A Failure to notify ATO of change of status 20 $3,400 S 124 Failure to appoint investment manager in writing 5 $850 S 160 Failure to comply with ATO education directive 5 $850 S 254 & S 347A Failure to provide ATO with establishment or statistical information 5 $850 37

38 In-house asset recap A loan to, or an investment in a related party An investment in a related trust An asset leased to a related party May not exceed 5 per cent of market value of fund Arms length market valuation requirements Exclusions for pre 1999 unit trusts A loan to a member or a relative is strictly prohibited! There is no 5% concession here 38

39 Acquisition of related party assets Trustee must not intentionally acquire an asset from a related party unless the asset is A listed security purchased at market value Business real property (BRP) for small funds acquired at market value An in-house asset acquired at market value that does not result in in-house assets exceeding 5 per cent of the fund value Penalties for arrangements intended to circumvent Breaches for acquisition of property that does not meet the BPR tests Acquisition of employee share schemes shares 39

40 Related party loans Limited recourse borrowing arrangements Non-commercial terms leads to non-arm s length income Without the loan there would be no investment in the asset Without the investment in the asset there would be no income including capital gain Therefore all income is non-arm s length income All non-arm s length income taxed at 47% ATO ID 2014/39 and ATO ID 2014/40 40

41 Investment problems Not being aware of the rules Not all SMSF investment rules are intuitive but they are the law Under appreciation of the depth and breadth of related parties! Fixing problems Be pro-active in addressing breaches Don t wait to be subject to ATO rectification directions If you are - take them seriously! Invariably will require undoing of the transaction Stamp duty CGT Professional fees 41

42 Group discussion Lifecycle of the family home 42

43 Case study review Lifecycle of the family home 43

44 Summary Superannuation rules are not always intuitive and can be complex Creates many opportunities to assist clients with SMSFs Pensions can offer excellent tax benefits if structured and administered properly Understanding the potential disasters of death can provide peace of mind for clients View any non vanilla investments carefully 44

45 Questions 45

46 Creating financial independence since 1846