A FREE
QUARTER IV | ISSUE 048 | THE PREMIER SELF-MANAGED SUPER MAGAZINE
PASS THE LEGACY PENSION AMNESTY
FEATURE
STRATEGY
COMPLIANCE
STRATEGY
Legacy pensions A way out
Risk cover Death benefit implications
Property holdings Legal considerations
Withdrawals All key factors
Brought to you by
- SAVE THE DATE -
SMSF PROFESSIONALS DAY 2025 SMSF Professionals Day 2025 is back for another year. Join us for a comprehensive day of superannuation insights and strategies to build, preserve, and access your retirement wealth. We’ll kick off with an update on the latest superannuation changes, including any super related implications from the Federal election and any announcements out of a Federal Budget. Our expert-led sessions will delve into maximising tax concessions, optimising contributions within the rules, and accessing your super to make the most of your retirement savings. The day concludes with an engaging Q&A session.
Sydney: Thursday 22 May Melbourne: Tuesday 27 May
Brisbane: Thursday 29 May Online: Tuesday 3 June
“The SMSF Professionals Day is always my favourite event in the year. ”
“The day went really well. All of the presenters were very knowledgeable and the support staff were extremely helpful.”
“Really enjoyed the day and the content was fantastic. So glad I came.”
“Most informative. So glad I came.”
Sponsorship opportunities now available
COLUMNS
A FREE
PASS THE LEGACY PENSION AMNESTY
Investing | 20 Markets forecast post US election.
Investing | 24 Infrastructure tailwinds.
Strategy | 28 Death benefit implications of insurance.
Compliance | 32 Factors involved with property holdings.
Strategy | 36 The larger picture for drawdowns.
Compliance | 40 Tax implications of carried-forward concessional caps.
Strategy | 44 New dimensions of having multiple pensions.
Compliance | 47 Preparing for the Division 296 tax.
Strategy | 50 Ensuring death benefits are distributed properly.
Strategy | 54 The benefits of having a successor director.
Strategy | 58 Issues to consider when planning for the future.
REGULARS
A FREE PASS THE AMNESTY FOR LEGACY PENSIONS Cover story | 12
What’s on | 3 News | 4 News in brief | 5 SMSFA | 6 CPA | 7 IFPA | 8 CAANZ | 9 IPA | 10 Regulation round-up | 11 Super events | 62
QUARTER IV 2024 1
FROM THE EDITOR DARIN TYSON-CHAN INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEAR
Two early Christmas gifts For most of my life I have been a pragmatist, which pretty much means from an early age I stopped believing in Santa Claus. But two positive developments to come out of Canberra in the final days before the politicians took their end-of-year leave have had me reflect on my Grinch-like stance. The first of these was confirmation the bill for the proposed Division 296 tax had not received passage through the upper house. This result has certainly spawned a ripple of optimism among sector stakeholders, with SMSF Association chief executive Peter Burgess suggesting the $3 million soft cap has now been reduced to a “zombie measure”. While we don’t want to get ahead of ourselves, and that is why the positive sentiment is only a ripple and not a wave or tsunami, I think Peter is correct. That’s because in recent months the measure has met firmer resistance across both houses than I think Financial Services Minister Stephen Jones anticipated. To this end, the penny dropped with certain elected officials as to how much damage could be done to both the tax system and the general public if the ideology of taxing unrealised gains was implemented. This impasse would be difficult to fix without a redraft of the piece of legislation – a scenario this government has seemed averse to from the outset. The next question then is if the Albanese government would be willing to include this policy as part of its election platform after declaring it would not touch superannuation the last time we hit the polling booths. I predict it would not have the appetite to do so.
And then finally you’d have to wonder if the Member for Whitlam would have the courage to reintroduce the bill if Labor was re-elected. Again, this is highly doubtful as even the most optimistic ALP members admit the best-case scenario it has to hang on to power would be through minority government and that means the Greens would have the balance of power. Of course, it’s the Greens who offered to support the Division 296 bill on the condition the threshold included was lowered to $2 million and a ban on limited recourse borrowing arrangements would be brought to bear. I’m positive Stephen Jones would not be prepared to go that far to get this policy through so I think it’s sayonara to this measure. The other gift was confirmation the fiveyear amnesty to allow individuals to exit legacy pensions has now officially been put in place. Many quarters of the SMSF industry felt this initiative might be dead in the water once the Division 296 bill was not passed as the two measures were so closely linked due to total super balance calculation methodologies. But Capital Hill showed a good degree of common sense and treated the legacy pension relief as a completely separate matter and to that I say bravo. While some detail is yet to be revealed, such as the social security implications, it is a long overdue solution to eliminate structures from the superannuation system that are no longer fit for purpose and problematic in so many ways. So the sector got two early Christmas presents and in my view they’re better than two front teeth.
Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au Senior journalist Jason Spits Journalist Todd Wills Sub-editor Taras Misko Head of events and corporate partnerships Cynthia O’Young c.oyoung@bmarkmedia.com.au Publisher Benchmark Media info@bmarkmedia.com.au Design and production AJRM Graphic Design Services
2 selfmanagedsuper
WHAT’S ON
Accurium Inquiries: 1800 203 123 or email enquiries@accurium.com.au
TBAR, TBC, TSB – be prepared for 2025 22 & 29 January 2025 Webinar 2.00pm–3.15pm AEDT
Transfer balance account reporting – get it right 22 January 2025 Webinar 2.00pm–3.15pm AEDT
Maximising opportunities under the transfer balance cap 29 January 2025 Webinar 2.00pm–3.15pm AEDT
Setting up an SMSF for success 5 February 2025 Webinar
2.00pm–3.15pm AEDT Unlocking SMSF opportunities with business real property 12 February 2025 Webinar 2.00pm–3.15pm AEDT
Unwinding SMSF wind-ups
To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.
Institute of Financial Professionals Australia Inquiries: (03) 8851 4555 or email info@ifpa.com.au
Inquiries: dba@dbanetwork.com.au
SMSF Online Updates
Holistic estate planning in 2025
14 February 2025 Webinar 12.00pm–1.30pm AEDT
6 February 2025 Webinar 12.30pm–1.30pm AEDT
21 March 2025 Webinar 12.00pm–1.30pm AEDT
11 February 2025 Webinar 12.00pm–2.00pm AEDT
NSW 11 February 2025 Karstens Level 1, 111 Harrington Street, Sydney
VIC 13 February 2025 The Veneto Club 119 Bulleen Road, Bulleen
2025 Annual Conference 4 April 2025 Grand Hyatt Hotel Melbourne 123 Collins Street, Melbourne
SMSF Professionals Day 2025 Inquiries: (02) 8973 3315 or email events@bmarkmedia.com.au
NSW 22 May 2025 Sydney Masonic Centre 66 Goulburn Street, Sydney
VIC
Super Discussion Group
Heffron Inquiries: 1300 433 376 or email events@heffron.com.au
Quarterly Technical Webinar 27 February 2025 Webinar 1.30pm–3.00pm AEDT
SMSF Clinic
27 May 2025 Melbourne Convention and Exhibition Centre 1 Convention Centre Place, South Wharf
QLD 29 May 2025 Pullman Brisbane King George Square Corner Ann & Roma Streets, Brisbane
5 March 2025 Webinar 1.30pm–2.30pm AEDT
Super in 60 13 March 2025 Webinar 2.00pm–3.00pm AEDT
Death Benefits Masterclass
SMSF Association
5 March 2025 Webinar
Inquiries: events@smsfassociation.com
2.00pm–3.15pm AEDT Maximising super contributions – post-tax opportunities
SMSFA National Conference 2025
12 March 2025 Webinar 2.00pm–3.15pm AEDT
DBA Lawyers
19-21 February 2025 Melbourne Convention and Exhibition Centre 1 Convention Centre Place, South Wharf
20 March 2025 Webinar 12.00pm–4.30pm AEDT
2025 Post-Budget Webinar 26 March 2025 Webinar 3.00pm–4.00pm AEDT
Unlock the full potential of tax-effective contributions 19 March 2025 Webinar
2.00pm–3.15pm AEDT
QUARTER IV 2024 3
NEWS
ATO considers ACR threshold By Darin Tyson-Chan
The ATO has taken into account industry feedback it has received on whether the $30,000 threshold used as one trigger for the need to lodge an auditor contravention report (ACR) and confirmed it will not be changing this existing parameter. The regulator has seven tests to determine whether the lodgement of an ACR for an SMSF compliance contravention is required. To this end, Test 7 stipulates an ACR must be lodged if the total value of all contraventions is greater than $30,000. In a similar vein, Test 6 states if the total value of all compliance contraventions represents more than 5 per cent of the entire assets of the fund, then an ACR
has to be recorded with the ATO. “The $30,000 test has been in place for quite a while now. Via the auditor stakeholder group … we did have some submissions going back about two years now [that prompted] some fairly detailed analysis around the $30,000 test,” ATO director Paul Delahunty told members of the Auditors Institute during a recent presentation. “The analysis at the time indicated to us that, in addition to the other six tests, the $30,000 test itself wasn’t triggering a significant number of specific reports. “That said, we recognise yes it is an additional test auditors turn their minds to when they do report, and often has consequences in relation to their engagement with trustees, some additional fees
are often charged in relation to ATO lodgement, and so the question around the threshold and whether it is set at the right point is a valid one to ask.” Delahunty pointed out the threshold plays an important role in drawing attention to particular problematic compliance areas so any amendment to it would have to take this factor into account. “From an ATO perspective I think we’re a little bit cautious in relation to the test on the basis that it does provide a lot of visibility for us for some of the high-risk contraventions that might not be triggered by some of the other tests,” he acknowledged. “If I look at the example around illegal early access, something that is below 5 per cent but also below the $30,000 may have an issue in relation to visibility for the ATO as to whether we
see that,” he shared. He confirmed the issue had been raised by more than one industry body, which means the regulator’s current stance on the matter is under consideration. “So it is on our radar for some further discussion. We have reviewed it in the past and we are open to some further feedback and what options might be there in relation to that test,” he said.
Paul Delahunty
Caution needed over gearing rules subjectivity By Darin Tyson-Chan
A senior executive in the SMSF lending space has cautioned practitioners and trustees as to the subjective nature of the borrowing rules under section 67A of the Superannuation Industry (Supervision) (SIS) Act and how different types of expenditure that appear similar in nature can cause a compliance breach. “Bluestone head of specialised distribution Richard Chesworth recognised the provisions regarding SMSF gearing can be confusing with regard to financing for the maintenance of an asset. “An SMSF can borrow for the acquisition,
4 selfmanagedsuper
maintenance or repair of an asset. SMSFs are prohibited from borrowing for improvement whereby you change the character of the asset,” Chesworth told selfmanagedsuper. However, he pointed out these restrictions are not as clear cut as they appear to be at face value. “For arguments sake I’ve purchased an old place in Marrickville in my SMSF using a limited recourse borrowing with a pretty rundown kitchen,” he said. “The tenant moves out and it gives me a chance to do up the kitchen to enable me to charge more rent on the property. The existing kitchen doesn’t have a dishwasher. So I’m going to redraw on the borrowing to install a dishwasher. Is that expenditure considered maintenance or repair, or
improvement of the asset? “Now I would have thought it is an improvement, but the ATO has noted in its written guidance saying it feels a kitchen of today’s standards would have a dishwasher so it deems that as maintaining the asset and not improving it. So I can borrow to add a dishwasher to the kitchen and that’s great.” “But if I was to knock out a side wall and put aluminium-framed glass bifolds in there to let more light in, the same guidance says if I do that, move a wall, it’s deemed improving the asset, which is a breach of the borrowing rules.” He explained in neither scenario had the lender done anything wrong, but that the subjective nature of these provisions was something trustees have to consider.
NEWS IN BRIEF
Legacy pension amnesty approved The barriers for SMSF members to exit legacy pensions have been removed with a five-year amnesty on their tax-free commutation starting on 7 December after the government used a legislative instrument to bring them into effect. The Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024 were approved by Governor-General Sam Mostyn on 5 December after Financial Services Minister Stephen Jones presented them as a legislative instrument that altered existing superannuation and tax regulations. As such, the instrument was registered on 6 December and the commencement of the regulations took place the following day. Under the new regulations, legacy pension holders will have a five-year period in which they will be allowed to roll monies in these income streams back to an accumulation account, exit them from the superannuation environment or convert them into an account-based pension. The limitations on the allocations of pension reserves have also been lifted whereby those supporting a current income stream and are allocated to the pension recipient will be exempt from the contributions caps.
Div 296 bill split The progress of the bill that will impose the Division 296 tax has taken a turn, with the Senate agreeing on a motion to have it split into two parts, isolating the proposed impost from other nonrelated measures. The motion was put forward by West Australian Liberal Party Senator Dean
Smith on 27 November, the last sitting day of the Senate for 2024, and stated the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 should have all schedules unrelated to the tax moved into a separate bill. As a result of the motion, the Senate has agreed to deal with two bills – the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, which contains schedules 1 to 3 of the original bill, and the Treasury Laws Amendment (Miscellaneous Measures) Bill 2024, which contains schedules 4 to 8. Schedules 1 to 3 will create the Division 296 tax and direct its operation, while schedules 4 to 8 will amend acts related to the Australian Charities and Not-for-profits Commission, Financial Regulator Assessment Authority, goods and services tax and the licensing of foreign financial services providers.
Objective of super now law The Superannuation (Objective) Bill 2023 has been passed by the Albanese government after it secured the necessary votes to make it law at the eleventh hour during the final day of parliamentary sittings for 2024. The bill was one of 32 passed through the Senate on 28 November and for the first time legislates an objective for superannuation. The law will now define the objective of super as “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. While the bill passed without any amendments, some of the more contentious and broad terms of the objective, such as ‘dignified retirement’, ’equitable’ and ’sustainable‘, were left undebated. Financial Services Minister Stephen
Jones noted the bill will strengthen Australia’s retirement income system. “Any future changes to super legislation must be judged against this objective, making policymakers more accountable when considering changes affecting Australians’ retirement savings,” Jones said. “The government is committed to protecting and strengthening the super system so it delivers a dignified retirement to more Australians and helps build a stronger and more resilient economy.”
New ATO sector appointment The ATO has appointed Alister Boyes to take on the role of assistant commissioner in its SMSF regulatory branch, a position recently vacated by Justin Micale after he took on a new role related to superannuation and employer obligations. Micale’s role was temporarily filled by Paul Delahunty in an acting capacity, but Boyes, who has been with the ATO for more than 30 years, will tackle it on a permanent basis. Prior to this appointment, he was most recently individuals and intermediaries, technical leadership and advice acting assistant commissioner and said his collective experience provided a well-rounded understanding of the challenges and opportunities that lie ahead for the SMSF sector. “In my previous role … I gained valuable experience in technical issues, implementing new public advice and guidance, and engaging with external stakeholders,” Boyes said. “In my new role, my key focus will be on working closely with trustees, auditors and other professionals to ensure they have the support and information needed to meet their taxation and regulatory obligations, and addressing our highest risks with strategies that impact at scale.”
QUARTER IV 2024 5
SMSFA
Sector is all about collaboration
PETER BURGESS is chief executive of the SMSF Association.
6 selfmanagedsuper
In all my years of attending our national conference, one aspect of this signature event on the SMSF calendar that has always appealed to me is the unique opportunity it provides to speak to such a wide range of professionals. It might be a lawyer at morning tea, an actuary at lunch or enjoying a cold beer with a financial adviser at a networking session in the evening. They all bring their own perspectives about our superannuation sector to the conference and by doing so, greatly enhance the delegate experience both in the formal sessions and workshops and, just as importantly, during those informal discussions we all value. Ruminating on this with my colleagues, it seemed obvious this interdisciplinary phenomenon we all appreciate had all the necessary ingredients to be the cornerstone for this year’s theme – Collaboration: Unleashing Collective Potential. We know how important collaboration is to effectively service clients, so the 2025 National Conference, being held at the Melbourne Convention and Exhibition Centre from 19 to 21 February, will dissect how professionals working together can deliver the best outcomes not just for clients, but also their businesses. Our head of technical, Mary Simmons, put it succinctly: “With complex client needs across super, tax, estate planning and compliance, the SMSF sector thrives on the power of collective expertise. This year’s conference celebrates the unique blend of skills across accounting, auditing, legal and advisory professions, creating a space for SMSF professionals to work together to achieve outstanding client outcomes.” Once again, Mary and her conference team have pulled together a program that will interest, challenge, inspire and educate you, whether it be the in-depth technical sessions, practical workshops or plenary sessions. Your tried-and-true favourite speakers, such as newly appointed SMSF Association board member Meg Heffron and Colonial First State’s Craig Day, will be in attendance, intermixed with some exciting fresh voices. I will get the ball rolling with my ‘legs & regs’ session, which will review the key legal changes that shaped the SMSF landscape in 2024 and provide an inside look at the agenda in this area for the year ahead. Considering how much the Division 296 tax has dominated the association’s agenda this year and, at the time of writing it is looking increasingly unlikely to become law, at least until after the next federal election, it will be an ideal opportunity to take stock and consider what lies ahead for this proposal we believe to be deeply flawed, especially as it relates to the taxing of unrealised capital gains.
I will also explore the reform of legacy pensions, an important win for our sector. Then it will be two-and-a-half days of sessions that will be complemented by the hands-on workshops that have become an integral part of the conference, offering, as they do, the opportunity for delegates to engage with real-world case studies and tackle the critical issues they encounter daily. Each workshop is intentionally kept small to encourage active discussion and in-depth exploration of core topics, including contributions, non-arm’s-length investments, pensions, auditing, death and aged care. Beyond technical content, attendees will gain insights into building efficient, future-focused superannuation practices. Sessions cover cutting-edge topics such as harnessing artificial intelligence, adapting to generational shifts and enhancing operational efficiency, all tailored to drive SMSF business growth. As loath as I am to identify specific sessions, it would be remiss of me not to mention Meg Heffron’s session, which will open day two by unpacking new strategic opportunities in our sector, association chairman Scott Hay-Bartlem, who will close the official side of the conference by reflecting on key lessons to be learnt from recent court decisions, and Anna Hacker’s first-day specialist-only session. A highlight of Scott’s address will be the 2024 decision in Merchant v Commissioner of Taxation, one of the most important legal cases in recent times because it involves what could be considered a common and uncontroversial transaction and covers such a vast array of SMSF areas and issues, from trustee disqualification through to sole purpose and financial assistance to members and the importance of the investment strategy. Scott will share his learnings from this case to ensure you and your clients are not embroiled in something similar. Anna’s session should be a must attend for those delegates with a keen interest in elder law and abuse. As client director at Pitcher Partners and an accredited specialist in wills and estates, she will review what happens when clients lose capacity and the impact it has on how we assist them. Enhancing the event’s rich discussions and networking, Craig Day returns with the much anticipated Super Mastermind quiz. After last year’s success, this lively, competitive plenary session offers a chance to claim the coveted Quizmaster title and trophy, marking a fun and unmissable highlight of the conference. It all adds up to a conference that should appeal to everyone working in our sector, deliberately designed to tackle those issues currently front and centre for SMSF specialists. Certainly, it’s not to be missed, so see you in Melbourne in 2025.
CPA
Digital world dictates specific data security
RICHARD WEBB is superannuation leader at CPA Australia.
The data breach involving MediSecure in September was one of the largest in Australia, affecting 12.9 million Australians. The breach exposed a large trove of personal information, including names, addresses and medical histories. The data held by entities servicing SMSFs is seen as vulnerable by the ATO, cybersecurity experts and others. But how prepared are trustees to deal with these situations? Today cybersecurity is a critical concern for all financial entities. SMSF trustees must be vigilant in protecting their members’ sensitive information from cyberthreats. Preparedness for cybersecurity breaches needs to consider data held by service providers, such as administrators, banks and share registries, as well as data exchanged with entities like advisers, tax agents and the ATO. Given the immense body of guidance and commentary from the ATO, cybersecurity experts and others, it can seem like a constant battle to stay on top of the many problems that can arise. Cyberthreats are becoming increasingly sophisticated, targeting financial institutions due to the valuable data they hold. SMSFs are no exception. The ATO has repeatedly emphasised the importance of cybersecurity for SMSFs, noting trustees must take proactive steps to protect member data from cyberthreats. Cybersecurity experts agree SMSFs, like other financial entities, are attractive targets for cybercriminals due to the sensitive financial information they hold. The need for trustees to consider risks presented by their service providers is often overlooked. SMSFs rely on various service providers, including administrators, banks and share registries, to manage their operations. Each of these entities holds critical data that, if compromised, could have severe consequences for an SMSF and its members. A breach in any of the areas managed by these entities could lead to significant financial loss or identity theft. Part of a trustee’s duties should be to conduct regular due diligence on their service providers and consider any risks presented by these organisations with respect to cybersecurity, regardless of their general reputation. The ATO has issued general guidance to assist with these types of issues. This includes basic advice, such as regular software updates, strong password practices and the use of two-factor authentication (2FA). This contrasts with prudential guidance offered by the
Australian Prudential Regulation Authority, which also includes guidance on cybersecurity, emphasising the need for robust risk management frameworks and regular security assessments. Cybersecurity experts recommend trustees adopt a multi-layered security approach. At a micro level this includes using firewalls, antivirus software and encryption to protect sensitive data. It also involves regular conversations with advisers, third parties and others about how data is secured and stored. Good practice is to ensure at least once a year a risk assessment is carried out on the various touchpoints where the fund’s data could be accessed, with trustees ensuring any perceived or actual risks are resolved to their satisfaction. Basic protections for trustees include ensuring strong password practices are in place on personal computers and using 2FA wherever possible. Software updates should be regular and email awareness of phishing and other attempted fraud vectors should be regularly reviewed. Data should be backed up wherever possible with archived records maintained offline where they cannot be accessed. Trustees themselves play a crucial role in ensuring the cybersecurity of their SMSFs. They must stay informed about the latest threats and best practices for protecting sensitive data they directly manage. In addition, trustees should ask service providers about their cybersecurity policies and procedures, how sensitive data is protected, encrypted and accessed, as well as details of the provider’s disaster recovery plan. Other questions to ask include how a provider’s breach reporting works, whether there have been incidents in the past, how the provider manages the cybersecurity risk of their own providers and the degree to which staff are trained in using systems to minimise risks. Trustees should also consider obtaining insurance to mitigate the financial impact of a potential cyber incident. These policies, where available, can cover costs related to data breaches, including legal fees. Preparedness for cybersecurity breaches is essential for SMSF trustees to protect their members’ sensitive information and maintain the integrity of their funds. By following the guidance provided by regulators, adopting best practices and staying informed about the latest cyberthreats, trustees can significantly reduce the risk of an incident. Ultimately, proactive cybersecurity measures are a necessity to safeguard the data and assets of SMSFs in an increasingly digital world. QUARTER IV 2024 7
IFPA
A wrap-up of 2024
NATASHA PANAGIS is head of superannuation and financial services at the Institute of Financial Professionals Australia.
8 selfmanagedsuper
As 2024 draws to a close, it’s clear the federal government’s legislative agenda for superannuation and financial services has been both ambitious and packed with activity. Yet many of the key announcements remain unfinished. Among the most significant measures still outstanding are those addressing the Division 296 tax and payday super. One milestone that was achieved this year was the royal assent granted to the non-arm’s-length expenditure (NALE) provisions for superannuation funds. While the new law brings some relief, urgent legislative amendments are still needed to clarify the interaction between the NALE rules and capital gains tax, which is an area of ongoing concern. Similarly, the ATO’s recent update to Taxation Ruling 2013/5, which defines when a superannuation income stream begins and ends, also demands urgent reconsideration. This change will significantly affect SMSF trustees who fail to meet the pension standards in a financial year. Under the revised ruling, a pension that does not comply with the payment standards is deemed to cease for income tax purposes, but not necessarily for superannuation purposes. This creates additional complexity without delivering practical benefits, further burdening trustees and the system alike. Another noteworthy development was the passing of the first tranche of recommendations from the Quality of Advice Review (QAR). These changes aim to simplify adviser fee payment rules from superannuation funds and reduce regulatory hurdles for financial advice – a welcome step forward. However, controversy arose with the government’s proposal to introduce a new class of ‘qualified advisers’. The term sparked alarm among professional financial advisers and professional associations as it implied individuals without full qualifications could be labelled as such. Fortunately, Assistant Treasurer Stephen Jones has acknowledged industry concerns, emphasising ‘qualified adviser’ is merely a working title for now. While the QAR outcomes mark progress in reducing red tape, two glaring omissions remain unaddressed: the role accountants could play in expanding access to financial advice and the inefficiencies within the current limited Australian financial services licence (AFSL) framework.
Accountants are trusted, skilled and experienced professionals who play a pivotal role in their clients’ financial well-being. Many industry stakeholders argue qualified accountants should be allowed to bridge the advice gap, especially if employees of banks, super funds and insurers may soon be empowered to provide advice. Accountants, particularly those well versed in superannuation and SMSF matters, are equally capable of delivering high-quality advice. However, the existing limited AFSL regime poses significant challenges. The complexity, regulatory burden and prohibitive costs of obtaining and maintaining a limited licence deter many accountants from offering superannuation advice. For most accountants, this type of advice is a small, ancillary part of their services. The current framework makes it financially unviable, leading to minimal uptake of the regime and falling short of its intended policy outcomes. Consequently, individuals are left without access to essential superannuation advice, while both accountants and financial advisers are weighed down by overregulation. Australians deserve affordable, high-quality superannuation advice from well-qualified professionals, supported by robust consumer protections. To achieve this we need a fresh approach to regulating superannuation and SMSF advice – one that considers the roles of both accountants and financial advisers within a streamlined financial advice framework. As parliament wraps up for the year, there’s a sense of urgency to clear the legislative backlog. While routine bills often pass with bipartisan support, major reforms like the Division 296 tax bill are still pending. This critical bill must not be bundled into an ‘omnibus’ package of unrelated measures and rushed through without adequate scrutiny. Looking ahead to 2025, we anticipate further legislative progress on this year’s unfinished business, including the remaining QAR recommendations and consultations on how superannuation can better support retirement income needs. The year ahead is set to bring further changes to super and financial services, particularly with an election scheduled for early next year, which could result in a change of government and a shift in policy priorities.
CAANZ
A desperately needed overhaul
TONY NEGLINE is superannuation and financial services leader at Chartered Accountants Australia and New Zealand.
Even a drover’s dog could see Australia’s retirement income system is horrendously complicated. For some reason we tend to overengineer regulatory settings. I have long thought no one really likes this “riddle wrapped in a mystery inside an enigma” to borrow Winston Churchill’s description of the then Soviet Union. Obviously there will be some people who appreciate the complexity primarily for commercial gain – for example, it is a barrier to entry for potential competitors and makes it difficult for consumers to engage with the system without any professional assistance. You will often hear people say no one on their death bed wishes they had done more work. Perhaps in a similar vein, it’s unlikely anyone wakes up each morning thinking our retirement income system is the most beautiful of human inventions and thanks their lucky stars that for another day they get to work with its web of rules. So what could be done to simplify it? Over the past 10 years, federal and state governments have held royal commissions on a wide range of subjects. Would this type of process be appropriate here? These types of processes are typically conducted to examine some significant failure in public policy and suggest changes to ensure the problems do not re-emerge. Such exercises are often very expensive. The retirement income system complexity is arguably a public policy failure. But perhaps easier, less formal, solutions are possible. In the past, Chartered Accountants Australia and New Zealand (CAANZ) has suggested in its prefederal budget submissions that the Productivity Commission should “comprehensively review all current retirement-related tax and transfer payments policies, including aged-care subsidies, with the aim of untangling inconsistency and complexity”. Our idea has, in broad terms, been endorsed by Australian Securities and Investments Commission (ASIC) chair Joe Longo. At the recent ASIC forum, Longo suggested the current regulatory environment is unsustainable and proposed the regulator create a Simplification Consultative Group to “identify how we, ASIC, can more efficiently and more effectively administer the law” and “how the levers and guidance available to ASIC can be more helpful”, with a focus
to make “the most difference as quickly as possible for consumers and investors, for businesses large and small and for directors”. All this sounds exciting and CAANZ looks forward to participating in these activities. We hope good things come from this initiative. Improving how ASIC works is essential, but this on its own means the complexity of the Corporations Act and other laws related to retirement would remain in place. Reforming and simplifying this legislation is also essential. We have to be honest, however, and ask how many electoral votes are there in making better a 4000-page piece of legislation, that is, the Corporations Act, that impacts everyone directly or indirectly every day. In reality, probably not that many. I suspect most people would intuitively think government legislation should lead to good, efficient and effective outcomes that do not result in any unintended consequences. We already have had several attempts to improve the income tax and corporations legislation. The Income Tax Assessment Act 1936 had become an impenetrable mess and a decision was made to simplify it. That task led to the Income Tax Assessment Act 1997 being legislated with some of the previous act’s provisions rewritten with a clearer structure and a broad plan to move the rest of the old law into the improved new law as soon as possible. Twenty-five years later this task remains incomplete as the 1936 act still exists, with seemingly no plans for its remaining provisions to be brought into the 1997 version. During the 1990s and early this century, we had successive reforms to the corporations legislation called the Corporate Law Economic Reform Program. Twenty years later we have a body of law that is a mess. But the reform task is urgent. On its own the compliance costs and effort for all areas of the financial services industry are a major brake on productive activity. However, what really needs to happen is that our lawmakers need to take greater care when amending the law. They need to avoid having a tendency to spray gun new law at some problem without considering the bigger picture of how the said changes improve the overall system and don’t clog it up.
QUARTER IV 2024 9
IPA
Investor protections for modern times
TONY GRECO is technical policy general manager at the Institute of Public Accountants.
Investor protections in Australia’s financial markets are at a crossroads. The wholesale investor and wholesale client tests, introduced over two decades ago, have failed to keep pace with modern economic realities. With thresholds that have remained static since their inception, these tests now inadvertently expose a significant portion of Australians to risks they are ill-prepared to manage. When these thresholds were established under the Financial Services Reform Act of 2001, the intent was clear: distinguish between retail clients who need greater regulatory protections and wholesale investors presumed to have the financial literacy and resources to navigate complex financial markets. Back then only about 2 per cent of Australians qualified as wholesale investors. Today this figure has ballooned to 16 per cent and could reach 44 per cent by 2041 due to inflation and the surge in residential property values. This demographic shift undermines the original intent of the framework, leaving ordinary Australians vulnerable. Outdated thresholds The current thresholds, $500,000 for the product value test and $2.5 million in net assets or $250,000 in gross income (for each of the last two years) for the individual wealth test, have not increased since their introduction and are relics of a bygone era. Adjusting for inflation and, in particular the increase in house values, these figures no longer reflect financial sophistication. A median house in Australia’s c apital cities now exceeds $1.1 million, placing many property owners in the wholesale category despite lacking the financial acumen the label implies. Without reform, more Australians will fall outside the protective net of retail client safeguards, exposing them to high-risk investments and unscrupulous financial practices. Cases like Mayfair 101, where investors were misled into believing they were buying products akin to bank term deposits, illustrate the dangers of an unregulated wholesale market. A blueprint for reform The Institute of Public Accountants believes several straightforward changes could align the tests with today’s financial realities. 1. Increased financial thresholds. Raising the product value test to $1 million and the net assets test to $4 million reflects economic changes since 2001. Similarly increasing the gross income test to $350,000 (excluding certain amounts) ensures these thresholds accurately filter for genuine sophistication. All these amounts should be indexed to average weekly
10 selfmanagedsuper
ordinary time earnings in appropriate increments to maintain their relevance over time. 2. Exclusions for principal places of residence and superannuation from the net assets test. Including an individual’s home in their net assets may artificially inflate their financial standing, exposing homeowners to undue risk. Excluding preserved superannuation balances aligns with the principle of not risking retirement savings and, in any case, the individual does not have access to these benefits at the time of the wealth test. 3. Consent and transparency. Introducing a mandatory consent requirement ensures investors understand the implications of being classified as wholesale clients. An opt-in form would clarify the loss of protections, such as the best interest duty and access to dispute resolution through the Australian Financial Complaints Authority. 4. Eliminating accountants’ certificates. Often used to classify clients as wholesale, these certificates place undue liability on accountants and are misused to bypass retail compliance obligations. The responsibility for determining client suitability should lie with advisers or product issuers, who are better equipped to assess financial knowledge and risk tolerance. Addressing the regulatory gap The disparity in the Australian Securities and Investments Commission’s oversight costs between retail and wholesale advisers, $48 million versus $176,000 respectively for 2022/23, is striking. Wholesale advisers currently operate without minimum education standards or an obligation to act in their clients’ best interests. This regulatory gap not only puts wholesale investors at risk, but also undermines trust in the financial advice sector as a whole. Strengthening oversight for wholesale advice providers should be a priority. Investor protections are not just about compliance, they are about confidence. Australians need to trust that financial markets operate fairly and transparently. By updating the wholesale investor tests, policymakers can ensure these classifications serve their intended purpose: to differentiate between those who need protection and those who can fend for themselves. By raising thresholds, excluding misleading assets, eliminating accountants’ certificates, requiring informed consent and tightening regulatory oversight, Australia can modernise its framework to reflect current economic realities and protect all investors. The question is no longer whether reform is needed, but how quickly we can act to safeguard the financial futures of millions.
REGULATION ROUND-UP
Proposed legacy pension changes
NICHOLAS ALI is SMSF technical service director at NEO Super.
On 17 September, the draft Treasury Laws Amendment (Self-managed superannuation funds – legacy retirement product conversions and reserves) Regulations 2024 were released for public consultation until 8 October 2024. The regulations have now been approved and will allow the commutation of non-commutable income streams, such as market-linked pensions, life expectancy pensions and lifetime pensions, and the reserves associated with such income streams to be converted into account-based pensions or back into accumulation and/or to be paid out as lump sums. These are very welcome changes to inflexible legacy pensions that, for many, are no longer fit for purpose and are expensive to administer. Other key takeaways from the amendments are that: • they will enable individuals to exit legacy retirement income streams for up to five years, • reserves associated with the above-mentioned pensions that have ceased can be allocated to the recipient’s member balance without counting against the contribution caps, • reserves in an SMSF created for other reasons can be allocated to a member and will count against their non-concessional contributions cap, rather than their concessional cap, • this includes the ability to use the bring-forward non-concessional contributions provisions, however, the total super balance rules still apply, and • the measure will only apply to SMSF members.
Tax agent Code of Professional Code The government has agreed to further changes to the Code of Professional Conduct for tax agents following ongoing industry advocacy. The professional bodies lobbied for changes to section 15, the client ‘dob in’ provisions and section 45, the client ‘disclosure’ provisions, of the Tax Agent Services (Code of Professional Conduct) Determination 2024 bill. The latest iteration was registered on 9 October. The finalised section 45 is now limited to matters related to bankruptcy, tax, fraud or dishonesty offences, a prison sentence or the registration of a tax agent being suspended or terminated by the Tax Practitioners Board (TPB) where a client did not correct a false, incorrect or misleading statement (usually to the ATO) within a reasonable time. The previously proposed section 15 potentially breached client confidentiality by requiring practitioners to notify the ATO or the TPB where a client did not correct a false, incorrect or misleading statement within a reasonable time. The new
proposed section 15(2) states practitioners must have reasonable grounds to believe their client’s actions have caused, are causing or may still cause substantial harm to the interests of others.
Advice reform regulations tabled Some of the long-awaited Quality Advice Review (QAR) reforms have come into effect. The Treasury Laws Amendment (Delivering Better Financial Outcomes) Regulations 2024 are measures to implement the first tranche of reforms in the Delivering Better Financial Outcomes package, which address the government’s response to the QAR. The regulations contain five parts, with the first four parts in effect as of 17 September, while the fifth commences on 9 July 2025, allowing a 12-month transition period for related measures in the Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Act 2024. The first part updates the Electronic Transactions Regulations to reflect changes in the Superannuation Industry (Supervision) Act, enabling superannuation documents, such as written consents or requests, to be electronically sent, received and stored. The second removes the requirement to provide a fee disclosure statement and amends the mandatory content for ongoing fee consents when entering or renewing ongoing fee arrangements. The third recommendation permits financial product advice providers to either continue to give a financial services guide or instead make that information publicly available on their website. The fourth revises the rules on conflicted remuneration by banning benefits from product issuers that could influence advisers’ recommendations, while benefits from retail clients remain unaffected. The fifth amendment clarifies financial advisers can continue receiving commissions on general insurance products, provided they obtain informed consent for personal advice from clients. When general advice is provided, no consent is required.
Division 296 bill passes House of Representatives The Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 passed the lower house on 9 October. Amendments proposed by teal MPs Kylea Tink and Allegra Spender, as well shadow financial services minister Luke Howarth were defeated. The bill will now be debated in the Senate, where the government will need the support of all 11 Greens senators and three of the crossbench to pass the legislation. QUARTER IV 2024 11
FEATURE
A FREE
PASS THE LEGACY PENSION AMNESTY
For the first time since 2006, the treatment of legacy pensions has undergone significant changes, opening the way for them to be fully commuted and closed. While this move has been welcomed, Jason Spits writes making an exit will require slow and careful deliberation. 12 selfmanagedsuper
FEATURE LEGACY PENSION AMNESTY
After many years of requesting action from the government to allow SMSF members to exit legacy pensions, the green light to do so was given on 7 December when draft regulations, first released for consultation in September, were approved by the Governor-General and took effect immediately. For the SMSF sector, this marks the end of a long campaign to enact change for legacy pension holders that appeared for many years to be unheeded by government and mainly left off any agenda for change. That’s not to say legacy pensions were never considered by the government. The 2021/22 budget proposed a two-year commutation period during which any pension amounts would still be taxed and subject to the concessional contributions cap, but these plans under the previous government never eventuated. Canberra has now granted a five-year amnesty to commute any existing legacy pensions. Further, no taxes will be imposed upon the cessation of these income streams nor on the allocation of any associated reserves. Also, the allocation of a legacy pension reserve to the income stream recipient will not count towards that member’s contributions caps. Additionally, large allocations from nonpension reserves will be counted towards a fund member’s non-concessional contributions cap (see: What’s been approved). A welcome reception There is not much the sector does not like about the changes, with SMSF Association technical manager Fabian Bussoletti seeing it as the culmination of its activities in this area. “We have been advocating for this type of amnesty for years as there has been a long-term
need to address these pensions, so it is very welcome. It is also more favourable than what was expected, given the last time we saw any proposal it was for a two-year window where taxes would still apply,” Bussoletti says. Insignia Financial Group senior technical services manager Julie Steed adds the applause for the pension reforms is because they will benefit older SMSF members who have been trapped in products not offered for more than 17 years. “I can’t think of any financial product that old being sustainable or viable for those using it,” Steed notes. “These pensions were okay when people were in their 60s, but now they are in their 80s at least and many are holding onto their SMSF just because of a legacy pension and paying annual actuarial, audit and bookkeeping fees which are more than the actual pension payment.” Another key issue is the reforms were uncoupled from the proposed Division 296 tax bill, which threatened to prevent any further progress taking place, with BDO private wealth senior consultant Peter Crump confirming the perception the two measures were linked together in the mind of government officials. “In consultations with Treasury it was suggested the legacy pension reforms would help with tidying up Division 296, as reserve allocations would be added to the earnings calculations for that tax, and were contingent on the $3 million cap bill passing,” Crump says. “Given that bill still remains under a cloud, if they had remained connected, we may not have seen these generous reforms get up.” The uncoupling from the Division 296 proposals, however, does not take all the pressure off legacy pension holders, particularly those who may be subject to the
tax on earnings for total super balances over $3 million, to take action to deal with reserve allocations, Heffron SMSF technical and education services director Leigh Mansell points out. “If Division 296 takes effect from 1 July 2025, as proposed, and someone held a legacy pension at that time, any allocation of reserves would be taxable and to avoid having it happen they would have limited time to exit the pension by the start of the next financial year,” Mansell says. “If the pension reserve is illiquid, this could also create the potential for Division 296-related liquidity problems.” Pieces still missing Along with the Division 296 timing issues, some holes still remain in the finalised regulations that the industry had requested be addressed in regards to asset test exemptions and the uncertain fate of reserves unable to be allocated to members because they are deceased. Super Central superannuation special counsel Michael Hallinan regards these gaps as issues related to the drafting of the regulations rather than intentional oversights, and feels, in the case of the assets test exemption, they can be easily fixed via another regulatory change. Hallinan suggests one of the drivers behind commencing a legacy pension in the past was the asset test exempt status they were given where the capital value of the pension was not counted for Centrelink purposes. “However, now if you use the pension reforms, it will undo the social security treatment and allow Centrelink to reassess any entitlements for the age pension for the last five Continued on next page
There is much to consider, including whether someone should retain their legacy pension, or if they do exit, where the money should go. The obligations for financial advisers will be onerous and they will need to understand all the issues as a legacy pension exit will not be an execution-only approach. – Michael Hallinan, Super Central
QUARTER IV 2024 13
FEATURE LEGACY PENSION AMNESTY
Continued from previous page
years, creating a debt which would have to be repaid,” he explains. “The Social Security Act does allow for discretion so this would not require complex change, but rather the adoption of a policy allowing any debt to be written off.” However, Bussoletti notes the passing of the pension reforms without any related changes to the social security rules means all legacy pensions are currently open to Centrelink assessment. “Legacy pensions were given full or 50 per cent asset test exemptions if they met a certain condition, being they would be non-commutable except under specific circumstances. The new regulations make all legacy pensions commutable so there is a risk they will all lose the exemption,” he says. “These new regulations and the existing provisions of the Social Security Act are not talking to each other. Treasury will need to work with the Department of Social Services to resolve this because it affects all legacy pension holders.” Another gap in the operation of the regulations relates to the treatment of reserve allocations where a pension recipient has died as the cap-free pathway available to living pension holders becomes invalid in this circumstance. “The amended regulations don’t address this issue, but there was a genuine intent during the consultation that these reserve allocations would follow the same path as a death benefit pension,” Crump acknowledges. “The only way to access them previously was to direct them to another member via a modest drip-feed method using the fair and reasonable approach.” Mansell recognises exiting a legacy pension
will not be mandatory and the treatment of reserves for a deceased member is not a dead end, but should become part of any consideration around moving out of these closed-end products. “The SMSF sector requested some action on this point and I am unsure what became of that, but what we have gives us a choice – to hold on and drip feed the reserve out or exit the pension, use the contribution caps and pay the tax,” she says. Look before you leap While pension commutations have been given the green light, SMSF practitioners and members should not rush into taking action, according to Steed, who sees what happens outside of the pension as being of critical importance. “The calculation of the transfer balance account debit and the treatment of an excess commutation will be critical because one of the things I often see is many advisers who have a client with a legacy pension have inherited that client and don’t understand how these calculations will work,” she reveals. “There is nothing intuitive in the calculation of the transfer balance account debit, so they should consider partnering with an SMSF legacy pension specialist because it is essential they understand how the calculation works and what the available balance will be, if any, to start a new account-based pension.” The lack of widespread knowledge about the operation of legacy pensions and the amount of time involved in the commutation process, including extinguishing related reserves, have likely been factors in the final amnesty period being set at five years rather than two. “There is much to consider, including whether someone should retain their legacy
pension or if they do exit, where the money should go,” Hallinan indicates, adding issues related to death benefits, estate planning and tax inside an SMSF will need to be considered as well. “The obligations for financial advisers will be onerous and they will need to understand all the issues as a legacy pension exit will not be an execution-only approach.” Aware of the need for guidance, Bussoletti reveals plans are already in place to assist practitioners who may start to see old pensions resurface, particularly as they can now offer practical help to clients seeking a way out. “We have already flagged education in this area as an opportunity for the SMSF sector. It was a specialist area and many practitioners are still well versed in them and we expect to draw on their collective experience,” he states. “It will also be a challenge because of the historical nature of these pensions and the advisers who started them have in some cases moved on and those now dealing with them have never done so before.” A small chance of failure As the SMSF sector continues to assess the implications of the most important changes to legacy pensions in nearly 20 years, it is also keeping an eye on both the calendar and Canberra. One of the surprising factors about the changes is how little fanfare accompanied them, with the government giving no indication it was moving in that direction. To this point, the first indication Capital Hill had progressed beyond the consultation phase was when the measure appeared on the federal register of legislation. Since the amendments are to existing Continued on next page
We have been advocating for this type of amnesty for years as there has been a long-term need to address these pensions, so it is very welcome. It is also more favourable than what was expected, given the last time we saw any proposal it was for a two-year window where taxes would still apply. – Fabian Bussoletti, SMSF Association
14 selfmanagedsuper
FEATURE
Continued from previous page
superannuation regulations, they were presented for approval using a legislative instrument, rather than having to run the gauntlet through both houses of parliament in the same way the Division 296 bill is currently doing. However, this does not mean their future is guaranteed and regulations enacted in this way still have to be tabled in parliament within six sitting days of gaining approval, with another period of 15 sitting days beginning after that
during which a motion to disallow them may be moved. As such, the earliest date this process can be completed is 14 April 2025 in the House of Representative and 13 May 2025 in the Senate. However, it cannot be derailed by the calling of an election early next year as that event would only pause the disallowance period until the new parliament reconvenes. More importantly, the regulations have been law since 7 December and legacy pension holders can act accordingly, even if they become disallowed at a future date.
Steed, however, sees moves like this as being highly unlikely. “These are not contentious changes and it was the current opposition that first proposed them when they were in government, and they would be even more hard-pressed then to oppose them if they win the next election,” she explains. So if the timetable plays out unencumbered, the long wait for nearly 17,000 legacy pension holders may finally be over and they can use their ‘free pass’.
The calculation of the transfer balance account debit and the treatment of an excess commutation will be critical because one of the things I often see is many advisers who have a client with a legacy pension have inherited that client and don’t understand how these calculations will work. – Julie Steed, Insignia Financial Group
What’s been approved The legacy pension reforms, which took effect from 7 December and contained within Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024, deal with the commutation of lifetime pensions, life-expectancy pensions and market-linked pensions that were issued before 20 September 2007, the reserves supporting those pensions and other unrelated reserves. While the regulations have two parts, dealing with pension commutations and reserve allocations, they are linked as the latter addresses how any amounts that once supported a commuted legacy pension can be allocated to the income stream recipient and be redeployed in a number of ways. It is important to note while the changes offer release for income streams that have
been locked in for many years, certain rules will apply. The first of these is a five-year window has now opened to allow legacy pensions to be fully commuted and either cashed out as a lump sum, rolled back into an accumulation account or, depending on transfer balance cap space, used to commence a new account-based pension. It is significant the commutation will give rise to a transfer balance debit, which needs to be calculated using a complex formula. The transfer balance debit is likely to be noticeably less than the asset supporting the pension and, if cashed out, the payment will be tax-free where the recipient is over 60. If the commutation is rolled back into an accumulation interest, it will be treated as an internal rollover rather than a contribution, and if used to commence a new pension, the resultant transfer balance credit will be offset by the debit materialising from the commutation. Reserve allocations will not have a
five-year window applied to them. Instead, allocations to a member’s account can be made where a legacy pension ceased before the start of the five-year commutation window, during that period or after it ends. Another point of difference is the pension reserve reforms will apply to lifetime, life-expectancy and flexi-pensions, but not market-linked pensions issued before 2007 as these structures have no supporting reserves. There will also be different treatment of reserve allocations depending on the recipient, with amounts directed to the pension recipient not counting toward the individual’s contributions caps. Allocations to another member will receive the same treatment as long as they do not exceed 5 per cent of the member’s account balance, known as the ‘fair and reasonable’ approach in the Superannuation Industry (Supervision) Regulations. If the limit is breached though, the entire allocation will be treated as a nonconcessional contribution.
QUARTER IV 2024 15
FEATURE
Capacity issues are becoming an increasing concern in SMSF estate planning, raising questions about how disputes will be handled as the sector evolves. Todd Wills explores the growing impact of mental capacity challenges, recent legal precedents and what it means for the future of superannuation planning.
16 selfmanagedsuper
FEATURE MENTAL CAPACITY According to the latest ATO data, more than one-third (38 per cent) of members in Australia’s $1 trillion SMSF sector are aged 65 or older. While death is often a challenging topic to discuss, the reality is many of those members may pass away without completely drawing down on their superannuation savings. The financial implications are likely to be significant. A cursory glance at the Treasury-led “Retirement Income Review” reveals the total value of superannuation death benefits was estimated at about $17 billion in 2019, with an average benefit of $190,000 per member. However, by 2059, this figure is projected to rise to around $130 billion, with average death benefits exceeding $480,000 per member. Superannuation interests cannot typically be included in a will as they are held in trust. As a result, many individuals use death benefit nominations to specify beneficiaries directly. While this mechanism aims to simplify estate planning and ensure super assets are distributed according to the member’s wishes, it is certainly not without its flaws. Without a death benefit nomination, the decision on how to distribute these assets falls to the superannuation fund’s trustee, which can lead to disputes among potential beneficiaries. Even when a death benefit nomination is in place, ambiguities or legal challenges can arise and are currently increasing in number. As the SMSF sector matures and super balances grow, the stakes are higher than ever before. The next frontier At this year’s SMSF Association Technical Summit held in Sydney, Cooper Grace
Ward partner Scott Hay-Bartlem spoke of a new threat that has emerged in these disputes. “In terms of death benefit disputes, we’re seeing a number of these transactions now being things that we fight about. Even when you’re doing things right, there can be flow-on effects,” he explained. “We often ask does your binding death benefit nomination (BDBN) stipulate dependants and do you comply with the deed? But we have to take a step back. The disputes are getting more sophisticated and complicated and we’re now looking at questions like capacity. It is coming up more and more: did the person signing the BDBN have capacity?” It’s understandable to question why disputes over mental capacity are becoming central in superannuation cases. While several factors may be contributing to this trend, Sladen Legal principal Phil Broderick views it as a natural step in the ongoing development of estate planning challenges. “If you look at the history of death benefit-type challenges, they do follow a bit of a pattern. You had the earlier cases which were more about the control of the funds and then it evolved into BDBNtype challenges, and in more recent years you’ve had challenges on the basis of conflict. It seems like potentially capacity may be the next phase of where people are challenging these things,” Broderick notes. “It could be argued every time there are these initial phases, practitioners might start to tighten things up a bit. So with those original trustee-type decisions, people started to nail down their trustee roles and after the BDBN cases, they
started to get this area in order. It’s an interesting evolution and capacity could be next.” A view shared between Broderick and DBA Lawyers special counsel Bryce Figot is that BDBNs simply haven’t been around long enough to face rigorous scrutiny over capacity issues in the courtroom. “With wills, there’s a case from the 1800s, Banks v Goodfellow, and that’s sort of the seminal test which to this day is still referred to. People have been making wills and dying for centuries, but of course SMSFs and BDBNs are such new creations. We don’t have nearly as much jurisprudence on those things,” Figot says. Some of the issues surrounding death benefit nominations and the capacity of members to make such directions came to the forefront earlier this year in a significant legal case, van Camp v Bellahealth Pty Ltd [2024] (the Nespolon case), heard by the New South Wales Supreme Court (see breakout box). Timing is everything The complexity deepens when we consider how the concept of capacity is interpreted by the courts. In the Nespolon case, one of the central arguments focused on issues of timing regarding the relevant person’s capacity and specifically how opioid medication may have affected decision-making abilities. The issue of when an individual is considered to be compos mentis is rarely simple. “It’s possible to lose capacity and regain it. And people who enter comas lose capacity and they might exit the coma and regain capacity. There’s also more problematic instances, especially Continued on next page
“The disputes are getting more sophisticated and complicated and we’re now looking at questions like capacity. It is coming up more and more: did the person signing the BDBN have capacity?” – Scott Hay-Bartlem, Cooper Grace Ward
QUARTER IV 2024 17
FEATURE MENTAL CAPACITY Continued from previous page
if people age. They might be lucid in the mornings but have questionable capacity in the evenings. Capacity is not necessarily a black-and-white switch,” Figot acknowledges. Echoing this perspective, View Legal director Matthew Burgess shares an example from his own practice to illustrate the challenges of determining capacity, noting disputes can often arise long before they reach the courtroom. “It’s such a nuanced area and generally it’s very, very subjective. By definition, the involved party is not unlikely to be selfaware they’ve got a problem. It’s not like they’re in a coma and can’t speak. It’s so much more nuanced than that and it just makes it extraordinarily difficult,” Burgess reveals. “In this situation, you’ve got an adult child who’s in their 50s, trying to negotiate with a parent who’s in their early 80s who still considers themselves completely in control of everything. And you sort of have to say, ‘well maybe now is the time for you to relinquish control of your SMSF’.” Cases like the ones Burgess and Figot highlight are far from rare and such examples may be cited as evidence in heated disputes. This underscores the need for advisers to encourage early and thorough planning, especially when there are concerns about a potential decline in capacity. “Capacity can vary hour by hour, it can vary day by day. I’ve had clients who come in one day, clearly understand what’s going on, but come in a week later and have no real idea. The timing around capacity is crucial because it’s not just about general capacity, but whether the
person had the capacity at the specific point when they signed the document,” Hay-Bartlem explains. “There are two times to test for capacity. One is when the client is telling you what they want and the second time is then when the documents are signed and you need to have capacity at both times. “The Nespolon case is really interesting because he told his accountant and lawyer he wanted the binding death benefit nomination to go to his de facto a few days before it was actually signed and then he died later on the day it was signed. So we had a clear pattern of what he wanted over a couple of days and capacity reached those trigger points.” Words from the wise The question of whether an individual has the mental capacity to sign documents like a BDBN is expected to feature prominently in future disputes over superannuation death benefits, much like it has long been a focal point in will disputes. However, as these cases increase, the nature of the disputes is also likely to change with the industry adapting to address the challenges faced by both members and advisers. As Broderick suggests, professionals in the field may begin refining their processes to improve the likelihood of securing a favourable outcome. “What you’ll find practitioners have long done for wills, and no doubt do for BDBNs as well, is getting someone assessed for their medical capacity on the day they sign the documents. That’s what you often see in practices, getting a medical professional to assess them on that day and then sign the document on that day,” Broderick predicts.
As awareness of potential issues in this area grows, maintaining thorough records and a clear paper trail of evidence and discussions about an individual’s capacity will become increasingly crucial. “The real concern is asking are we doing enough in the industry to be testing capacity with our clients. Most people in the SMSF industry have got the base-level ability to ask the right kinds of questions,” Hay-Bartlem recognises. “What we need to do is make sure we’ve got evidence of what we’ve asked. If you have a discussion, but you can’t remember it because it’s five years later, and you’ve got no notes of what you talked about, that’s going to be the problem. “There’s not always a really good chain of evidence about the discussions we’ve had and what evidence we’ve got of capacity. Whoever had the discussion needs to have good notes and we need to make sure we can understand them, read them, interpret them and they’ve covered off the sorts of questions we need to be able to prove the person had capacity.” However, mental acuity issues must be considered within the sphere of wider estate planning issues, rather than in isolation. “It’s very important to have an enduring power of attorney in place. If you don’t have an enduring power of attorney and you lose capacity, the fund is probably going to fail to be an SMSF within six months,” Figot says. “Basically anyone in the SMSF could lose capacity, therefore, anyone in the fund should not just think about a binding death benefit nomination and the will, but also the enduring power of attorney.” Continued on next page
“It’s very important to have an enduring power of attorney in place. If you don’t have an enduring power of attorney and you lose capacity, the fund is probably going to fail to be an SMSF within six months.” – Bryce Figot, DBA Lawyers
18 selfmanagedsuper
FEATURE Continued from previous page
Burgess agrees with Figot and suggests strategies to reduce the risk of disputes over capacity can be more broadly integrated into the overall estate planning process. “Everyone understands they need an estate plan, but most people, even a lot of really good advisers, just assume that means getting a will done. That to us reinforces you’ve got to adopt a holistic
approach,” he suggests. “For example, what does the enduring power of attorney say? That might mean buying into this idea of a hygiene check every 12 months, which could well involve assessment of capacity and certainly could involve having documentation triggered, for example, by a medical assessment.” The Nespolon case represents an early yet significant milestone in testing capacity issues linked to BDBNs, but it is unlikely to be the last. Capacity is set
to remain one of the more challenging aspects of estate planning for SMSF trustees and we can expect it to play a central role in future disputes, potentially as a decisive factor. How the courts handle this crucial issue going forward will be critical given the high stakes involved. Whether capacity becomes the Achilles heel of SMSF estate planning remains uncertain, but it is likely to be a key focus for the foreseeable future.
“Everyone understands they need an estate plan, but most people, even a lot of really good advisers, just assume that means getting a will done. That to us reinforces you’ve got to adopt a holistic approach.” – Matthew Burgess, View Legal
Van Camp v Bellahealth Pty Ltd [2024] NSWSC 7 Dr Harry Nespolon, a prominent Sydney-based medical practitioner and president of the Royal Australian College of General Practitioners, passed away in 2020 following a nine-month battle with pancreatic cancer. On the day he died, he executed a BDBN, directing his superannuation benefits, held mainly in an SMSF of which he served as the sole director, be paid to his partner, Lindy van Camp, rather than his estate. The executors of his will contested the validity of the BDBN, arguing Nespolon lacked the mental capacity to make such a decision given the substantial doses of opioids administered to manage his severe pain. In court, the judge meticulously assessed evidence regarding Nespolon’s mental state, including medical records, expert testimony and statements from those close to him. Despite acknowledging the gravity of his illness and the impact of his
medication, the judge determined Nespolon retained sufficient mental clarity to understand the BDBN’s implications. Notably it was considered he had a long history of independently managing his financial and legal affairs and had sought legal counsel shortly before executing the BDBN, demonstrating a clear grasp of its purpose and effect. The executors further claimed van Camp had unduly influenced Nespolon, potentially exploiting his weakened state. However, the court found no credible evidence to support these allegations. Instead, it was highlighted Nespolon took proactive steps, directly contacting his legal adviser without any apparent involvement from van Camp, reinforcing the notion of his independent decision-making. Ultimately, the judge upheld the validity of the BDBN, ruling it reflected Nespolon’s true intentions and was free of coercion or undue influence. The decision required the executors to pay the superannuation benefits directly to van Camp in accordance
with the deceased person’s wishes and reinforcing his strategic estate planning aimed at providing tax-effective benefits to his dependants. The case may set a precedent that is likely to be referenced in future cases involving similar disputes. “There had been nothing which told us definitively what the test for capacity for a BDBN is. The case was particularly important because there’s always been a question about whether a BDBN is a testamentary document like a will, meaning the same capacity test would apply,” Cooper Grace Ward partner Scott Hay-Bartlem explains. “The cases are now saying a BDBN is not a testamentary document. The Nespolon case does go through the test for capacity regarding this type of arrangement. “The court took quite a sensible approach, which is it’s the ability to understand the effect and the nature of the particular document you are signing. In that particular case, capacity is very situational and very circumstance dependent.”
QUARTER IV 2024 19
INVESTING
Investing in a Panglossian world
There are many implications for investment markets as a result of the incoming Trump administration in the US. Stephen Miller lays out the possible scenarios and warns against unbridled optimism.
STEPHEN MILLER is investment strategist at GSFM Funds Management.
20 selfmanagedsuper
For much of 2024 the dominant narrative attaching to global investment markets has been a benign one: a resilient economy in which inflation declines to an extent that central banks can make significant cuts to policy rates. That this is an ‘immaculate disinflation’ scenario – in which bond yields fall and equity markets are pushed along by powerful tailwinds associated with central bank easing and falling bond yields and continuing economic growth – has important implications for SMSF investment portfolio construction. With the ascension of Donald Trump to the United States presidency, a benign view of investment markets is still the dominant theme, albeit tinged with some nascent inflation fears and the prospect of higher-forlonger US bond yields. It is the prospect of those higher-for-longer US bond yields that has me worrying whether there is an element of Dr Pangloss in these optimistic market projections.
Pangloss, of course, is the epitome of an incurable but misguided optimist made famous in Voltaire’s satirical novel, Candide. SMSF investors and trustees would be correct to be worried as well. Bond yields have already spiked higher in the wake of Trump’s election victory and the US dollar has surged. Despite higher bond yields, equity markets have rallied on the expectation of corporate tax relief under a Trump administration and/or on the absence of any increased corporate taxes that may have been instituted under a Harris administration. The rise in bond yields reflects three factors: • the already gargantuan US budget deficit (close to 7 per cent of gross domestic product (GDP) at a time when the US economy is close to full capacity), Continued on next page
There is another element that necessarily attaches to any commentary on the Trump ascension and that is the mercurial one. There are often large differences between what a President Trump says he’ll do and what he ends up doing. Continued from previous page
• the prospect of a reacceleration of still relatively ‘sticky’ inflation under a Trump administration, and • a possible curtailment of the US Federal Reserve’s independence by making the policy rate a more political device. (This will inevitably result in higher inflation, expectations thereof, and as a consequence higher medium and long-term bond yields.) Tax cuts and bond issuance Given the prospect of large US corporate tax cuts, it now seems certain bond investors will be asked to swallow a gargantuan amount of bond issuance needed to fund a budget deficit of such an extraordinary magnitude. In so doing, the fixed income market will likely develop episodic and potentially severe bouts of indigestion that have the potential to send yields higher. Worries about the deficit and future higher fixed income yields will undermine the attractiveness of US bonds as a safe-haven investment.
More broadly, the large US deficit may chip away at the exorbitant privilege the US$ has enjoyed as the world’s reserve currency, particularly if it occurs against a background of a less independent, and more political, Federal Reserve. Bloomberg recently reported that two of the largest foreign holders of US government bonds, Japan and China, were net sellers of these instruments in the September quarter. With rising Japanese yields likely as the country’s monetary policy returns to more normalised settings, it is difficult to see Japanese investors returning quickly to US bonds. And the prospect of heightened geopolitical and trade tensions with China is not likely to make it an enthusiastic investor in US bonds either. This is occurring at a time when inflation, at least in the US, is proving to be ‘sticky’. This inflation characteristic is likely to be exacerbated by the policy agenda of President Trump 2.0. Trade tariffs a concern for markets Certainly a Trump 2.0 administration has indicated it will embark on a high-grade weaponisation of trade that will fuel inflation via aggressive tariffs. That will inevitably result in an inflation spike and one in bond yields as well. This comes at a time when structural elements are re-enforcing the current ‘sticky’ nature of inflation. The globalisation of labour supply, after the fall of the Berlin Wall and the export of labour from large emerging market economies such as China and India, is abating, globalisation of goods markets is in retreat as governments everywhere introduce protectionist measures under the guise of industrial policy and national champions, domestic regulation of goods and labour markets is increasing in scope leading to upward price pressures, and baby boomer workforce participation is declining, limiting labour supply and lifting wages. Inflation developments aside, the ‘neutral’ interest rate appears to have risen from the
abnormally low levels that applied postfinancial crisis through to the end of the pandemic. Certainly the resilience of activity and the labour market during the recent Federal Reserve tightening cycle is suggestive of the notion the ‘natural’ real growth rate has increased from that in the preceding 15 years or so and, accordingly, the ‘neutral’ real interest rate should also have increased. Interest rate levers Some observers point to other emergent secular trends, apart from the US budget deficit, that might have pushed, and continue to push, the ‘neutral’ real interest rate upwards: investment demands on the savings pool from clean energy investments (perhaps lessening under a Trump administration) and boomer retirees de-accumulating savings. The diminution, perhaps permanent, in the attraction of US bonds as a safe haven and a curtailment of the Federal Reserve’s independence are why I’m yet to be convinced higher US bond yields will see further appreciation of the US$. More importantly for SMSFs looking to share investments, higher bond yields call into question the durability of the rally in US equity markets, particularly at a time when stock valuations look somewhat stretched. In this context, US 10-year bond yields might at best remain stuck around current levels. A little surprisingly, in my view, gold prices have declined sharply, while its latter-day cousin, cryptocurrency, has surged. Of course gold is generally challenged by rising bond yields, as are equities, and also by an appreciating US$. Cryptocurrency surged on the prospect of lighter regulatory oversight. The gold standard I had thought, and still do, that it would take substantially higher yields to derail gold’s appreciation and I remain sceptical of the Continued on next page
QUARTER IV 2024 21
INVESTING
Continued from previous page
durability of the US$ rally over the medium term, despite higher bond yields. Such fears had driven the gold price to record highs prior to Trump’s election, even as bond yields rose. I think this dynamic remains in play over the medium term and, for that reason, gold will still act as a good diversifier in a multi-asset portfolio. My best guess is cryptocurrency will continue to do well, but confess I find the dynamics behind the pricing of these assets a little opaque. Of course, rising US bond yields, and the attendant potential headwinds to equity market performance, will make it harder for domestic bonds and equities. Moreover, domestic equities are unlikely to benefit from tax cut tailwinds. However, I struggle with the notion that Trump’s tariffs will have any meaningful effect on Australian inflation and by extension the Reserve Bank of Australia (RBA) policy rate. If that is the case, Australian bonds may do better and provide superior diversifying qualities than US bonds. Trump’s policies are inflationary for the US, but they will have a barely perceptible impact on inflation in Australia. That is the case even if China and others retaliate. The more important impact is on Australian economic activity, which would unambiguously suffer and that would be disinflationary. The Australian impact US tariffs on imports from China, Mexico or the European Union will not change the price of goods we import from those nations and nor will they alter in any significant way the price of goods the US exports to Australia (domestic import prices), except in those instances where tariffs attach to goods that are inputs into the production of US exports to Australia. It will of course have an impact on US inflation. Similarly, were China and others to retaliate,
22 selfmanagedsuper
it would not change the price of goods we import from the US or the price of exports from those countries to Australia, again with a caveat attaching to tariffs applied to goods that are inputs into the production of exports bound for Australia. The only way there will be a significant price impact in Australia is if we shoot ourselves in the foot by engaging in retaliatory tariffs. I think RBA governor Michelle Bullock was correct when she discounted the impact of tariffs on the stance of monetary policy in Australia. I acknowledge there may be some effect via the exchange rate, that is, a lower Australian dollar leading to modestly higher import prices, but: • as mentioned, I’m yet to be convinced the US$ appreciates significantly, and • more importantly, rather than inflation being the more significant effect locally (and globally as well), it will be on activity growth and employment and these effects will be disinflationary. If in fact the bigger impact is disinflationary, then other things being equal, I argue for lower policy rates sooner in Australia. Global trade wars are internecine by nature. Global growth will suffer in a global trade war and, given our leverage to the freer international trade, the Australian economy will suffer a hit to growth (bigger than most) and an attendant disinflationary impetus. Mercurial considerations Of course, there is another element that necessarily attaches to any commentary on the Trump ascension and that is the mercurial one. There are often large differences between what a President Trump says he’ll do and what he ends up doing. Will he be full out aggressive on tariffs? Will he meaningfully curtail the Federal Reserve’s independence? Will Elon Musk pull off large expenditure dividends through his government efficiency drive, leading to a
Global trade wars are internecine by nature. Global growth will suffer in a global trade war and, given our leverage to the freer international trade, the Australian economy will suffer a hit to growth (bigger than most) and an attendant disinflationary impetus. calming of budget deficit fears? The sheer unpredictability is a daunting challenge for investors. The forgoing underscores perhaps the most important and overarching principle of investing – diversification. This may also mean greater diversification than that provided by the often favoured SMSF 60/40 equity/bond portfolio. While equities and bonds remain the core foundation of portfolios, it is important to put a case forward for such exposures that are uncorrelated with both equity and bond returns. That means perhaps thinking about something like a 50/25/25 equity/bond/ uncorrelated exposures portfolio. Such exposures may include long/short liquid alternatives, macro/quant hedge funds, gold or maybe even, for the adventurous, very small cryptocurrency exposures. But the key takeout given the current environment is that investors need to be wary of their ‘inner-Pangloss’.
INVESTING
The infrastructure future looks bright
Several global trends indicate there will be plenty of strong infrastructure investment opportunities in the short, medium and long term. Sarah Shaw examines the factors supplying tailwinds for this asset class.
SARAH SHAW is chief investment officer at 4D Infrastructure.
24 selfmanagedsuper
As we head into 2025, markets are likely to remain volatile, with uncertainty following elections clouding the outlook in many major economies and none more topical than the re-election of Donald Trump in the United States. Trump’s main policy agenda on the campaign trail was tariffs, taxes, immigration and clean energy. Although it remains unclear how these policies will translate into reality, at the headline level they are likely to be good for domestic US manufacturing, positive for risk on markets (especially with proposals to cut corporate taxes from 21 per cent to 15 per cent), inflationary (with the higher tariffs) and lead to higher government debt. Externally there will also be winners and losers as trade routes are redefined, countries are targeted and growth is impacted. As investors in infrastructure assets, we remain conscious of a volatile economic environment as well
as the 2024/25 political overhangs, but we are in the fortunate position of being able to position for the cyclicals while still capitalising on the structural growth thematics that will drive infrastructure valuations into the future. Indeed, infrastructure offers a unique combination of defensive characteristics and earnings resilience, but with significant long-term growth, as well as an ability to capture economic cycles. These long-term growth thematics are significant, long-dated, intertwined and absolutely necessary, thus providing multi-decade tailwinds within the infrastructure space immune to short-term economic events. They are: • developed market replacement spend – our infrastructure is old and inefficient, and a failure to Continued on next page
Infrastructure offers a unique combination of defensive characteristics and earnings resilience, but with significant long-term growth, as well as an ability to capture economic cycles.
Chart A 935 729 569 444 347 80
102 130
2022
2023
2024
166 2025
212 2026
271
2027
2028
2029
2030
2031
Hyperscale data centers offer a single, broadly scalable computational architecture to serve a technology’s digital and cloud infrastructure
2032
Source: Whiteshield and Khazna
Continued from previous page
upgrade it could have significant social and economic consequences (including health, safety and efficiency), • global population growth, but with changing demographics – the west is getting older, but much of the east younger. Both dynamics require increased infrastructure investment, • the emergence of the middle class in developing economies, which offers a huge opportunity with infrastructure both as a driver and a first beneficiary of improved living standards, • the energy transition that is currently underway – while the speed of ultimate decarbonisation remains unclear, there appears to be a real opportunity for multidecade investment in infrastructure as most countries move towards a cleaner environment, and • the rise of technology and all the associated nuances of its use and impacts on infrastructure needs. A very recent example of the importance of these intertwined thematics is the Baltimore bridge accident earlier this year. The bridge collapsed as it was old and past its useful life. The ship hit the bridge as it was under automation and lost power for a very brief
period. This one event highlights the need for replacement spend, as well as the need for security of energy supply if technology is expected to grow. The rise of technology Perhaps the most topical of these five themes over 2024 has been the rise of technology due to the rapid advances in artificial intelligence (AI) and large language models like ChatGPT. Mobile connectivity has long been an important essential service for daily life and economic growth. By the end of 2023, over 5.5 billion people globally subscribed to a mobile service, with mobile technologies and services generating roughly 5 per cent of gross domestic product, creating over US$5 trillion of economic value. More recently AI has excited investors with its potential application across virtually every industry. The rise of AI has further increased the demand for the infrastructure to support it, such as new generation processing technology, communication towers and dedicated data centres. And what has only recently been recognised by investors is that GenAI has resulted in a seismic shift in the outlook for the electricity industry. A ChatGPT search requires 10 times the power of a Google search. About 20 per cent of global data centre
capacity is already dedicated to AI, according to analysis by Synergy Research Group, and this is only set to grow exponentially. AI adoption will necessitate more hyperscale data centres, which are usually much bigger in terms of capacity and are designed to meet the specific technical and operational requirements of companies such as Amazon, Meta, Google, Alibaba, IBM and Microsoft. The global hyperscale data centre market is estimated to reach around $935.3 billion by 2032, with a forecast compound annual growth rate of 27.9 per cent. Chart A indicates the forecast global revenues in billions of dollars from hyperscale data centre developments. This rapid growth in data centre development has also caused a step change in power load demand. Banco Bilbao Vizcaya Argentaria has forecast one hyperscaler’s data centre can use as much power as 80,000 households. This exponential growth in data centres will drive investment and growth for utilities and independent power providers (IPP) for years to come. We foresee the incremental load required by data centres globally is going to drive: • additional generation development opportunities, potentially at higher power Continued on next page
QUARTER IV 2024 25
INVESTING
It’s important to have global exposure to infrastructure to take advantage of all opportunities across Asia, Europe and North America, as well as emerging markets.
Chart B Northern Virginia data centre capacity versus select international cities
3442
1000
908
906 587
N Virginia
Singapore
Tokyo
London
Germany
577
Hong Kong
572
Australia
448
Amsterdam
Source: JLL data centres outlook 2023
Continued from previous page
prices, • network investment to facilitate interconnections, and • investment in network modernisation to support higher peak network load. The obvious beneficiaries are IPPs that will target data centre developers and hyperscalers to construct generation to fulfil their requirements, or contract existing supply available in merchant markets at higher prices than is currently available. Hyperscalers’ need for speed to market, and uninterrupted security of supply, means they have been willing to offer power purchase agreement prices in excess of what is available in current merchant markets. For example, Microsoft’s deal with Constellation Power for nuclear energy is being contracted at prices rumoured to be far above the futures price for 2026, possibly
26 selfmanagedsuper
reaching as high as $100 per kilowatt hour. Electric network utility companies are the other big beneficiary. They derive regulated or contracted earnings streams linked to the investment made into a network. An example of how to find stock-specific exposure to these thematics is Dominion Energy in the US. It is the incumbent utility that operates in Virginia. Included in its operating jurisdiction are large parts of Northern Virginia, which is home to the largest data centre capacity of any city in the world (see Chart B). Northern Virginia is poised for unprecedented load demand growth driven completely by anticipated data centre development. However, this not just a US phenomenon. Iberdrola is one of the largest and most advanced providers of clean energy globally and has been a global leader in facilitating the energy transition. The company is based in Spain, but has network investments across Europe, the US and Brazil, as well as
predominantly clean generation assets in broader locations across the world. Iberdrola has now incorporated data centres within its strategy and believes Spain could become a hub for data centre developers because of its strategic positioning in Europe, solid infrastructure and competitive energy prices. Another example of a global company we believe is well positioned to benefit from these trends in infrastructure is Malaysia’s largest electricity utility company, Tenaga Nasional Berhad (TNB). TNB is responsible for the transmission and distribution of electricity to customers across Peninsular Malaysia, Sabah and the Federal Territory of Labuan. TNB holds a 51 per cent market share of the country’s domestic electricity generation capacity. As the nation’s primary energy utility, TNB will play a pivotal role as Malaysia increasingly emerges as a hub for data centres. We also predict data centre developers’ and hyperscalers’ requirement for security of energy supply and speed to market are likely to require increased natural gas-fuelled generation and gas volume demand. Continued on next page
Continued from previous page
Despite the longer-term net-zero ambitions of developers and hyperscalers, the required transportation of increased volumes of natural gas is expected to provide opportunities for gas midstream companies. Natural gas demand has also largely benefited from coal-fired plant retirements over the past decade, offset to some extent by efficiency gains. Higher future gas prices should drive increased gas production globally. Gas midstream companies are preparing for these higher prices and production by investing in infrastructure to support increased volumes being delivered to generation facilities owned by IPPs and utilities. Growing data is also good for tower companies as it is expected to go hand in hand with 5G telecommunication data demand, primarily driven by data-intensive activities, such as video streaming, cloud gaming and augmented/virtual reality applications, and AI. Mobile data traffic is projected to quadruple by 2028 compared to 2022. 5G’s share of mobile data traffic is projected to rise to nearly 70 per cent in 2028, up from around 17 per cent in 2022. This strong data demand will likely support higher use of telecommunications towers by mobile network operators, such as AT&T, Verizon, Vodafone, Deutsche Telecom, Movil and T-mobile, to support densification of data coverage. Higher use per tower or tenancy provides earnings growth for tower companies with minimal, if any, incremental capital investment. We truly believe the technology revolution is a multi-decade investment opportunity for infrastructure investors – the need for communication towers and the facilitation of energy central to data centre development and the proliferation of AI are incredible global growth dynamics. The data centre opportunity for infrastructure investors is just one of the five themes we believe will play out over the
coming decades. Short-term noise will always disrupt listed markets, evidenced by the volatility experienced in equities globally following Trump’s victory. But these major plays in infrastructure will outlive even Trump. There is understandable concern around parts of the energy transition since the US election. Trump is looking to repeal some aspects of the Inflation Reduction Act, which may impact the growth outlook of US renewable developers and utilities. Also, his inflationary policies could prove to be a headwind for interest rates and utilities in general. However, these short-term impacts do not derail the thematic to 2050. And importantly, as network investment is regulated at a state level, his impact on the grid story is very muted. In our view, grids are the best way to gain exposure to the energy transition thematic globally. We would also note the energy transition is not dependent on the US. Emerging markets account for 85 per cent of the global population and they currently use one-third of the energy per capita of the developed world. As their middle class evolves this is clearly going to change. If we have any hope of reaching net zero, the absolute need for infrastructure investment in clean energy must
grow from the current $1.5 trillion a year to $3.5 trillion a year by 2030 and $4.5 trillion by 2046. While the developed world is important to this mix, emerging markets will account for 55 per cent of that 2030 spend and two-thirds of the 2046 spend (see Chart C). As such, Trump’s stall on clean energy policy does not derail global goals. Infrastructure is an essential asset class and it will always play a vital role in portfolio construction due to its unique characteristics, such as inflation offset, visible and resilient contracted or regulated earnings profiles, and exposure to numerous long-dated growth thematics. It’s important to have global exposure to infrastructure to take advantage of all opportunities across Asia, Europe and North America, as well as emerging markets. This allows investors to capitalise on in-country economic cycles and gain exposure to domestic demand stories. If economic trends diverge, investors can look for opportunities in regions that offer greater relative upside. In addition to geographical diversity, infrastructure provides economic diversity, which allows investors to actively position at a fundamental level for all points of the economic cycle – even in periods of inflation and rising interest rates, recession and stagflation.
Chart C: Annual investment in $US required to achieve IEA’s net-zero scenario 5
Total
4.5 4 3.5 3
Advanced economies Other emerging & developing
2.5
China
2 1.5 1 0.5 0
2022
2026-30
2046-50
2022
EE & end use
2026-30
2046-50
Low emissions power
2022 Grid & storage
2026-30
2046-50
2022
2026-30
2046-50
Low emissions fuels
Source: International Energy Agency (IEA) September 2023
QUARTER IV 2024 27
STRATEGY
Risk cover and death pensions
The account from which risk insurance premiums are paid for cover held within an SMSF can have significant implications upon the death of a member. Anthony Cullen examines the different scenarios.
ANTHONY CULLEN is senior SMSF educator at Accurium.
28 selfmanagedsuper
Superannuation Industry (Supervision) (SIS) Regulation 4.09 requires SMSF trustees to formulate, regularly review and give effect to an investment strategy that considers, among other things, whether they should hold a contract of insurance providing insurance cover for one or more members of the fund. This is not a requirement to hold insurance, but an obligation to consider and document the decision made. Such insurances may include life cover, as well as income protection (salary continuance) and
total and permanent disability policies. In this article I will concentrate on life insurance and its interaction with receiving a superannuation death benefit pension. It used to be the great Australian dream to own your own home and have the mortgage paid off and be close to, if not completely, debt free before retiring. Although this may still be the dream, many people are now faced with the Continued on next page
Continued from previous page
prospect of heading into retirement with significant debt. This predicament is likely to have a flow-on effect on people choosing to hold on to life insurance policies for longer. SMSFs often have members with multiple interests, such as an accumulation account, a transitionto-retirement income stream or even retirement-phase pensions, and a decision as to which interest the insurance policy will be attached will be necessary. When considering SIS Regulations 5.02, determining and allocating costs, and 5.03, determining and allocating investment earnings, it is commonly accepted any payouts from an insurance policy should be allocated to the interest from which the premiums were deducted. This was also the view of the ATO when it addressed questions relating to the allocation of insurance proceeds in the June 2012 National Tax Liaison Group meeting. So the question is to which interest the insurance policy should be attached and, more importantly, who should be making that decision? The second part of the question is relatively easy to answer – it should be the trustees or members making the decision. Whether that is in collaboration with and guidance from professionals is up to them. What we as professionals should be avoiding is making an arbitrary decision on behalf of our clients without explaining the
potential consequences associated with them. As to the first part of the question, if I may borrow a common catchphrase from the lawyers, “it depends”. In many discussions I have had over the years, the default position is generally, where there are multiple interests, the accumulation account is the one from which insurance premiums should be deducted. On further investigation this appears to be primarily driven by the notion that to be able to claim a deduction for the premium, it must come from an accumulation-phase interest as it will be non-deductible when deducted from a pension interest that generates exempt current pension income (ECPI). This is a myth and/or a misunderstanding of the rules associated with ECPI. With section 8-1 of the Income Tax Assessment Act 1997 (ITAA) limiting general, non-capital outgoings to being deductible against assessable income, it is accepted outgoings incurred in producing non-assessable income, including ECPI, will not be deductible. ATO Taxation Ruling (TR) 93/17 income tax deductions available to superannuation funds confirms this. Certain insurance premiums, including for life cover, are considered a ‘specific type of deduction’ (refer to ITAA section 12-5) and therefore are claimable under ITAA section 295-465. Deductions under this section are not subject to the same proportioning requirements. Consequently, whether the member’s
interest from which the insurance premium is deducted is in retirement phase or not does not affect the fund’s entitlement to claim a deduction in full without the need to apportion based on assessable and exempt income. However, where the deduction results in a current-year tax loss for the fund, any brought-forward losses will be reduced by the fund’s net ECPI. Now we have established that ECPI shouldn’t be a deciding factor as to the interest from which premiums should be deducted, let’s look at the different implications for each interest in receiving the proceeds from a life insurance payout. General considerations Before we get into specifics, below are a couple of points that will be relevant in all situations. As with the commencement of any pension, a death benefit pension should not be commenced before all the capital required to support the interest has been received. Further, SIS Regulation 1.06(1) (a)(ii) stipulates capital cannot be added to the interest once it has commenced. Paragraph 138 of TR 2010/1 superannuation contributions confirms the ATO’s view insurance proceeds received under the terms and conditions of an insurance policy are to be treated as income, profits or gains from the use of the fund’s existing capital and not as a super contribution. However, when Continued on next page
QUARTER IV 2024 29
STRATEGY
Where life insurance policies are held, the interest to which the policy is attached can impact how any proceeds may need to be dealt with. Continued from previous page
it comes to dealing with commencing death benefit pensions, there are other areas of tax law that will need to be considered. Not to suggest the amounts could be contributions, more so, there is a limitation on them being ‘investment earnings’. We’ll come back to this later. In relation to a pension, section 307125 o the ITAA requires the tax-free/ taxable components to be determined at the time a pension commences. Accumulation Where insurance proceeds are to be allocated to a member’s accumulation interest, as with any allocation of earnings, they will increase the taxable component of the interest. There are two options in relation to starting a death benefit pension. Firstly, to wait until the insurance proceeds have
30 selfmanagedsuper
been received so as to determine the full value and tax components. Alternatively, if the death benefit pension is commenced prior to the proceeds being received, they cannot be allocated to the income stream unless it is commuted first and a new pension will need to be started. This is because the action would be seen as adding benefits to the pension interest after it has commenced and would be in breach of regulations. As mentioned above, if the premiums are deducted from the accumulation interest, the proceeds must be allocated to that same interest. This does not extend to or include the death benefit pension commenced from the interest as this would be a new interest. Where insurance proceeds are used to commence a death benefit pension, a credit will be recorded in the recipient’s transfer balance account (TBA). Non-reversionary pension Although a non-reversionary pension technically ceases on the date of death of the member, refer to paragraph 29 of TR 2013/5, it should be maintained as a separate interest and dealt with as a death benefit accordingly. Changes to the definition of a superannuation income stream in the tax regulations, effective from the 2013 income year, ensure ECPI can continue to be claimed on the interest from the date of death until such time the death benefit has been dealt with, provided it is dealt with as soon as practicable as per Income Tax Assessment Regulation 307-70.02. In addition, the tax components of
the interest should be maintained and will determine the components for any new death benefit pension. This is on the proviso no amount, other than investment earnings, have been added to the interest after death. For the purposes of SIS Regulation 307-125.02, life insurance proceeds are considered investment earnings. However, adjustments need to be made to the tax components for the proceeds received. Effectively all of the insurance proceeds will be included in the taxable component. Further, allowing for such amounts to be included as investment earnings is specific to this regulation. Generally, in the context of death benefits, they would not be considered investment earnings nor contributions as previously mentioned. This was confirmed under previous Income Tax Assessment Regulation 995-1.01(5). Consequently, it is generally accepted the earnings generated from the insurance proceeds will not be eligible against which to claim ECPI. However, it would be expected in most instances the death benefit will be dealt with within a reasonable timeframe after receiving any insurance proceeds and any income generated from the proceeds is likely to be minimal. As with accumulation interests, the timing of commencing a death benefit pension will need to consider the receipt of any insurance proceeds as they cannot be added to a new death benefit income stream after it has commenced. Further, Continued on next page
Continued from previous page
insurance proceeds used to commence a death benefit pension will result in a credit to the recipient’s TBA. Case study Let’s wrap up with a short case study comparing the impact of life insurance proceeds being received by different interests. On the date of his death, Andrew had one superannuation interest worth $1 million (with 40 per cent of it or $400,000 being tax-free) and the fund held a life insurance policy in relation to him worth $1 million. His spouse, Bridget, has an account-based pension
(ABP) worth $2 million. Her personal TBC is $1.9 million as is the balance of her TBA. Assume the fund has no investment earnings after Andrew’s death. The impact for Bridget and the fund will be based on how Andrew’s benefits were held when he died as outlined in Table 1. As can be seen, where life insurance policies are held, the interest to which the policy is attached can impact how any proceeds may need to be dealt with. As with many things, tax and ECPI should not be the driving force behind decisions concerning which interest of a member’s insurance premiums and proceeds should be allocated.
Where insurance proceeds are to be allocated to a member’s accumulation interest, as with any allocation of earnings, they will increase the taxable component of the interest.
Table 1 Andrew: Accumulation
Andrew: Non-revisionary pension
Andrew: Reversionary pension
Total death benefits
$2 million • Tax-free: $400,000 • Taxable: $1.6 million
$2 million • Tax-free: $400,000 • Taxable: $1.6 million
$2 million • Tax-free: $800,000 • Taxable: $1.2 million
Amount counted towards Bridget’s personal TBC & when
$2 million, on date of commencement of death benefit pension
$2 million, on date of commencement of death benefit pension
$1 million, on the 12-month anniversary of Andrew’s death
ECPI of the fund
Based on Bridget’s ABP only
Continues based on both ABPs, with possible adjustment for income derived from the insurance proceeds
Continues based on both ABPs, with no adjustment required for income derived from the insurance proceeds
QUARTER IV 2024 31
COMPLIANCE
The essence of complete property compliance
There are many compliance aspects trustees must recognise when holding real estate in an SMSF. Shelly Banton draws attention to the critical concept of knowing how all of these elements interact.
SHELLEY BANTON is head of technical at ASF Audits.
Investing in property within SMSFs remains a popular strategy for building retirement wealth. Compliance in this area, however, requires a holistic approach to ensure funds operate within the legal framework administered by the ATO and the Australian Securities and Investments Commission. One of the problems is SMSF trustees investing in property do not appreciate how the Superannuation Industry (Supervision) (SIS) Act 1993 and SIS Regulations 1994 interact. Areas that can cause the most concern are the sole purpose test, the non-arm’s-length income (NALI) provisions, market value implications and property development. Sole purpose test The sole purpose test lies at the heart of a complying SMSF as outlined in section 62 of the SIS Act. It mandates an SMSF must be maintained solely to provide retirement benefits to its members or their dependants in the event of a member’s death. Until then, SMSF assets must not be misused for personal or business purposes unrelated to retirement benefits. Breaches of the sole purpose test can have severe
32 selfmanagedsuper
repercussions because the fund can risk losing its complying status and be subject to higher tax rates. Non-compliance may arise from various scenarios such as: 1. occupying residential property by a related party for personal purposes, 2. undertaking property development activities where transactions are not at arm’s length, and 3. leasing business real property at non-market rates if used by related parties. Where the trustees of an SMSF are involved in property development ventures in various capacities, they must demonstrate their decision-making is solely pursuing the retirement purpose of the SMSF and is not influenced by other goals or objectives concerning those business or other entities. NALI NALI is another critical area of compliance for SMSFs. The NALI provisions, detailed in section 295-550 of the Income Tax Assessment Act 1997 (ITAA), target income derived from arrangements not conducted on commercial terms. Continued on next page
Continued from previous page
The provisions act as a powerful deterrent against arrangements that could unfairly increase member entitlements. Where income is classified as NALI, it is taxed at the highest marginal rate instead of the concessional superannuation tax rate of 15 per cent. Identifying NALI involves examining transactions to ensure they are conducted on arm’s-length terms. For example, if an SMSF acquires an asset for less than its market value or receives income under non-commercial terms, such arrangements may be deemed non-arm’slength, triggering the NALI rules. Property development projects The NALI provisions are particularly relevant in the context of property development projects. In its SMSF Regulator’s Bulletin (SMSFRB) 2020/1 and Taxpayer Alert (TA) 2023/2, the ATO has flagged concerns about property development arrangements where income gets diverted to SMSFs through non-arm’slength dealings. For instance, SMSFs may hold direct or indirect interests in entities that invest in property development projects engaging in non-arm’s-length transactions, such as entering into loans with related parties at a 0 per cent interest rate, to maximise profits. The role of market value Market value is central in determining compliance with the sole purpose test and NALI rules. SIS Regulation 8.02B requires SMSF trustees to value all assets at market value when preparing financial statements every year. The ATO says a valuation will be fair and reasonable if it takes into account all the relevant factors and considerations that are likely to affect the value of an asset. Accordingly, not only should the valuation be undertaken in good faith, but it should also be a rational and reasoned process. SMSF trustees must be able to explain the valuation in terms of the methodology and evidence to an independent third party. It means trustees are obliged to document
what value has been adopted and how that value has been determined. It would be difficult to perceive a situation where a vendor would sell a property to an unrelated party based on an outdated market valuation. The test is whether a prudent person, acting with due regard to their own commercial interests, would have agreed to the terms. The NALI provisions are triggered when a property transfer or sale is made at less or more than market value because the parties are not dealing with each other at arm’s length. What the ATO wants The ATO will accept a trustee valuation if: • it does not conflict with its valuation guidelines or market valuation for tax purposes guide, • SMSF trustees do not use different valuations for different purposes, such as a low one for a capital gains tax event and a higher one for the financials, because the fund has in-house assets, and • it is based on objective and supportable data. The regulator also suggests SMSF trustees should consider an independent qualified formal valuation if the asset in question accounts for a significant portion of the fund’s total value, if the valuation could be complex or difficult, or a significant event has occurred. A significant event includes a natural disaster, market volatility, a macroeconomic event, such as a major hike in interest rates, or substantial changes to the character of a property because of renovation or repair. Most importantly, where the ATO disagrees with a valuation, it will apply the appropriate method to an amended value, which can affect NALI, transfer balance caps and total super balances. Penalties may apply as a result. Consistency and objectivity in market valuations are paramount to avoid disputes with the regulator. Market valuation options Property held within an SMSF does not require an annual independent market valuation. SMSF trustees, however, must undertake research and produce evidence in the form of supportable and objective data each year to
One of the problems is SMSF trustees investing in property do not appreciate how the Superannuation Industry (Supervision) (SIS) Act 1993 and SIS Regulations 1994 interact. show how they arrived at the property’s market value. For example, trustees could source the market value of the real estate through a property report, comparable sales or other evidence. The cost of property purchased during the audit year at arm’s length may be acceptable audit evidence, depending on when it was purchased. While the value could remain the same in the subsequent year, the trustees must be able to provide evidence and objectively demonstrate precisely how and why they have continued to rely on that valuation. Other valuation methodologies can include: • the value of similar properties with recent comparable sales results, • the amount that was paid for the property in an arm’s-length market – if the purchase was recent and no events have materially affected its value since then, • an independent appraisal from a real estate agent (kerbside), • whether the property has undergone improvements since it was last valued, • a rates notice (if consistent with other valuation evidence), and • for commercial properties, net income yields (not sufficient evidence on their own and only appropriate where tenants are unrelated). While not a requirement of the SIS Act, SIS Continued on next page
QUARTER IV 2024 33
COMPLIANCE
Continued from previous page
Regulations or the auditing standards, the ATO considers a valuation insufficient if it is based on only one item of evidence from the above list. Where a valuation states the methodology used, such as comparable sales, the evidence must be attached. Online valuations may be used for residential property only, with the data generated from an automated service as an estimated value. Under these circumstances, the sales history used in the valuation must include similar properties. The auditor will also check the valuation range is not too broad, otherwise the value could be meaningless. Market value impact on NALI The link between market value and NALI is critical. If an SMSF purchases an asset that is less than the market value, the difference is considered NALI in line with Law Companion Ruling 2021/2. For example, if a purchase contract stipulates the fund is the purchaser, but the SMSF physically pays less than the amount on this document, this discrepancy triggers the NALI provisions. The ATO has clarified such differences are not considered in-specie contributions, but rather as paying less than market value leading to NALI consequences. Property development considerations No specific prohibitions prevent an SMSF from investing directly or indirectly in property development. It can be a legitimate investment for funds if the property development activities in which it is invested comply with the superannuation legislation. The ATO, however, is concerned about the structure of certain schemes and arrangements that divert income into super, creating potential breaches of the sole purpose test and other SIS issues. NALI and non-arm’s-length expenditure issues may also arise. To this end, the regulator has provided guidance to SMSFs through its regulatory updates in SMSFRB 2020/1 and TA 2023/2, cautioning care needs to be taken by trustees.
34 selfmanagedsuper
Joint ventures The ATO has affirmed a joint venture (JV) agreement involving related parties is an inhouse asset under section 71 of the SIS Act and confirmed it again in SMSFRB 2009/4 and TA 2009/16. As a result, the SMSF must hold a proprietary interest in any real property being developed so the regulator is comfortable with the fund investment being in the property and not an investment in the related party. One of the leading indicators the investment may be an in-house asset is if the fund provides capital for the JV and has no other rights apart from receiving a return on the final investment. The ATO has flagged this will depend on the terms of the JV. Where outside influences affect the trustee’s decision, such as ceasing to pay a pension to make a cash injection into a struggling property development venture, a contravention of the sole purpose test may occur. The SMSF is not there to ensure the success of a property development JV in peril. Ungeared entities Investing in ungeared entities is another area where compliance with the requirements of SIS Regulation 13.22C is complex. Ensuring the ungeared entity does not borrow, all transactions are at arm’s length, any related-party acquisitions are at market value and the entity does not operate a business can result in the investment becoming an in-house asset. Moreover, the asset can never be returned to its former exempt status, even if the trustee fixes the issue(s) that caused the assets to cease meeting the relevant conditions. As such, it can be difficult for SMSFs to meet and maintain these conditions while undertaking property development investments. Special purpose vehicle The ATO has now set a higher bar for property development schemes by focusing on a ‘controlling mind’. It makes the decisions for one or more property development groups by selecting the project and establishing a special
Navigating the regulatory landscape of SMSFs requires a holistic approach to property compliance. Understanding the connections between NALI, the sole purpose test and market value, to name but a few, is crucial for a fund’s successful and compliant operation. purpose vehicle where the key parties are typically the fund members. A broader approach has been adopted by the regulator that is less prescriptive about specific arrangements and structures that could potentially fail SIS Act compliance with property development. The ATO has acknowledged non-arm’slength dealings by any party, with respect to any step in relation to a scheme, can give rise to NALI as defined in the ITAA. It gives the regulator a much wider net to cast, ensuring trustees cannot circumvent the rules and try to get more money into an SMSF. Conclusion Navigating the regulatory landscape of SMSFs requires a holistic approach to property compliance. Understanding the connections between NALI, the sole purpose test and market value, to name but a few, is crucial for a fund’s successful and compliant operation. Trustees must ensure their funds are maintained exclusively for retirement purposes and all transactions are conducted on arm’slength terms. Non-compliance with these requirements can lead to severe consequences, including significant tax penalties and potential disqualification.
Start the New Year right with Heffron’s accredited courses Control the pace of your learning by targeting one topic at a time. Our courses allow you to easily fit learning into your busy day.
Super Foundations
Super Extension
Super Specialist
Build competence in the basics when you’re new to superannuation and SMSFs.
Take your working knowledge to the next level, one in-depth topic at a time.
Enrich your technical knowledge when you’re wanting to specialise.
Level: Beginner
Level: Intermediate
Level: Advanced
Accredited CPD: 5.75 hrs
Accredited CPD: 6–7 x 1 hr modules over 7 topics.
Accredited CPD: 6–7 x 1 hr modules over 7 topics.
Learn one topic at a time.
Learn one topic at a time.
7 x 1 hr modules in one online course. Learn more
Learn more
Learn more
Fund Administration Our award winning service gives you everything you need to take full advantage of Australia’s superannuation system. www.heffron.com.au
Leverage the technical strength of the industry’s forward-thinking best. Learn more
Actuarial Certificates Get more than you’d expect with our actuarial and education bundles. Learn more
Education & Support Apply your learnings and deliver immediate value to your clients with our expert guidance. Learn more
STRATEGY
The forest for the trees
There are many potential factors that motivate members to take money out of their SMSF. Meg Heffron looks at some of the bigger picture items requiring consideration before any drawdown is made.
MEG HEFFRON is managing director of Heffron.
Often a decision has to be made to take a significant benefit payment from an SMSF. It could be motivated by circumstance, such as having to pay a death benefit, or could be entirely voluntary. In fact, it might even be brought about by concerns over the proposed Division 296 tax and a desire to ensure one’s total super balance is below the $3 million threshold trigger. Further drawdowns from SMSFs can be more challenging when lumpy or illiquid assets are involved. So are there strategies that can be undertaken either before, during or after the event to deliver the best possible result for trustees?
A pension or lump sum? Generally large withdrawals are paid firstly from accumulation interests and these will naturally be in the form of lump sums. But pension accounts are a different matter. When withdrawing monies from a pension account, the member has a choice – should they take it as a lump sum or commutation or just a very large income stream payment. One of the benefits of a partial commutation, of
36 selfmanagedsuper
course, is it means the member gets back some of the transfer balance cap they’ve used in the past. It’s tempting to think it doesn’t matter for someone who has already converted all their super to a pension, so they don’t need to worry about their transfer balance cap anymore and haven’t made contributions in years. But these days there are a few extra points to consider before ruling out a partial commutation. Future contributions The extension of contributions with no work test up to age 75 now means some people will make contributions late in life, long after they thought their contributing days were over. A common example we see in practice is those whose pension accounts don’t keep pace with increases in the general transfer balance cap. A pension that started at $1.6 million in 2020 may well have increased a little, let’s say to $1.7 million. But if that is the member’s only super and they are still under 75, there is scope for a large non-concessional contribution. Continued on next page
Continued from previous page
While it may be possible to make the contribution, it can only be converted to a second pension if the member still has some of their personal transfer balance cap remaining. Hopefully they have taken any large withdrawals in the past as partial commutations rather than just large pension payments. Remember, the general transfer balance cap is likely to be at least $2 million from 1 July 2025. And downsizer contributions can obviously happen very late in life as you can never be too old to make one. Again, it is one thing to make the contribution, but ideally the member would also be able to convert it to a pension. That’s when having some of their personal transfer balance cap available will be helpful. Inheritances from a spouse Super inherited from a spouse can only remain in super if it’s in pension phase. Again, that means having as much as possible of the personal transfer balance cap available is a bonus. It allows the survivor to leave as much as possible of the deceased member’s super in the fund. Even if this isn’t the long-term plan, it might buy time to wind down the SMSF’s assets over several years. Choice about how the benefit is paid Finally, partial commutations can be paid by transferring assets, whereas pension payments must be paid in cash. On the whole, our default position is for most clients to treat large payments as partial commutations if only to preserve some options.
Assets or cash? Only lump sum benefits, either payments from accumulation accounts or pension commutations, can be paid in specie and some interesting issues arise when they are. Don’t forget cash is needed for other reasons The SMSF trustee needs to withhold tax from
some benefits. This applies in very few cases these days, but a death benefit paid directly to a non-dependant beneficiary, such as an adult child, would be a good example. If tax is to be withheld, the trustee will need to hold on to enough cash to execute this. It’s perhaps one of the many benefits of paying a death benefit to the deceased’s estate, that is, the fund trustee has no obligation to withhold tax and so the gross value of the benefit can be transferred to the estate. The executor then worries about the tax. In fact, within the estate, tax can even be paid from other assets entirely unrelated to the super benefit. Remember also capital gains are taxable on any asset disposal. It doesn’t matter whether the SMSF sells assets to pay a cash benefit or transfers the assets in specie, tax will be paid regardless and the fund will need enough cash to make that payment. Rules about in-specie payments While there are many rules about the people and entities from whom an SMSF can buy assets, there are actually no similar restrictions when it comes to selling assets. The only rule that comes close is that assets classified as collectables must be independently professionally valued first. So it’s entirely possible to transfer any asset the SMSF owns as a benefit payment to the member or to a beneficiary or their estate in the case of death. In fact, SMSF members can even direct the trustee to transfer an asset directly to another person or entity in settlement of their benefit payment. Consider an SMSF that owns a property. The members have decided to withdraw a large benefit payment and have agreed with the trustee the property will represent an in-specie payment. With the right paperwork, the members could direct that the property is transferred directly to their family trust rather than themselves personally. Or it could be transferred to just one of them even though both might be taking benefit payments. The key is the paperwork. It is critical to specify the member, being eligible for a benefit payment, is instructing the trustee to
As the SMSF population ages and many members spooked by the Division 296 tax are looking to draw down on their balances, we are likely to see large benefit payments made from time to time. pay it to someone else. All the usual SMSF rules apply in terms of making sure the value used for the transaction is a genuine market value. Further evidence needs to be obtained to demonstrate this. The fact there may be no legal requirement to obtain an independent professional valuation doesn’t mean it isn’t a good idea to have one performed, particularly if the asset is large and doesn’t have an obvious market value. And if the asset is property, check in with your solicitor on what is required for stamp duty purposes.
Optimising tax exemptions When it comes to SMSFs entirely in pension phase, different choices often have a profound impact on exempt current pension income (ECPI). This is particularly true when paying a large benefit will also result in realising capital gains. But even if that’s not the case, it pays to understand the rules when materially changing the profile of the fund. A 65-year-old client who is the sole member of his SMSF recently proposed the following series of steps: • start a pension with $1.9 million, say from 1 December 2024, leaving around $5.1 million of his $7 million super balance in Continued on next page
QUARTER IV 2024 37
STRATEGY
Continued from previous page
accumulation phase, • fully commute the pension in the subsequent few months and pay the money out of super, and • start a new pension and repeat. His objective was to take a lot of money out of his fund quickly in order to ensure his balance was less than $3 million at 30 June 2025 in anticipation of not wanting to qualify for the Division 296 tax. Not only did this present some tax avoidance concerns, such as whether he ever actually intended to commence an income stream or was the action simply a scheme to get some ECPI, but it was unnecessarily complex because he didn’t understand the ECPI rules. A far simpler, more legitimate and in fact more effective strategy would be to: • start a pension with $1.9 million and leave this in place while simply withdrawing the minimum pension payment over the year, and • take a lump sum benefit payment, say $4 million, from his accumulation account immediately. The key feature of ECPI the client missed is that when it’s calculated using the actuarial certificate method, as it would have been in this case, the same tax-exempt percentage will apply to all of the fund’s investment income during the year, regardless of when it occurs and regardless of how it comes about, that is, to withdraw large amounts from a pension or accumulation account. This is one of the truly special benefits of an SMSF. Assuming the pension was in place from 1 December 2024 and the withdrawal was made at the same time, the actuarial percentage is likely to be around 24 per cent for 2024/25. This means 24 per cent of any capital gains will be exempt from tax even though the sales were made to free up cash for drawing benefits from an accumulation
38 selfmanagedsuper
account. In fact, the order of events doesn’t matter either. What if my client had already withdrawn large amounts from super in July, but didn’t decide to start a pension until now? Is it too late? No. Let’s imagine he starts a pension in December 2024. This time, the actuarial percentage would be around 27 per cent for 2024/25. Hence 27 per cent of any capital gains realised in order to pay $4 million out of super would still be tax exempt even though: • the cash was used to finance a benefit paid out of his accumulation account, and • the gains were realised at a time when the fund didn’t support any pensions at all. The key lies in understanding how the actuarial percentage is calculated. In this case, it is very roughly worked out as follows:
$1.9m x (7/121) $3m2
The pension would only be in place for seven months that year. 2 If the $4 million withdrawal is made at the start of the year, the fund would be around $3 million throughout the year. Of course, this is oversimplified and makes no allowance for investment earnings, pension payments and the like. But it provides a reasonable guide. Given this calculation, the same percentage applies to all investment income during the year no matter when the income is earned. It’s slightly better than our first example even though the pension started at the same time in both cases. That’s because the average fund balance is lower this time – $3 million all year rather than $7 million for the first five months. In fact, seeeing this client’s motivation was avoiding Division 296 tax, there’s another 1
When withdrawing monies from a pension account, the member has a choice – should they take it as a lump sum or commutation or just a very large income stream payment. variation he could consider, that is, leaving both the sale of assets and subsequent withdrawal until July 2025. If he did so, the actuarial percentage for 2024/25 would be much lower, around 16 per cent. But the percentage in 2025/26 would be around 63 per cent, reflecting the fact the $1.9 million pension would be in place for a full year rather than seven months and the fund balance would be around $3 million throughout. Not only would this mean much more of the capital gain would be exempt from tax, but his plans to avoid Division 296 tax wouldn’t be compromised as the critical date for his balance to be less than $3 million is 30 June 2026, not 30 June 2025. There are, of course, many other issues to weigh up here, but if the primary driver is to minimise capital gains tax, this is an option worth considering.
Conclusion As the SMSF population ages and many members spooked by the Division 296 tax are looking to draw down on their balances, we are likely to see large benefit payments made from time to time. It pays to think carefully about how to manage all aspects of the payment, such as managing ECPI, choosing whether or not to direct in-specie payments to other entities or people, thinking carefully about pension commutations and more.
Hear discussions as they happen
Meet world class product/service providers
smsfassociation.com/conference
Network with the experts
COMPLIANCE
A Division 293 conundrum
Inconsistencies between the provisions allowing individuals to carry forward unused concessional cap amounts and the application of the Division 293 tax rules were illustrated in a recent court ruling. Michael Hallinan analyses the case.
MICHAEL HALLINAN is superannuation special counsel at Super Central.
A recent court case highlighted the interaction between the carry forward of unused concessional contributions caps and the clawback of the tax concession for superannuation contributions in respect of high-income earners by the Division 293 provisions. The case was WTBW v Commissioner of Taxation [2024] AATA 3268 and clearly illustrated tax concessions can be granted, but can also be taken away. Factual background In respect of the 2022 financial year, the taxpayer was assessed as having income for Division 293 purposes of $272,100, including concessional
contributions of $82,482. Consequently, the individual was liable for Division 293 tax on their ‘taxable contribution amount’. This amount is that portion of the taxpayer’s Division 293 income that exceeds $250,000, assuming the taxable contribution amount is the top slice of the Division 293 income, which was $22,100 ($272,100 less $250,000). This resulted in a Division 293 tax liability of $3315, being 15 per cent of the $22,100 excess. The concessional contributions in question consisted of the individual’s standard yearly cap of $27,500 and an additional $54,982, being the Continued on next page
40 selfmanagedsuper
Continued from previous page
unused portion of their cap from previous financial years. The curious aspect of the case was for the taxpayer to be able to apply their unused concessional contributions caps to the 2022 financial year, they were required to have had a total superannuation balance as at 30 June 2021 of less than $500,000. However, their total super balance (ignoring investment earnings) would at the end of the 2022 income year have been less than $600,000. Division 293 was introduced to claw back a portion of the tax concession in respect of high-income earners’ concessional contributions. In this case, the taxpayer had only become a high-income earner for the 2022 financial year by reason of the application of their unused concessional contributions caps and could only use this carried-forward space by having, for highincome earners, a relatively modest total superannuation balance. Carry forward of unused concessional contributions caps Since the 2019 financial year, if a taxpayer’s concessional contributions amount, even a nil amount, for a financial year is less than the standard concessional contributions cap for that year, the unused portion of the cap can be carried forward to subsequent financial years. Consequently, the concessional contributions cap for the taxpayer for the following year will be the standard cap for that year increased by the unused cap for
the previous year. There are two significant limits to the carry forward of unused cap space. The first is unused cap amounts can only be applied in a financial year if the taxpayer’s concessional contributions for the financial year exceed the standard cap for that year. The second is that unused cap spaces must be applied in the order in which they arose and they cannot be carried forward for more than five income years. Division 293 tax Division 293 tax applies when a taxpayer’s income under this provision, for a financial year, exceeds $250,000. The tax is imposed on the individual. The individual may pay the assessed tax personally or may arrange to have it paid from their super fund. In broad terms, the Division 293 income of a taxpayer for a financial year is the aggregate of the following: • the taxable income of the taxpayer for that year (excluding assessable income arising from First Home Super Saver released amounts), • the reportable fringe benefits total for the taxpayer for that year, • the aggregate of all concessional contributions made by or for the taxpayer other than excess concessional contributions, and • the total net investment loss of the taxpayer for that year. The Division 293 tax is calculated as 15 per cent of that portion of the Division 293 income that exceeds $250,000, but the tax is capped at 15 per cent of the
Division 293 tax applies when a taxpayer’s income under this provision, for a financial year, exceeds $250,000. The tax is imposed on the individual. The individual may pay the assessed tax personally or may arrange to have it paid from their super fund.
concessional contributions for that year. Argument against the Division 293 tax assessment The taxpayer argued the carry-forward concessional contribution amounts only applied at their election and that no such election had been made. If this argument was accepted, then the individual’s income for the 2022 financial year for Division 293 purposes would fall under the $250,000 threshold. This argument was supported by the wording of text on the ATO’s website relating to the carry forward of unused concessional contributions caps and states the use of this provision is at the election of the taxpayer and not mandatory. Continued on next page
QUARTER IV 2024 41
COMPLIANCE
Continued from previous page
Additionally, the taxpayer argued this election interpretation was supported by the text of the guide to Division 291, the division of the Income Tax Assessment Act 1997 dealing with deductions for superannuation contributions, which states: “You (the taxpayer) can carry forward unused concessional contributions cap from the previous five financial years….” Tribunal’s decision The tribunal found the website text and the guide when read in isolation were consistent with the taxpayer’s argument, but that neither the text nor the statutory guide could override the plain meaning of the statutory provisions. The plain meaning of the statutory provisions was that if a taxpayer has unused concessional contributions caps from one of the previous five financial years, these amounts are automatically carried forward and the taxpayer has no election in the matter. The operative provisions are section 291-20, section 291-30 and section 291-40 of Division 291. The first provision specifies the ‘standard cap’ for the 2018 financial year as $25,000, with the standard cap for subsequent financial years being the indexed value of $25,000. The second provision provides that if three conditions are satisfied, then a different contributions cap will apply – the standard cap increased by the unused caps from each of the preceding five financial years. Here the first condition is that the aggregate of the concessional contributions for the financial year
42 selfmanagedsuper
exceeds the standard cap applicable to that financial year. The second condition is that the total superannuation balance of the taxpayer immediately before the start of the current financial year is less than $500,000. The third condition is that there are unused concessional contributions caps from one or more of the five financial years preceding the current financial year. If all three conditions are satisfied, the application of section 291-20 is displaced and the concessional contributions cap for the financial year is determined by section 291-40. Subsequently, the concessional contribution cap space is determined as the standard cap increased by the unused concessional caps of the previous five years and these unused amounts are applied, and exhausted, in date order. To the extent that an unused concessional contributions cap amount has not been exhausted, the remaining portion can be carried forward to the next financial year, subject to the five-year rule. The tribunal held the application of section 291-40 to determine the contributions cap space is automatic if the three conditions of section 291-30 are satisfied. In short, there is no election required. The consequence of which was that the Division 292 tax assessment was valid. Other valid arguments Could the taxpayer argue that for the purposes of Division 293 only concessional contributions within the standard, which was $27,500 for 2022 income year, should be applicable? This argument simply has no support in the text of Division 293. As noted above, if
Since the 2019 financial year, if a taxpayer’s concessional contributions amount, even a nil amount, for a financial year is less than the standard concessional contributions cap for that year, the unused portion of the cap can be carried forward to subsequent financial years. the three conditions of section 291-30 are satisfied, the standard cap is displaced and the potentially higher cap determined by section 291-40 applies. Could the taxpayer argue the concessional contributions in the excess of the standard concessional contributions cap are excess contributions and should not be counted for Division 293 purposes? This argument has no support in the text of either Division 291 or Division 293. Where unused concessional contributions caps are carried forward, the excess contributions are determined by the concessional contributions cap adjusted by the carried-forward unused caps. If the taxpayer had excess concessional contributions for the 2022 financial year, they would have been disregarded for Continued on next page
Continued from previous page
the purposes of Division 293. However, the taxpayer did not have any excess concessional contributions for the 2022 financial year as all of the concessional contributions were within the actual cap applying to them. There is no textual support from Division 293 to define ‘low tax contributions’ (the term used in Division 293 to refer to non-excess concessional contributions) as only being concessional contributions within the standard cap. Could the taxpayer argue discretion conferred on the commissioner of taxation under section 291-465 of the Income Tax Assessment Act could be exercised to have the commissioner disregard or reallocate all or part of the concessional contributions to another income year? This argument fails as the precondition for the discretion to be exercised by the commissioner is the taxpayer having excess non-concessional contributions. Here the individual did not have excess concessional contributions as they were all within the actual concessional contribution cap applying to them. Could a portion of the contributions be treated as nonconcessional amounts? The contributions were made by the employer of the taxpayer and the individual was a director of this entity. As employer contributions they are fully tax deductible and there is no means to reduce the amount of the contributions that will be claimed as a tax deduction, unlike personal contributions where the taxpayer could elect to reduce the
deduction to be claimed. Could the trustee decline to accept the employer contributions to the extent they exceeded the standard cap? The decision of the trustee to decline the necessary portion of the contributions would have had to be based upon a duty conferred on the trustee not to accept such contributions. Neither the Superannuation Industry (Supervision) Act nor the Income Tax Assessment Act impose such a duty. Superannuation deeds would not normally impose such a duty on the trustee. Could the trustee classify the amount of contributions exceeding the standard cap as being nonconcessional? Such a power of classification is not open to the trustee. Employer contributions are necessarily ‘assessable contributions’ of a superannuation fund and so will be concessional contributions by reason of a section 291-25(2)(b)) of the Income Tax Assessment Act. The trustee has no discretion in the matter. Could the taxpayer argue the contributions were made under a mistake as to the taxation consequences that would arise by making the contributions and therefore be set aside? No, as only a court can set aside a transaction on the basis of an operative mistake and there was no court order. In any event, the proper litigant would have been the employer rather than the taxpayer. It would be difficult for the employer, even if so minded, to argue there was any operative mistake as any contribution made by the employer would be a deductible contribution and
therefore a concessional contribution. In any event, the financial harm suffered by the taxpayer, being an assessment of Division 293 tax of $3315, is vastly disproportionate to the costs of any legal proceedings to make such a decision to commence proceedings irrational. Could the employer contribution be made over two financial years? Yes, but that did not occur. Had the employer contributed half of the $82,482 in the 2021 financial year with the balance in the 2022 financial year, would Division 293 have applied? It seems the total superannuation balances for the taxpayer at 30 June 2021 and 30 June 2022 would most likely be under $500,000, so possibly yes. The critical issue is what the taxpayer’s Division 293 income would have been for the 2021 financial year. Their Division 293 income for 2022 would have been less than $250,000. Conclusion It is striking that the taxpayer was only liable for Division 293 tax, a tax intended to reduce the tax benefit of deductible superannuation contributions for highincome earners, by reason only of the additional concessional contributions and, in order to have additional concessional contributions, the taxpayer had to have a total super balance of less than $500,000, which is not consistent with the individual being a high-income earner. Should Division 293 be amended to disregard the effect of the carry forward of unused concessional contributions caps when determining whether the Division 293 threshold of $250,000 has been reached? Yes and such an amendment would be more consistent with the policy purposes of Division 293.
QUARTER IV 2024 43
STRATEGY
Multidimensional benefits
A multiple pension strategy has to date been implemented for SMSF estate planning purposes. However, Tim Miler demonstrates how the approach has taken on a new dimension given some recent regulatory developments.
TIM MILLER is education and technical manager at Smarter SMSF.
Three things happened in the last week of June and the first week of July. Firstly, the ATO released its updated version of Taxation Ruling (TR) 2013/5 “Taxation Ruling Income Tax: when a superannuation income stream commences and ceases” and a few days later, on 1 July, the stage three tax cuts took effect and the preservation age shifted to age 60. These three isolated events give us food for thought with regards to numerous strategies available via an SMSF, namely running multiple pensions, commencing transition-to-retirement income streams (TRIS) and using salary sacrifice arrangements. TR 2013/5 Of most significance from the ATO’s ruling is failing to satisfy the pension standards will now likely result in additional member and trustee activity in the year following that in which a fund failed to pay the minimum pension. While the need to consciously commute a pension that has failed to pay the minimum is likely the end result for a fund in this position, there are strategies that can minimise the damage done in the event an SMSF has paid part but not all of its required drawdown. Multiple pensions for the one member have long been considered valuable for estate planning purposes, but now, more than ever, they can be of value by ensuring not all strategic work already undertaken will be undone by having a pension shortfall. Multiple pensions As we know, a member of an SMSF can have more than one pension interest and once a pension commences
44 selfmanagedsuper
it is always to be treated as a separate superannuation interest until such time the pension ceases, and even then some of the cessation circumstances, such as death, still provide for the benefit to be paid in the original commencement components post cessation. The use of multiple pension interests is generally determined by the needs of the members, often with reference to estate planning. Tax-free and taxable components calculated at the commencement of a pension apply to all pension payments and superannuation lump sums from that interest, therefore if a member is looking to direct particular benefits to particular beneficiaries, then the use of multiple interests may be an appropriate way to achieve this goal. Example Dave, 65, has a $500,000 accumulation balance that is 80 per cent taxable and 20 per cent tax-free. He has the ability to contribute up to $660,000 as non-concessional and downsizer contributions following the sale of his primary place of residence. As part of his estate planning, he wants to split his superannuation benefits between his second wife and his adult child from his first marriage. As such, he takes the following action: Step 1 – Dave commences a pension for $500,000 (100 per cent taxable). Step 2 – Dave makes a contribution of $660,000. Step 3 – Dave starts a second pension for $660,000 (100 per cent tax-free). Continued on next page
Continued from previous page
Dave makes the first pension reversionary to his wife and the second pension subject to a binding death benefit nomination to his child in accordance with the fund’s trust deed and pension contract. One versus two If Dave had commenced one pension for $1.16 million, it would have been considered approximately 35 per cent taxable and 65 per cent tax-free, which would have tax ramifications for his adult child. It would also mean any failure to pay the minimum required would result in a loss of exempt current pension income (ECPI) on the entire amount and a further tarnishing of the tax-free and taxable components. Let’s consider the following scenario. Dave’s minimum pension obligation is $58,000 and he sets up a quarterly payment of $14,500. However, due to the timing associated with the commencement, his first pension payment occurs in the December quarter of the relevant year rather than the September quarter. He never makes up the first quarter payment prior to 30 June. In total, he has drawn down $43,500. In a single-pension environment, he has no positive outcome, the fund will lose the ECPI deduction and he will need to make a decision to consciously commute the pension after 1 July, which will lead to transfer balance account anomalies and potentially an uptick in the taxable component. In the situation above, where he sets up two pensions, then the minimums are $25,000 for pension one (reversionary to his wife) and $33,000 for the second. So long as Dave has not stipulated a specific amount to be allocated to a specific pension, he could allocate sufficient drawings to pension two and maintain the ECPI deduction and 100 per cent tax-free status. Granted he would fail the payment standard for pension one, but this would be less severe. Transition to retirement A TRIS, if being paid from an SMSF, are a vital part of the membership cycle and a key tool in the estate planning process as they allow
individuals the opportunity to create separate interests prior to retiring. Now that preservation age has hit 60, they can also provide varying levels of tax savings as a result of the stage three tax cuts that took effect from 1 July 2024. With preservation age now at 60, it means any income stream commenced from an SMSF will pay non-assessable non-exempt income. That is a double win for those who have satisfied a nil-cashing restriction condition of release as they will not only receive tax-free income, but the fund will also generate it as a result of the ECPI deduction. So while a TRIS is not entitled to the ECPI, they still retain benefits associated with multiple interests as discussed above. Salary sacrifice tax deferral A member who has attained preservation age, but has not retired will still in many instances benefit from a salary sacrifice and transition-to-retirement strategy. Given there are a substantial number of SMSF members at preservation age who also have a total superannuation balance of less than $500,000, the ability to use a salary sacrifice and catchup concessional contribution strategy is significant. Recognising salary sacrifice arrangements no longer reduce an employer’s superannuation guarantee (SG) obligation, the ability to salary sacrifice and use any unused concessional contributions caps from the previous five years could prove significant even though there is no ECPI deduction for a TRIS in accumulation phase. So while the loss of ECPI within the super environment does reduce the overall tax benefit, the stage three tax cuts mean for many there is still a tax benefit to be had. Example Simone, 60, earns $100,000. Let’s assume Simone’s employer already pays SG on her pre-salary sacrifice income, so she currently has contributions made totalling $11,500 and without salary sacrifice, Simone will pay $20,788 tax, excluding Medicare, and have take-home pay of $79,212. For the past five years she has not made any additional contributions above the SG amount so
Of most significance from the AT O’s ruling is failing to satisfy the pension standards will now likely result in additional member and trustee activity in the year following that in which a fund failed to pay the minimum pension. is entitled to carry forward her unused concessional contributions cap amounts, assuming her total super balance is below $500,000. If we also assume Simone has at least $420,000 in her SMSF, it means she can commence a TRIS and draw between $16,800 and $42,000 as an income stream. Under the new stage three tax cuts, the low rate of 16 per cent is payable up to $45,000. Let’s look at the outcome if Simone contributes $55,000 via a salary sacrifice arrangement and elects to draw the maximum of $42,000 from her TRIS (Table 1). She is not only paying less tax overall, but she is receiving more income than on the original $100,000. Even if you factor in the earnings the fund has to pay tax on, they are negligible when compared to the $8250 less tax paid. The net position sees Simone’s income grow as well as her super balance. This assumes a 100 per cent taxable component. Estate planning While there are overall tax savings to be made by using a TRIS, the greatest benefit they can deliver may still be estate planning flexibility as they allow a member to create multiple interests prior to retirement as indicated above. Continued on next page
QUARTER IV 2024 45
STRATEGY
Continued from previous page
A TRIS can provide some strategic advantages to members who have attained preservation age as existing benefits can be isolated from future contributions, meaning estate planning strategies that previously relied on multiple income streams can still be commenced during the transition-to-retirement stage of an individual’s life. The TRIS recontribution strategy One of the most effective ways to achieve a desirable tax outcome is through a recontribution strategy. This strategy works best once a member commences one or more income streams because if they do not, the member is just recontributing to an accumulation interest, which will have some
tax effect, but the contribution value is at risk of being diminished by future investment returns. Given there is no upper limit to the dollar value of a TRIS commenced prior to moving to the retirement phase, because a TRIS in accumulation phase is not subject to the transfer balance cap, the 10 per cent maximum withdrawal can also be beneficial. One of the considerations when contemplating using recontribution strategies is going to be an individual’s total superannuation balance. Members with less than $1.66 million in total super have no restriction other than the current $360,000 cap over three years. Example If we consider Carol, 60, with a balance of $2.5 million, she could start drawing the maximum out of her TRIS of up to $250,000 in the
Table 1 Simone
Without salary With salary sacrifice sacrifice and TRIS ($) and TRIS ($)
Employment income
100,000
45,000
Personal tax (excluding Medicare)
20,788
4288
Take-home pay
79,212
40,712
Concessional cap (assumes SG only)
115,670
115,670
Super guarantee
11,500
11,500
Salary sacrifice
0
55,000
Tax on super
1725
9975
Combined tax
22,513
14,263
TRIS
0
42,000 (with 10 per cent non-assessable non-exempt income)
Take-home pay with TRIS
79,212
82,712
Closing super balance Balance + contributions – tax – TRIS
429,775
434,525
46 selfmanagedsuper
Multiple pensions for the one member have long been considered valuable for estate planning purposes, but now, more than ever, they can be of value by ensuring not all strategic work already been undertaken will be undone by having a pension shortfall. first year and recontribute it. She could then commence a second TRIS for $250,000 and then repeat the cycle. The effect is that in one year, based on the same numbers, Carol’s fund has gone from 100 per cent taxable to 90 per cent taxable and 10 per cent tax-free. The following year she could take the maximum from the taxable pension and minimum from the one that is tax-free and this would significantly impact her SMSF for estate planning purposes, although in year two and three her recontribution would be limited. Failing the pension standards So while there are definitely opportunities for using a TRIS, seeing the new preservation age and the stage three tax cuts make them attractive to some members, it should be noted part of this article was dedicated to failing the minimum standards as a result of the update to TR 2013/5. This ruling applies to TRIS as well and in actual fact is worse for TRIS because failing to pay the minimum or indeed paying more than the maximum is significant as the ATO could deem the fund to be illegally accessing preserved benefits. Multiple TRIS may help partially overcome the minimum issue and conceivably the maximum for one of the income streams, allowing for the preservation of tax-free and taxable planning, but it will not take away the breach of the payment standards. QUARTER IV 2024 46
COMPLIANCE
Optimal outcomes depend on preparation
While it is too early to take any definitive action with regard to the proposed Division 296 tax, having clients prepare for its introduction is a prudent move. Liz Westover details the elements individuals who are likely to be caught by the measure should consider now.
LIZ WESTOVER is superannuation and SMSF retirement savings partner at Deloitte.
In early 2023, the federal government made the announcement of its intention to impose an additional 15 per cent tax on the superannuation earnings of those Australians with a total super balance in excess of $3 million. Conceptually, an additional tax on earnings attributable to balances above $3 million makes sense. It is unlikely those fortunate enough to have these larger balances will need the same ongoing level of government assistance through the concessional taxation arrangements for a comfortable retirement. When Canberra released more detail on how it planned to implement its proposal, it was clear this new measure was a far cry from the additional tax on earnings originally announced. Rather, what we saw
was a proposal for a brand new tax with some very controversial features. The new Division 296 tax, due to take effect from 1 July 2025, is effectively a 15 per cent impost on the movement in an individual’s total superannuation balance (TSB) over a financial year, prorated to apply only for the portion of change attributable to amounts over $3 million. Broadly, if an individual has a closing TSB of $3 million or more and their balance has increased during the year, Division 296 tax will be imposed. The high-level calculation of Division 296 tax is as in table 1: Continued on next page
Table 1 Proportion (%) of TSB > $3 million
x
‘Superannuation earnings’ (Adjusted closing TSB less opening TSB less any net prior-year unapplied negative earnings)
x
15%
QUARTER IV 2024 47
COMPLIANCE
When Canberra released more detail on how it planned to implement its proposal, it was clear this new measure was a far cry from the additional tax on earnings originally announced. Rather, what we saw was a proposal for a brand new tax with some very controversial features. Continued from previous page
As with most things in super, the practical application of this formula is far from simple and there are adjustments, exemptions, exclusions and variations (more later). There are significant concerns with the proposed operation of the new tax and it is largely these that have delayed the progress of legislation. Tax on unearned income Division 296 is, in part, a tax on unearned income. As we know, an individual’s TSB is a factor of contributions and withdrawals, actual income received, from dividends, interest, rent and the like, and growth in the value of the underlying assets. Normally, capital gains tax (CGT) is only imposed upon the disposal of an asset. The taxpayer generally chooses when they sell an asset and they effectively
48 selfmanagedsuper
use the proceeds of the sale to pay their CGT liability. With this new tax there is no sale. Tax is calculated using a value at a particular point in time and there are no proceeds with which to fund a tax liability. Even if you support additional tax for those with higher super balances, everyone should be concerned about the introduction of a tax that is imposed on a paper profit that may never be realised by a taxpayer. It is easy to lack sympathy for people with large super balances, but the reality of this new tax is that it impacts far more people than the ‘uber rich’ and it could easily cause people significant financial stress and in some cases to lose their business property, farm or their home. Lack of indexation The lack of automatic indexation on the $3 million threshold could result in increasing numbers of Australians being impacted by this tax in future years. Indexation is a common feature of other rates and thresholds in super that provide equity and fairness over time. While much has been written in the past 12 to 18 months about the operation of the tax, there is still a lot of angst and misunderstanding with clients that needs to be managed. So what should advisers be doing and what do we say to clients now? What should advisers do now? • Familiarise themselves broadly with how the law will operate so they can easily and readily explain it to their clients. • Be aware of where the exemptions, exclusions and variations will be with respect to the calculation of Division 296 tax. Some people will be exempt from the tax, including child recipients of income streams, those in receipt of structured settlements and where an individual has died before the last day, 30 June, of the income year. Further adjustments are needed when calculating the closing TSB to allow for contributions and withdrawals throughout the year, as well as
considerations for defined benefit interests, foreign super funds, limited recourse borrowing arrangements and temporary residents. Special rules may also apply with respect to constitutionally protected funds and certain commonwealth justices. At this stage it may not be necessary to know the intimate details of each of these, but know they are there to go back to when and if needed. • Identify those clients likely to be impacted by the new tax. For now, this will include those who already have $3 million in super and those who will by 30 June 2026. This date will be the first test date with respect to the closing TSB to determine whether the new impost will apply. Client conversations There remains a misunderstanding with how the tax will work so the first task with clients is to dispel the many myths that exist. A lot of people still think it is simply an increased tax rate on earnings in super and others are aware of reports of tax on unearned income. The best way to explain it is to describe it for what it is – a brand new tax. Explain broadly how the tax will work with the use of very simple examples, followed by examples of how they would have been impacted by Division 296 tax had the law applied in prior years using their own super balances. This is a very effective and meaningful way of getting clients to understand what it will mean for them. For those clients likely to be impacted, now or in the next few years, discuss what their options will be should legislation be passed. In most cases action in anticipation of the new tax is unadvisable until we have absolute certainty of how it will work or the legislation implementing the measure is approved by parliament. Options available will depend on a number of factors, including whether clients have satisfied a condition of release to access their super, types of Continued on next page
Continued from previous page
investments, volatility of investments and tax rates outside of super. Some clients may already be determined to withdraw their super savings. Their confidence in the super system is understandably waning, but withdrawing from super may not be the best course of action so a discussion on the reason for withdrawal is important. Early modelling for the tax indicates those individuals with a marginal tax rate outside of super or above 30 per cent will likely be better off retaining their balances in super rather than withdrawing and investing outside of it. This is a strong message that super will remain a tax-effective retirement savings vehicle. It also suggests where an individual has a low or zero tax rate outside of super, there may be benefit in partial retirement savings withdrawals, if a condition of release has been met, to invest outside of super to make use of tax-free thresholds. For many clients a discussion on the Division 296 tax invariably leads to a conversation about estate planning. The two in combination will possibly lead to a greater desire to withdraw super, particularly for those with high balances and adult children. There is still a level of misunderstanding when it comes to tax payable by adult children in receipt of their parents’ retirement savings benefits. Further, in light of higher interest rates, some are starting to consider withdrawals from super to assist children with their mortgages during their own lifetime as opposed to the children having to wait until their death. In this way, they can alleviate some of the stress for their children now, limit the potential application of Division 296 tax and start to reduce the potential for the ‘death tax’ on super paid to adult children. Where individuals are contemplating withdrawals, timing of asset sales and withdrawals can impact tax outcomes. For example, where an individual has both accumulation and pension interests, asset
sales and subsequent withdrawals of the accumulation balance early in the year can result in a higher actuarial percentage for the purposes of calculating exempt current pension income and this higher rate will be applied against any capital gains realised from asset disposals. Valuation of assets is currently a focus area of the ATO and SMSF auditors. While SMSFs have a legal obligation to report assets at market value every year, the application of this is even more critical in the context of the Division 296 tax. Client discussions need to occur around the requirements for market valuations, including annual valuations of property. Consideration is also required as to whether disposal costs can be factored into the final asset valuations. Tax-deferred accounting may also grow in popularity. This effectively reduces member balances by allowing for notional tax on unrealised capital gains on assets held. If legislation passes as currently proposed Clients need to consider how Division 296 tax liabilities will be paid. While they will have a choice to pay personally or from their super fund, with a release authority, cash flow and liquidity will be critical, particularly for those who may end up with large liabilities resulting from asset value movements that don’t provide actual income to pay for the tax liability. Clients impacted by the Division 296 tax are likely to ask if it is still worth making contributions to super. Again there is no straightforward answer, but generally the discussion should be around the ongoing tax effectiveness of super, why the contribution is being made (such as for a tax deduction) and what the money would be used for if it were not allocated to the person’s super fund. The Division 296 tax may cause increased tax liabilities for reversionary income stream recipients following the death of the original pension beneficiary. This is due to the timing on TSB movements between the two and
It is easy to lack sympathy for people with large super balances, but the reality of this new tax is that it impacts far more people than the ‘uber rich’ and it could easily cause people significant financial stress and in some cases to lose their business property, farm or their home. the exemption from Division 296 tax for the original recipient in the year of death, other than those who die on 30 June. As such, practitioners will need to consider whether reversionary nominations for pensions still make sense. Non-reversionary income streams do not necessarily preclude the ability to commence a death benefit pension later when the amount and timing can be better controlled. Divorce proceedings may be impacted by this new tax as well. The additional tax may need to be considered with property settlements, making them more complicated and costly. The right response to the introduction of the Division 296 tax will be different for each client. The above considerations will not be right for everyone, but they should be factored into the decision-making process to get the right outcomes for clients. Information and knowledge are important, but be wary of when to start taking action.
QUARTER IV 2024 49
STRATEGY
Navigating estate planning misconceptions
Attention to detail is very important when it comes to SMSF estate planning. Jemma Sanderson dispels some of the misunderstandings and recognises the appropriate courses of action to ensure the assets of the deceased are distributed to the right people.
JEMMA SANDERSON is director and head of SMSF succession at Cooper Partners.
50 selfmanagedsuper
There have been numerous misconceptions regarding superannuation death benefits and legal challenges over the past 10 years and which are becoming more prevalent. These include: 1. A person’s will has jurisdiction over superannuation. 2. Executors must become trustees or directors in the place of the deceased within an SMSF. 3. If a payment is made from superannuation directly to a beneficiary, it will be taken into consideration with respect to the distribution of the estate. 4. If you have executed a binding death benefit nomination (BDBN), it must be valid. 5. You can nominate whomever you please to receive a benefit directly from a superannuation fund. 6. Conflict will not arise between potential beneficiaries. 7. The BDBN deals with the benefits and therefore any other mechanisms within the fund are irrelevant, such as reversionary pension documents or the contents of the trust deed. 8. If there is a BDBN, a lump sum benefit must be paid out.
9. If any pensions are not reversionary, a lump sum benefit must be paid out. 10. Reversionary nominations within pension accounts direct all benefits to the survivor, meaning the BDBN only needs to deal with what happens when both members die. 11. BDBNs are foolproof. 12. Including the second spouse in the superannuation fund will be fine and they will adhere to the wishes of the testator. 13. Running separate superannuation funds is a waste of time and money. 14. Benefits need to be paid out of superannuation within a few months of death to ensure there are no adverse taxation consequences. 15. Benefits/assets cannot remain in superannuation when a member passes away and must be paid out as a lump sum. 16. All assets must be liquidated prior to payment out of the fund. 17. Once members pass away, the fund must be wound up. Continued on next page
Continued from previous page
18. Payments from the fund directly to beneficiaries can be subject to a challenge where the will is contested. Wills The content of the member’s will generally has zero jurisdiction over the decisions made about the payment of superannuation death benefits. The only time a will has any impact is: • where the fund has no successor in place already, that is, a surviving director or an individual trustee, the executor as the legal personal representative (LPR) is required to step in to the fund as the replacement. This would occur with a single member/sole director fund or where husband and wife pass away in the same accident, and • where the benefits are paid out of the fund to the estate of the member/LPR according to their BDBN or where the fund trustee exercises that discretion. The will then prescribes what happens to those assets, including whether: o to pay directly to nominated beneficiaries, o to use testamentary trusts, o to use a superannuation proceeds trust, o particular assets should be paid to particular beneficiaries, and o they should be paid into the residual estate for distribution. Superannuation benefits do not form part of the estate unless they are paid to the estate/ LPR. Further, it is only when the assets are paid to the estate that the executor can administer those particular assets. As always, anything to do with an SMSF requires review of the current trust deed and the chain of deeds for the fund to ensure there aren’t any clauses that may be construed to alter the consideration. The succession of a superannuation fund is therefore incredibly important to consider, as well as mechanisms, such as BDBNs, to ensure benefits are paid as intended. This is particularly the case with second families, although first families are not immune where one of the children is already in the fund or the
sole executor as it can still result in that child potentially disinheriting their siblings. Distribution of assets, total wealth and contesting Another misconception is if a benefit is paid to an individual directly from the fund, it will be taken into consideration in terms of the overall distribution of assets from the estate of the deceased. This would only be the case where the will contains an equalisation clause or the like, or in New South Wales with respect to the notional estate provisions. Further, such a clause is only of benefit if the deceased has substantial assets outside superannuation that will actually form part of their estate. In this case, where one beneficiary receives the superannuation directly, it can be assessed against their entitlement under the will, with the remaining assets then used to pay the remainder of the beneficiaries under the will. This can still result in a distortion of the distribution of wealth between the beneficiaries. In Munro & Anor v Munro & Anor [2015] QSC 61, the estate had very few assets available for distribution. Accordingly, the daughters of the deceased, who brought action against their stepmother for the exercise of discretion in the SMSF, had very few assets to dispute as the estate did not include the SMSF proceeds. Specifically where an estate is contested, the superannuation assets paid directly to beneficiaries from the fund will not form part of the assets to be contested (except in NSW). Therefore, if a beneficiary is unhappy with their distribution, the benefits paid to other beneficiaries directly from the fund cannot be brought into the net. In addition, if there is no equalisation clause, which was the case in Katz v Grossman [2005] NSWSC 934, one beneficiary may also end up with a disproportionately high/ low intended distribution of assets. In this case, depending on what the estate assets are comprised of, the beneficiary could look to contest the will. However, the person in question would generally need
to demonstrate, depending on the relevant family provision legislation in each jurisdiction, they have not been adequately provided for by their deceased parent and they have the need for additional provision. Eligible beneficiaries The Munro case showed it is imperative the correct eligible beneficiaries are stipulated under a nomination to ensure it is valid and therefore binding. Using the correct terminology is also important. Pursuant to Superannuation Industry (Supervision) (SIS) Regulation 6.22, benefits can only be paid out to the LPR or one or more dependants. Section 10 of the SIS Act defines these terms. Where the nominated beneficiary pursuant to a BDBN does not fall into either of the above definitions, the nomination may not be valid and the trustee of the fund may be unable to pay benefits in the prescribed manner. In Re Narumon Pty Ltd [2018] QSC 185 an invalid beneficiary in a BDBN did not result in the nomination being invalid in its entirety, but only to the extent of that invalidity. However, it will depend upon the particular trust deed and circumstances in each matter. Example Moe passes away with no spouse or children. He has a brother and a sister and drafts his will such that they benefit from his estate. He also has two nephews he would like as his direct superannuation beneficiaries and executes a BDBN to facilitate this wish. The BDBN would not be binding unless one or both the nephews were financially dependent on Moe as they would not be eligible beneficiaries under the superannuation rules. Therefore, Moe’s superannuation would be paid to his estate and be distributed to his brother and sister in accordance with his will. However, this is contrary to his intentions. In this instance, Moe should ensure his will is drafted appropriately to allow his superannuation to be paid to his nephews. Continued on next page
QUARTER IV 2024 51
STRATEGY
Continued from previous page
Moe’s brother and sister, as the executors, would likely step into the SMSF as the replacement trustees/directors and they would be required to distribute the benefits from the fund to his estate as they are also not eligible beneficiaries. The will would then deal with the benefits. BDBNs are foolproof Recent cases have demonstrated that even where a BDBN is in place, it may not be foolproof. This can occur for the following reasons: • it has lapsed as it was only valid for three years or a different restrictive timeframe, • it doesn’t nominate eligible beneficiaries, • it is executed incorrectly, including not in accordance with the current trust deed or not in accordance with the deed in place when executed, • it is not accepted by the fund trustee, the principal employer, the fund guardian or another alternative role per the thrust deed, • it stipulates benefits are to be paid as a lump sum only rather than a pension, which may be preferred for the survivor as an example, and • it contradicts pension terms and conditions in the fund. In all of the above situations, to ensure the intentions of the testator are met, several actions should be taken. Firstly, the fund trust deed and the historical chain of deeds should be reviewed. This will generally outline: • whether a nomination has a term or can be non-lapsing, • the process for the execution of a nomination for it to be binding, • whether the nomination needs to be accepted by the trustee or another nominated position with respect to the fund, • whether the recipient can legally be
52 selfmanagedsuper
nominated or must stipulate the form of a benefit also, and • whether it is a nomination being put in place or whether it is a ‘notice’ or ‘agreement’ instead and what the difference may be. Next the BDBN itself needs to be reviewed in light of the above. In addition to the BDBN, any pension documentation should also be reviewed. To decide which takes precedence where there may be a conflict, the following should be considered: • whether the trust deed provides any guidance as to the enforcement of the BDBN over a pension, and • where the deed may be silent: o the ATO’s view on pension terms and conditions, o whether the BDBN is precedential as it is specific in terms of death. Consideration would have to be given to see if the deed fetters the trustee’s discretion in relation to the ability to have a reversionary pension in place or if the deed has a provision confirming a BDBN is precedential when compared to a reversionary pension where they are contradictory, and o what the testator’s intention is, that is, reversionary to the spouse or payment to children/estate. In order to ensure the specified intentions are met, one must: • make sure the BDBN and pension documents are not contradictory, but complementary, • follow the instructions in the trust deed as to the process, form and procedure for a nomination to be binding and valid, • ensure any new BDBN is executed in accordance with the most recent valid deed, making a review of the chain of deeds important, and • have the correct terminology in the nomination. For example, LPR and/or executor, BDBN or binding death benefit
‘notice’ or ‘agreement’. Deed is silent If the trust deed is silent as to process, form or procedure, what is required for a nomination to be binding and valid? In the author’s view, although sections 59(1) and (1A) of the SIS Act and SIS Regulation 6.17A do not apply to SMSFs (confirmed in Hill v Zuda Pty Ltd [2022] HCA 21), it is prudent to consider the provisions in SIS Regulation 6.17A(6) with regard to the execution of the nomination: “(6) … the notice: a. must be in writing; and b. must be signed, and dated, by the member in the presence of 2 witnesses, being persons: i. each of whom has turned 18; and ii. neither of whom is a person mentioned in the notice; and c. must contain a declaration signed, and dated, by the witnesses stating that the notice was signed by the member in their presence.” Further, the preference is that the trustee of the fund should accept the nomination by minute/resolution. Summary If not reviewed in the past few years, estate planning in a super context should be. Also pension commencement is a substantial estate planning consideration and who the intended ultimate beneficiary is must be defined, as well as the practical implication of this action. Further, with existing pensions, clients should be made aware of the implications for their spouse when they pass as to strategic considerations and whether the income stream is reversionary. Finally, the short and longer-term ramifications for the SMSF assets, as well as any transfer balance account and Division 296 tax for the recipient, need to be taken into account.
TAKE THE STRESS OUT OF THE SMSF AUDIT PROCESS
Need help with your SMSF Audits?
CONTACT US TODAY!
03 9040 1514 info@smsfcompliace.com.au www.smsfcompliance.com.au
STRATEGY
Avoiding the common death trap
Sole-member SMSFs can create several issues when the person in question dies. Grant Abbott details a solution ensuring the fund enjoys a smooth transition and conclusion.
GRANT ABBOTT is director and founder of LightYear Docs.
It is fairly commonplace for an SMSF to have a single member who is the sole director of the fund’s corporate trustee. However, this can lead to complications upon this individual’s death, including management, compliance and legal issues. Luckily there is a practical solution that can allow people in this situation to avoid any of these problems. Case study: The $2 million SMSF with one member Let’s look at an SMSF with $2 million in assets and a single member, John Smith, who is aged 63. John established a corporate trustee for his SMSF where he was the sole director. The fund was performing well, investing in a diversified portfolio of property and equities, and he had been planning to draw down a pension from the fund in the coming years. However, John passes away suddenly, leaving the fund in a precarious position. As the sole
54 selfmanagedsuper
member and sole director of the corporate trustee, his death creates a number of critical legal, tax and compliance challenges that could jeopardise the fund’s status and potentially the $2 million it holds. Immediate consequences Upon John’s death, the SMSF is left without a trustee or a director of the corporate trustee. This creates a vacuum in governance and management, raising a fundamental question: who will take over the role of trustee and what happens to the fund in the meantime? Who steps in? With John’s passing, the corporate trustee now has no director, which is a breach of one of the core requirements for SMSFs. Section 19 of the Superannuation Industry (Supervision) (SIS) Act 1993 mandates all SMSFs must have either Continued on next page
Continued from previous page
individual trustees or a corporate trustee with at least one director. Without a director, the corporate trustee is nonfunctional, leaving the SMSF exposed. If no director is appointed to the corporate trustee within a reasonable timeframe, several compliance issues arise and the fund may lose its status as a registered superannuation fund. This brings us to five critical compliance and operational risks. Five potential compliance issues 1. Loss of tax concessions and noncompliance status The SMSF’s eligibility for concessional tax treatment is contingent upon meeting its trustee requirements. Without a trustee, the SMSF may not be a regulated superannuation fund under section 19 of the SIS Act. Without timely action, the ATO may deem the SMSF non-complying, which could result in the fund being taxed at the highest marginal rate of 47 per cent (including the Medicare levy) instead of the concessional 15 per cent. This could be a significant financial blow to the remaining beneficiaries, reducing the value of the $2 million SMSF. Alternatively, if the fund falls outside of being a regulated superannuation fund, it will be treated as a fixed unit trust for taxation purposes. 2. Breaches of trustee responsibilities John’s death leaves the SMSF without anyone to manage its day-to-day operations. This includes maintaining records, lodging tax returns, meeting financial statement obligations and
ensuring investment decisions are compliant with the fund’s trust deed and the SIS Act. The absence of a trustee creates a breach of the fund’s obligations under section 35B of the SIS Act, which requires the trustee to ensure all financial and operational duties are maintained. Noncompliance with these obligations could result in further penalties from the ATO. 3. Inability to pay benefits or pensions With no corporate trustee or director, the fund is unable to action any requests for the payment of death benefits. If John had dependants or had named a legal personal representative (LPR) in his binding death benefit nomination (BDBN), those benefits cannot be paid out without a functioning trustee. This delay can lead to financial hardship for beneficiaries, particularly if they were dependent on the SMSF’s income, such as a spouse or children. The deceased’s estate could also be left in limbo, further complicating estate planning and distribution. 4. Investment management and loss of control With no trustee there is no one to manage or oversee the fund’s investments. This lack of control could lead to missed opportunities, poor performance or noncompliance with the SMSF’s investment strategy – again a breach of the SIS Act. If the fund holds illiquid assets such as property there may be management issues. For example, rental properties within the SMSF would need someone to manage leases and collect rent. Without a trustee, the fund could suffer financially from mismanagement or neglect of its
If no director is appointed to the corporate trustee within a reasonable timeframe, several compliance issues arise and the fund may lose its status as a registered superannuation fund. assets. Also, who would operate the fund’s bank account? 5. Risk of legal disputes among beneficiaries The lack of a clear trustee can also open the door for legal disputes among beneficiaries. If John had family members or others listed as dependants or beneficiaries, disagreements could arise over who should be appointed as the trustee or how the SMSF’s assets should be distributed. The Gainer case Case note – In the matter of Gainer Associates Pty Limited [2024] NSWSC 1138 The matter of Gainer Associates Pty Limited concerns the administration of an SMSF following the deaths of its members, highlighting issues of trust deed compliance, trustee discretion and superannuation law. After the passing of Continued on next page
QUARTER IV 2024 55
STRATEGY
Continued from previous page
Gail and Werner Thelen, the corporate trustee, Gainer Associates Pty Limited, was tasked with distributing a $7 million death benefit. However, a dispute arose when the trustee proposed to divide the benefit between Gail’s partner, Mr Bone, and her estate contrary to Bone’s claim for the entire benefit. Complications included challenges to trustee qualifications and compliance with the SMSF trust deed that required appointing the LPR as the trustee director under section 17A of the SIS Act. Instead the accountant, Mr Heesh, was improperly appointed, risking noncompliance with SMSF regulations. The court proceedings revealed the complexities of trustee responsibilities and remuneration. While trustees are generally prohibited from receiving fees for services related to SMSF administration, the court allowed partial remuneration under section 17B(2) of the SIS Act for non-trustee-related work. However, $31,900 in fees directly related to Heesh’s director role was disallowed as payment would have caused fund noncompliance. Importantly, the court found Gainer Associates had acted in good faith and sought appropriate legal advice. This judicial advice process clarified the proper death benefit distribution, ultimately ordering one-third to Bone and two-thirds to Gail’s estate, while trustee and estate costs were allocated accordingly. Key takeaways The case underscores the critical importance of a well-drafted trust deed to guide trustees through disputes and compliance challenges. Trustees must
56 selfmanagedsuper
strictly adhere to the deed and the SIS Act to ensure lawful fund administration. Trustees must exercise discretion in good faith, considering all relevant circumstances and seeking judicial advice when disputes arise. Judicial guidance protects trustees and ensures compliance while resolving contentious distributions. Breaches of the SIS Act, such as improper appointments or non-compliant remuneration, can result in severe tax and compliance risks. The case highlights the necessity for sound legal support to navigate the complexities of SMSF governance and protect the fund’s integrity. Without a trustee in place to make objective decisions, disputes could escalate into costly litigation, which could erode the value of the fund. Legal proceedings would delay the distribution of benefits and add significant stress to already grieving family members. How John’s estate and beneficiaries can avoid these pitfalls 1. Appoint an LPR as temporary trustee One solution would be for John’s estate to appoint an LPR to act as the temporary trustee of the SMSF. The SIS Act allows an LPR to step into the trustee’s role upon the death of a sole member. The LPR would have the authority to manage the SMSF, pay out benefits and oversee the winding up of the fund, if necessary. However, the trust deed must have in place the ability for this automatic appointment. 2. Establish a successor trustee plan If John had established a successor trustee or appointed another individual to act as the director of the corporate trustee in the event of his death, many of these
Without a trustee, family members may argue over who should control the SMSF, delaying the distribution of benefits and leading to costly litigation.
issues could have been avoided. Proper succession planning within the SMSF, including detailed instructions in the trust deed or binding nominations, is essential for avoiding such complications. 3. Wind up the SMSF If no suitable trustee can be found, the fund may be wound up with its assets sold and the proceeds distributed to beneficiaries according to the trust deed. This process must be handled carefully to avoid penalties or non-compliance with the SIS Act. However, the Gainer Associates case may see this take years and run legal costs into seven figures. Case study: a solution for John Let’s return to the case of John. As the sole director of his corporate trustee, John’s death immediately leaves the SMSF without a functioning trustee, raising multiple compliance issues. The situation becomes critical because, under SMSF regulations, a fund without a trustee cannot operate. Continued on next page
Continued from previous page
However, this entire scenario could have been easily avoided if John had planned for such a contingency by implementing a successor director solution. Let’s explore how this solution would have ensured a smooth transition for John’s SMSF and avoided many of the problems that arise when a fund is left without a trustee. What is the successor director solution? The successor director solution is a strategic mechanism built into the structure of an SMSF’s corporate trustee. It ensures, upon the death or incapacity of a sole director, a designated person – the executor of the deceased member’s estate – is automatically appointed as the new director. This person can step into the role of trustee, preserving the continuity of the fund’s operations and preventing the fund from falling into a governance vacuum. This solution is particularly crucial for SMSFs with only one or two members as it mitigates the risks associated with losing the fund’s sole decision-maker. How John should have handled his SMSF If John had planned effectively, his SMSF would have included a well-drafted successor director clause in the corporate trustee’s constitution or the fund’s governing documents. This clause would have automatically appointed a successor director – typically the executor of his estate – upon John’s death. Here’s how this process would work and the benefits it brings:
1. Immediate appointment of a successor director Upon John’s death, the executor of his estate, or another designated successor, would automatically be appointed as the director of the corporate trustee. The corporate trustee continues to function, ensuring there’s no gap in governance, and the fund remains compliant with the requirements of the SIS Act. This automatic appointment avoids the need for external intervention, court applications or delays, ensuring the smooth continuation of the SMSF’s management. The successor director takes over all responsibilities, such as managing the fund’s investments, maintaining compliance and preparing for the distribution of benefits. 2. Continued access to tax concessions One of the major risks of having no trustee is the SMSF could lose its concessional tax status, leading to punitive taxation at the highest marginal rate of 47 per cent (including the Medicare levy). By having a successor director in place, the SMSF can maintain its compliance as a regulated superannuation fund, ensuring it continues to benefit from the concessional 15 per cent tax rate on earnings. This is especially important in John’s case as a loss of concessional status could erode a significant portion of the $2 million in assets, leaving his beneficiaries with far less than intended. 3. Uninterrupted investment management John’s SMSF may have held a variety of assets, including property and equities. Without a trustee in place, these investments could fall into neglect.
Rental income may stop flowing, market opportunities could be missed or critical decisions might not be made. The successor director ensures there is no break in the management of these assets. 4. Prompt payment of death benefits One of the successor director’s immediate tasks is to action the payment of John’s death benefits. If he had a valid BDBN or SMSF will in place, the nominated individual would be responsible for paying out the benefits to the nominated beneficiaries. Without a trustee in place, the SMSF could face significant delays in paying out benefits, which could cause financial hardship for the beneficiaries. 5. Minimisation of legal disputes SMSFs with no appointed successor director often become the subject of legal disputes, especially when there are multiple potential beneficiaries. Without a trustee, family members may argue over who should control the SMSF, delaying the distribution of benefits and leading to costly litigation. By having a successor director automatically appointed upon John’s death, the legal framework is clear and disputes over control are minimised as the appointed person is empowered to handle the fund’s operations, reducing the risk of family conflicts. John’s case illustrates the importance of planning for continuity in the management of an SMSF, particularly when there is only one member involved. By implementing the successor director solution, John could have ensured his SMSF continued to function smoothly upon his death, avoiding serious compliance breaches, tax penalties and legal disputes.
QUARTER IV 2024 57
STRATEGY
Planning for the future
It is critical for SMSF trustees to put measures in place to deal with their death or loss of mental capacity. In this multi-part series, William Fettes and Daniel Butler detail the options available to ensure optimal outcomes when these circumstances eventuate.
WILLIAM FETTES (pictured) is senior associate and DANIEL BUTLER is director at DBA Lawyers.
58 selfmanagedsuper
This article is the first in a series on SMSF succession planning. Here, we examine the key characteristics of a sound SMSF succession plan, including in relation to planning for control of the fund to pass into trusted hands in the event of a member’s death or loss of capacity. Introduction For many Australians, superannuation is a significant asset, especially if an SMSF is involved. Despite this, many do not plan ahead for what happens to their retirement savings upon their loss of capacity or death. We recommend every SMSF member develops a succession plan, consistent with the other strategies of this nature they have in place, to ensure there is a well-considered and documented process present to
govern control of their fund in the future. Failing to plan ahead can result in considerable uncertainty with respect to the control of an SMSF and the ultimate fate of the member’s superannuation benefits. For instance, inadequate attention to succession planning could result in super death benefits being paid otherwise than intended and unnecessary costs and stresses arising for the family. Elements of good succession planning SMSF succession planning broadly aims to accomplish the following outcomes: • having the right people gain control of the SMSF to ensure superannuation benefits are paid as intended, Continued on next page
Continued from previous page
• having the right people receive the intended proportion of SMSF money and assets, and • ensuring outcomes are provided in a timely and legally effective manner, with minimal uncertainty and in as tax-efficient a manner as possible. SMSFs are subject to some complex rules and are strictly regulated by the ATO, with sizeable penalties available to be imposed for most breaches. Thus, expert advice should be considered when undertaking this type of strategy, especially seeing not all SMSFs will have governing rules covering the right succession strategies. Accordingly, there is no easy one-size-fitsall solution for SMSF succession. However, all plans should, at least: • determine the person(s) who will occupy the office of trustee/director upon loss of capacity or death, • ensure the SMSF can continue to meet the definition of an SMSF under section 17A of the Superannuation Industry (Supervision) (SIS) Act 1993, • determine what each member’s wishes are for their superannuation benefits, • determine to what extent each member’s wishes should be locked in through the use of a reversionary pension and/ or a binding death benefit nomination (BDBN), and • determine the tax profile of anticipated benefits payments. Succession on loss of capacity With the passage of time there is a significant risk some SMSF members may lose the capacity to administer their own affairs. In the absence of prior planning, this could result in major uncertainty and risk arising in relation to control of the SMSF. Having an enduring power of attorney (EPOA) in place can help overcome this problem as such an appointment is ‘enduring’, enabling a trusted person, that
is, the member’s attorney under an EPOA, to continue to run the SMSF as their legal personal representative (LPR) in the event of loss of capacity. It is strongly recommended every SMSF member implement an EPOA as a part of their personal SMSF succession plan. It would not be an exaggeration to say being an SMSF member without having an EPOA is a significant risk exposure. Naturally, given the important responsibilities placed on an attorney, a member must trust their attorney to do the right thing by them. Only a trusted person should be nominated and insofar as the member retains capacity, the EPOA should be subject to ongoing review to ensure its ongoing appropriateness. Consideration should also be given as to whether the scope of the appointment should be general in nature, that is, a general financial power, or limited to the SMSF or to the fund trustee. For example, if the member wishes to preclude their attorney from exercising certain rights in relation to their member entitlements or making or revoking their BDBN, this should be expressly covered in their EPOA. It should be noted that having an EPOA in place does not generally give effect to an intended appointment of the attorney as an SMSF trustee or director of a body corporate that is trustee. An EPOA merely permits the member’s attorney to occupy the office of trustee or director of the corporate trustee to help satisfy the trustee-member rules set out in section 17A of the SIS Act. Thus the attorney must still be appointed at the trustee level at the appropriate time. The appointment mechanism that facilitates an attorney, or other LPR, to step into the role of trustee/director must be contained in the SMSF trust deed and the company’s constitution. For example, in the context of a corporate trustee and in the absence of other appointment provisions in the constitution, generally a majority of the
Inadequate attention to succession planning could result in super death benefits being paid otherwise than intended and unnecessary costs and stresses arising for the family.
company’s shareholders must exercise their voting rights to appoint a director. Succession on death The death of a member is the other key succession planning risk needing to be carefully considered. Section 17A(3) of the SIS Act provides an exception to the trustee/member rules where a member has died. The exception in this section provides that a fund does not fail to satisfy the basic conditions of the trustee/ member rules by reason only that: a. a member of the fund has died and the [LPR] of the member is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during the period: i. beginning when the member of the fund died, and ii. ending when death benefits commence to be payable in respect of the member of the fund. This exception permits an LPR of a deceased member, such as an executor of a deceased person’s estate, to be a trustee or director in place of a deceased member until that member’s death benefits Continued on next page
QUARTER IV 2024 59
STRATEGY
Continued from previous page
commence to be payable. However, this provision does not result in an LPR becoming a trustee or director. This means, for section 17A(3) of the SIS Act to apply, an LPR must actually be appointed as either: • a director of the corporate trustee pursuant to the constitution of the company, or • an individual trustee pursuant to the governing rules of the fund. This has been confirmed in numerous cases, including Ioppolo v Conti [2013] WASC 389, Ioppolo v Conti [2015] WASCA 45 and implicitly in Wooster v Morris [2013] VSC 594. In Ioppolo v Conti [2013] WASC 389, Master Sanderson described the operation of section 17A(3) as follows ([20]): “…The mechanism of the section is tolerably clear. Section 17A(3) allows for the appointment of an executor as a trustee of the fund but does not in its terms require such an appointment…” These cases broadly confirm a deceased person’s LPR, that is, their executor, will not generally step into the role of an SMSF trustee or director automatically upon a member’s death. Broadly, it depends on the provisions of the fund’s trust deed and the company constitution (most SMSF deeds and constitutions do not have a mechanism for this to occur) and whether there are other legal documents in place to ensure this occurs. The role of the Corporations Act 2001 Section 201F of the Corporations Act 2001 empowers the personal representatives of a sole director and sole shareholder in a private company to appoint new directors for the company on the death or loss of mental capacity of the principal, that is, the
60 selfmanagedsuper
sole director/shareholder. Thus, if an SMSF was a sole member who is also the sole director/shareholder of the corporate trustee, section 201F can assist in relation to the member’s LPR exercising powers to take control of the SMSF trustee after their death or loss of legal capacity. However, it is important to understand the limitation of this provision. For instance, section 201F cannot assist where a fund member has died and the SMSF trustee company has more than one director or shareholder, or where the shareholder is a person other than the sole director who has died. Accordingly, relying on section 201F is not a sound strategy in many cases. Successor directors By ensuring the fund’s corporate trustee has an appropriate company constitution containing successor director provisions, it is possible to plan for smooth succession to the role of a director in advance, while also overcoming limitations that apply in respect of: • appointing a new director via the usual rules in the corporate trustee’s constitution, for example, by majority shareholder vote, or • the limited flexibility in section 201F of the Corporations Act 2001. Making a successor director nomination allows a director, that is, the principal director making a nomination in accordance with an appropriately drafted constitution, to nominate a person to automatically step into their shoes immediately upon their loss of capacity, death or a specified event occurring. The successor director strategy is designed to work in conjunction with a member’s overall estate and succession plan to enable an attorney appointed under
It is strongly recommended every SMSF member implement an EPOA as a part of their personal SMSF succession plan. It would not be an exaggeration to say being an SMSF member without having an EPOA is a significant risk exposure.
an EPOA or an executor of a deceased member’s estate to be automatically appointed as a director without any further steps involved. Naturally, a successor director strategy relies on the right paperwork being in place, including the right constitution and related successor director nomination form. Conclusion Forward planning supported by the right documents is required for smooth and effective SMSF succession planning. Please note, expert advice should be sought in relation to formulating and implementing an appropriate SMSF succession plan. Part 2 in this multi-part series on SMSF succession planning will cover the role of BDBNs.
WE CAN HELP WITH CLIENT EDUCATION Advisers see client education as part of their responsibility but don’t always have the time to fulfil this obligation. A solution can be to white label smstrusteenews. Doing so will keep your clients informed on the major issues shaping the sector and ensure engagement every fortnight. To explore this opportunity further contact us at info@bmarkmedia.com.au | d.tyson-chan@bmarkmedia.com.au
Tell us what you need
NEWS ATO, COMPLIANCE & REGULATION, SMSF March 25, 2024 | Todd Wills
A further 149 trustees banned
NEWS REGULATION, SUPERANNUATION September 8, 2023 | Todd Wills
Super objective bill released
Close to 150 SMSF trustees were disqualified in the December quarter 2023, marking a substantial decrease in barred trustees compared to the previous three-month period. read more. SMSF, SMSFA, TAX March 25, 2024 | Jason Spits
Close to 150 SMSF trustees were disqualified in the December quarter 2023, marking a substantial decrease in barred trustees compared to the previous three-month period. read more.. LEGISLATION, SMSF, SMSFA, TAX March 25, 2024 | Jason Spits
New tax policy rushed and flawed Government plans to introduce a superannuation earnings tax for total super balances over $3 million have been rushed and remain flawed. read more..
New tax policy rushed and flawed Government plans to introduce a superannuation earnings tax for total super balances over $3 million have been rushed and remain flawed. read more. INTERNATIONAL SHARES, INVESTMENTS March 25, 2024 | Todd Wills
Global dividends surge Global dividends paid out to shareholders hit record highs in 2023, with banks leading the way, despite a decline from mining giants. read more..
SUPER EVENTS
SMSF Trustee Empowerment Day 2024
This year, smstrusteenews hosted SMSF Trustee Empowerment Day 2024 in conjunction with the SMSF Association. The Sydney event took place at the Rydges Central Sydney hotel with around 120 delegates in attendance. 1
3
2
4
6
62 selfmanagedsuper
5
6
8
9
13
10
11
14
12
1: Neil Sparks (SMSF Association). 2: Andrew Thomson (CFMG Capital). 3: Les McMillan (SMSF Compliance Audits). 4: Arthur Naoumidis (Aligned Disability Property Fund). 5: Neil Sparks (SMSF Association), Liz Westover (Deloitte), Tracey Besters (The Strategy Hub) and Darin Tyson-Chan (smstrusteenews). 6: Dania Zinurova (Wilson Asset Management). 7: Victoria Arellano, Jay Husarek and Ruth London (all Gold Bullion Australia Group). 8: Tracey Besters (The Strategy Hub). 9: Arthur Naoumidis (Aligned Disability Property Fund). 10: Ruth London (Gold Bullion Australia Group). 11: Liz Westover (Deloitte). 12: Lauren Ryan (Thinktank). 13:Todd Wills and Jason Spits (both smstrusteenews). 14: Neil Sparks (SMSF Association) and Liz Westover (Deloitte). QUARTER IV 2024 63
SUPER EVENTS
IFPA Australian Financial Industry Awards 2024
In November 2024, the Institute of Financial Professionals Australia hosted the inaugural Australian Financial Industry Awards at the Four Seasons Hotel in Sydney.
1
3
2
4
5
7 6
64 selfmanagedsuper
8
11
9
10
12
13
14
1: Tracey Rubens (Appy Books). 2: Peter Berner (Comedian). 3: Sam El Shammaa (Finchley and Kent). 4: Shelley McGinty (Preston Point Capital). 5: Nicola Beswick (FMD Financial) and Natasha Panagis (Institute of Financial Professionals Australia). 6: Warren Strybosch (Find Group). 7: Sarah Foggie (Southern Star Advisory). 8: Kylie Abby (Encore Financial Services). 9: Ben Nash (Pivot Wealth). 10: Helen Francis (Ty Francis). 11: Keegan Harper (WHM Partners). 12: Terry Chung (Factor 1 Accountants and Advisers). 13. Awan Hammad, Gino Coiera, Lina De Marco, Ron Phipps-Ellis and Brian Roughley (all Auditors Institute). 14. Christine McWilliams (The SMSF Foundation) and Phil Broderick (Institute of Financial Professionals Australia). QUARTER IV 2024 65
“ I NEVER THOUGHT I’D BE HOMELESS.” Like many of us, Megan* never thought it would happen to her – she never imagined she would need to escape a violent relationship; she never imagined her own family would turn their backs on her; she never imagined she and her daughter would become homeless and have to live out of their car. Right now, there are thousands of Australians like Megan* experiencing homelessness but going unnoticed. Couch surfing, living out of cars, staying in refuges or transitional housing and sleeping rough – they are often not represented in official statistics. In fact, for every person experiencing homelessness you can see, there are 13 more that you can’t see. Together we can help stop the rise in homelessness.
Visit salvationarmy.org.au or scan the QR code *Name changed for privacy