2022 Technical Roadshow - Across the Golden Line

Netwealth Investments Limited

Level 6, 180 Flinders Street Melbourne, VIC 3000

Freecall 1800 888 223

Fax +61 3 9655 1333

Email contact@netwealth.com.au Web netwealth.com.au

ABN 85 090 569 109

AFSL 230975

DISCLAIMER: FINANCIAL ADVISER USE ONLY

This information has been prepared by Netwealth. Whilst reasonable care has been taken in the preparation of this booklet using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information.

Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No. 230975) and Netwealth Superannuation Services Pty Ltd (ABN 80 636 951 310), AFS Licence No. 528032, RSE Licence No. L0003483 as the trustee of the Netwealth Superannuation Master Fund, is a provider of superannuation and investment products and services. Information contained within this presentation about Netwealth’s products or services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

Taxation considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Information in this document may contain forward looking statements regarding our reviews with respect to potential regulatory changes. Unless specified, all information in this document is current as at May 2022.

Financial adviser use only – This document is intended for adviser use only. Unauthorised use, modification, disclosure or distribution to any other party without Netwealth’s express prior written consent is prohibited.

Advice Foundations

Family planning matters

DISCLAIMER: FINANCIAL ADVISER USE ONLY

This information has been prepared by Netwealth. Whilst reasonable care has been taken in the preparation of this booklet using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information.

Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No. 230975) and Netwealth Superannuation Services Pty Ltd (ABN 80 636 951 310), AFS Licence No 528032, RSE Licence No. L0003483 as the trustee of the Netwealth Superannuation Master Fund, is a provider of superannuation and investment products and services. Information contained within this presentation about Netwealth’s products or services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product

Taxation considerations are general and based on present tax laws and may be subject to change You should seek independent, professional tax advice before making any decision based on this information.

Information in this document may contain forward looking statements regarding our reviews with respect to potential regulatory changes. Unless specified, all information in this document is current as at May 2022

Financial adviser use only – This document is intended for adviser use only. Unauthorised use, modification, disclosure or distribution to any other party without Netwealth’s express prior written consent is prohibited.

Financial adviser use only

Family planning matters

This is true on almost every level:

• Families can be very diverse, sometimes needing to incorporate parents, children, grand-children, family businesses, SMSFs and other structures. Each level of family will have different needs and possible solutions and so family planning matters.

• Time and again we get questions from advisers who are trying to help clean up an overly complex set of financial structures that may have made sense at the time, but, now due to changes in the law or family circumstances have become legacy problems creating unforeseen problems and so family planning matters.

• We all want to look after our families as best we can so family planning matters

The diagram below is based on a real-life case faced by an adviser and shows how complex family structures can become if they evolve over time without some overarching plan that looks forward as opposed to looking at the past or now.

Start with the parents

Typically, it would be the parents who have created the wealth, have the higher cashflow and in the instances where family planning normally becomes critical, have “maxed out” many of the traditional tax planning options such as concessional superannuation contributions and negative gearing.

One attractive investment option that seems to have waned in popularity is limited recourse borrowing arrangements (LRBA) in SMSFs. This can still be a very effective strategy for high net wealth individuals as gearing into super is almost as good as contributions. While careful consideration and planning is required, LRBA can be strategically used in both accumulation and pension mode.

The borrowing can be sourced from a related party – the parents/members – or from a commercial lender. Legislative and administrative regulations have been tightened significantly and there are impacts for transfer balance account (TBA) and total super balance (TSB) reporting, but it should be remembered that in these cases you are probably dealing with high net wealth families and so this level of complexity and regulation is relatively normal. From the beginning, it is probably a good idea to create a team of advisers to the family group that might include the accountant, a lawyer, an SMSF administrator and you as the strategist and investment specialist. Using a comprehensive platform to administer the investments and provide data to the accountant and administrator should leave the adviser more time to concentrate on strategy and planning.

LRBA – safe harbour guidelines

Where an LRBA with a related party lender is established and the loan is not on commercial terms, the ATO may classify the income from the arrangement as non-arm’s length income (NALI). NALI is subject to tax at the highest marginal rate. In order to avoid this, the ATO established the so-called “safe harbour” lending guidelines which set out the loan terms and conditions which must be met to ensure that the ATO will accept the LRBA as being an arm’s length dealing thereby avoiding penalty NALI tax rates.

The table shows the borrowing terms required to be met for the ATO safe harbour guidelines:

Loan feature Real property (residential or commercial) Shares/units listed on a stock exchange

Interest rate benchmark Reserve Bank Indicator Lending Rates for banks standard variable housing loans for investors

Repayment type

Loan term

Variable or fixed. Maximum five years for fixed rate terms before switching to variable

Maximum of 15 years

Loan to value ratio 70%

Reserve Bank Indicator Lending Rates for banks standard variable housing loans for investors, plus 2%

Variable or fixed. Maximum three years for fixed rate terms before switching to variable

Maximum of 7 years

50%

Security Registered mortgage over property Registered charge/mortgage or similar security

Personal guarantee Not required Not required

Repayment frequency Monthly. Must be principal and interest Monthly. Must be principal and interest

Loan agreement Written and executed Written and executed

TSB implications

For LRBA commencing after 1 July 2018, the LRBA amount as at each 30 June counts against the TSB if either:

• the LRBA is an associate loan, or

• a member/s has met a condition of release with a nil cashing restriction

If it is a loan by a related party, then all members whose interests are supported by the LRBA will have their TSB adjusted up.

If the LRBA is financed via a commercial loan, only members who have satisfied a nil condition of release will have their TSB adjusted up. This change does not impact existing LRBA entered into before 1 July 2018 or refinanced after that date, if:

• The new borrowing is secured by the same asset or assets as the old borrowing

• The refinanced amount is the same or less than the existing LRBA

The outstanding LRBA amount that is included in the member’s TSB each 30 June is the proportion of the total outstanding balance based on member’s share of the super interest supported by the LRBA.

TBA implications

A credit will arise in the member’s TBA for a payment under an LRBA entered into on or after 1 July 2017 if it results in an increase in the value of the super interest that supports an income stream in the retirement phase, and it is in respect of a SMSF (or SAF).

This may happen if there is a repayment of an LRBA that transfers value from accumulation interests into pension interests ie the member pays down some of the outstanding loan amount held in a pension account from their accumulation account.

There is no TBA credit generated if repayments of outstanding LRBA amount is sourced from assets that support the same pension, for example, from other sources such as rental income from the property being acquired under the LRBA.

This is because there is no increase (or any transfer in value from accumulation) in value of interest supporting the income stream as the loan repayment is offset by rental income which is earned in the pension phase.

A last word on SMSFs

SMSFs are wonderfully flexible structures that allow families to consolidate personal and business structures and plan more wholistically. Recent changes that allow up to 6 member SMSFs potentially increase the scope and financial resources to enhance such plans.

However, SMSFs do have a “use by date” whereby, whether for reasons of member age/mental capacity or a change in family circumstances, they simply are more trouble than the benefits that are available at that time. Further, greater flexibility usually means greater complexity, increase administration burden and expense and, more members can also mean greater propensity for management dispute. And then there is death! Managing death benefits along with family business structures, LRBAs and differing family objectives can get very messy. Add a blended family overlay and it can be a recipe for disaster.

These issues are not impossible to manage BUT planning ahead and having the right trust deed and right advice is absolutely critical.

Planning for children, grand-children and beyond

This can take many forms including helping them financially, to buy a home, helping with school fees etc. However, many of the major problems arise when dealing with family wealth distribution in the event of adult children’s marriage break-ups, health difficulties, where there is a “black sheep” child and of course in the transfer of wealth from parents to the next generation. Rarely are there 100% solutions that will satisfy everyone, but by planning ahead, it may be possible to better control the damage or financial pain.

When it comes to estate planning for the children, clients need to understand issues such as:

• What does and does not go through the estate

• The impact this has on the ability for others to challenge the estate

• Making sure the right assets are directed to right beneficiaries

‒ Family business directed to child/ren involved with the on-going business or personal assets going to those with great sentimental attachments

• Cash or assets?

‒ Tax considerations – make sure the after tax “bottom line” is similar

‒ Principal residence may be transferred tax free whereas super death benefits and other assets may have tax payable

‒ Centrelink impacts on some

• Effective holding structures moving forward

‒ Testamentary trusts

‒ Special disability trusts

‒ Death benefit pensions

‒ Child pensions

Death is not necessarily a taxing point, in fact, capital gains and losses are ignored on death. It is not until the beneficiary disposes of the asset that tax may become payable. The ownership can pass through some structures, for example, the deceased person’s asset passes to a testamentary trust and then some time in the future from the trust to the beneficiary. It is not until the beneficiary disposes of the asset that it becomes a taxable event. There are some exceptions such as where the asset passes to a foreign resident, an exempt entity or a super fund.

Other points to remember include:

• Modification of the 12 month rule for CGT so that the trustee or beneficiary “stand in the shoes” of the deceased:

‒ If the 12 month rule has been satisfied by the deceased, it is satisfied by the trustee/beneficiary;

‒ If not, the balance of the 12 months must be served out

• Determining the assets cost base:

‒ If it is a pre CGT asset, then the trustee/beneficiary is taken to have acquired the asset at the market value as at the date of death

‒ If post CGT asset, it is deemed to be acquired at the deceased cost base at the date of death

Remember also that there are three stages of tax to consider when dealing with the estate:

1. Tax for the deceased up to date of death

2. Tax for the estate under administration – estate income taxed at resident tax rate with tax free threshold – maximum 3 years administration (year of death first FY for estate), thereafter top marginal tax rate applies

3. Tax assessed on beneficiaries presently entitled

Children with a “rocky marriage”

Unfortunately, not all marriages will be “until death do you part” and dealing with this situation can be difficult whether it occurs within the parent’s lifetime or if allowances need to be made as part of the estate planning process.

In either case, once the assets are in the hands of the children, Family Law has very wide powers to include all the assets as part of the settlement.

Superannuation is not a protection against Family Law.

Family trusts may offer some protection from an estranged spouse, but it is a common misconception that assets owned by a discretionary trust will not form part of the property pool available for division between spouses. Whether a trust forms part of the property pool will depend on the nature of a spouse’s interest and their degree of control over the trust. Generally, for a trust to be considered property, it is not enough for a spouse to simply be in a class of beneficiaries eligible for distribution from a trust.

Where a trust is set up by a spouse’s parents, and the parents have built up the assets in the trust, are the appointers and trustees, and the spouse is simply in a class of beneficiaries, and, depending on (for example) the history of distributions to the spouse, the trust could likely be treated as a financial resource rather an asset in the property pool to be divided. This is because the spouse has no control over the trust.

Assets left (to children) via a testamentary trust often have more lenient treatment from Family Law courts because the assets are seen as “inherited assets”. Thus, they are seen as being held for the entire family rather than belonging to a particular individual.

As a “left field” strategy, consideration could be given to giving and protecting assets by way of a loan to the individual. In the event of a marriage dispute, the loan would normally need to be repaid to the family as the lender.

The “black sheep” of the family

The “black sheep” in a family may also be of concern. Whether it be mental capacity or lavish lifestyle abuse choices, these children sometimes need special structures to protect both themselves and the family wealth base. Once again, the usual answer to this is the use of the various trust structures where the trustee has control to distribute income and capital as they see fit. Note that in these cases, appointing a family member in this role can put them in a challenging position, so often, there is a need to consider the use of a professional trustee.

Disabled children – special needs

Disabled or children with special needs, require extra careful planning. The situation can often be managed while the parents are alive, but as parents age, and after death, there are many factors to consider including:

• How does the child maintain their independence?

• Who will manage their life and health affairs? Brothers and sisters may not always be the best choice

• Who will manage their financial affairs?

• Centrelink support?

These are complex and emotional issues and there is rarely a simple answer, and it can often revolve around other issues, such as the need to maintain Centrelink eligibility. Simply because a family seems to have significant wealth does not automatically exclude the disabled individual from such support. Indeed, it may be the preferred option in certain circumstances. For example, a child that wants to live independently but has high medical costs and a need for extended home care, may be better served with a special disability trust and professional trustee rather than a brother or sister simply moving into that role (assuming they wanted to or had the skills) even if they are backed by a discretionary trust with significant financial resources.

Looking out for the “grand-kids”

Providing for grandchildren brings its own set of considerations. Generally, grandchildren are not dependants of grandparents and therefore the use of super death benefits is unlikely to be available. That said, it is not impossible to prove an interdependency between grandparents and grandchildren but generally this would require a much closer relationship such as them actual living together, and the grandparents effectively doing the parenting role. Simply helping with school fees or similar is unlikely to meet the test.

Super for grandchildren, however, is a real possibility. Grandparents could consider contributing to super on their behalf or even structuring the contributions to meet the FHSSS guidelines. Either way, the long-term nature of investing for grandchildren lends itself to superannuation as an investment medium.

Other than these, the most likely contenders for consideration are the use of investment bonds while the grandparents are alive or establishing a testamentary trust as part of the estate plan. Investment bonds are taxed at 30% but this is better than the highest marginal tax rate, they have simple management being outside personal tax reporting, wide investment choice and do not fall into the estate thereby providing greater certainty that they will end up with the right person.

Consider a charity fund – private ancillary funds

Finally, when the family is accounted for, high net wealth parents may wish to establish a charity fund. This may fulfill a need to “feel good” or to “give back” to society. Either way, there are many special rules to adhere to when considering private ancillary funds (PAF). A PAF is a private fund that is exempt from income tax and can provide a receipt to donors, which enables them to accept tax deductible contributions (donations) and generally, have the same tax status as registered charities.

PAFs can be established by an “instrument of trust” or by the “will”. Either way, to access the tax concessions, there are prescribed guidelines that must be met including:

• No distribution required in year of setup

• Otherwise, must distribute on annual basis

• Fund must not borrow generally

• Must be audited annually

As a general rule of thumb, PAFs are not practicable and not likely to be cost effective for amounts under $500,000. For lesser amounts, there are umbrella style master funds that have similar features without the administration hassles but which still provide naming rights making them a suitable alternative.

Conclusion

Many of these specific options are covered in greater detail in this tech booklet but the key point here is that these options need to be structured in advance as it is often too late to put them in place after death. It was said in the opening comments that there needs to be some overarching plan that is looking forward rather than reacting to the past or the “now”. In many cases this should be the role of the financial planner – planning and strategy looking forward. However, achieved, as the title suggested, at all levels, family planning matters.

Advice Foundations

The last bite

DISCLAIMER: FINANCIAL ADVISER USE ONLY

This information has been prepared by Netwealth. Whilst reasonable care has been taken in the preparation of this booklet using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information.

Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No. 230975) and Netwealth Superannuation Services Pty Ltd (ABN 80 636 951 310), AFS Licence No. 528032, RSE Licence No. L0003483 as the trustee of the Netwealth Superannuation Master Fund, is a provider of superannuation and investment products and services. Information contained within this presentation about Netwealth’s products or services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

Taxation considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information

Information in this document may contain forward looking statements regarding our reviews with respect to potential regulatory changes. Unless specified, all information in this document is current as at May 2022.

Financial adviser use only – This document is intended for adviser use only. Unauthorised use, modification, disclosure or distribution to any other party without Netwealth’s express prior written consent is prohibited

Financial adviser use only

The last bite

As much as we can preach to people that you should start your investment journey as young as possible, and that compounding over time is the greatest investment tool you can have, in the majority of cases, it is still likely that most retirement saving efforts will be concentrated later in life.

This section focuses on those investment strategies that can be used later in a client’s working life to extract maximum advantage – a so-called “last bite of the cherry”.

Transition to retirement pension (TTR)

TTR’s are still available but having lost the tax exemption on fund earnings when not in retirement phase, they seem to have largely been forgotten. A TTR is simply an account-based pension that:

• Can be commenced from preservation age and using preserved benefits

• Is non-commutable other than back to accumulation (and some very limited other cases)

• Has the normal minimum pension payment threshold

• Has a maximum pension payment of 10% pa

• Lump sum withdrawals are not permitted

• May be “in” or “out” of retirement phase which itself determines whether fund earnings as they accumulate are taxable or not

• May count against a member’s transfer balance cap (TBC) or not again depending on whether it is in a retirement phase or not

There are some confusing rules regarding TTRs and while not the subject of this paper, here is a brief overview:

• According to the legislation, the payment and non-commutability restrictions of a TTR fall away once the member has retired or met a condition of release (CoR) with a nil cashing restriction eg attaining age 65

• However, the Australian Tax Office view is that a TTR is a separate product entity and the fund rules will continue to apply while the member remains in the TTR product - once a TTR always a TTR

• This means that in many cases, the restrictions continue to apply even in retirement phase. The only way to escape the restrictions is to rollback to accumulation and commence an accountbased pension in its own right. It important to check with your chosen provider how they deal with this situation.

A TTR will normally NOT be in retirement phase. This in turn means that the earnings as they accumulate in the member account are not tax free – it is taxable in the same manner as an accumulation fund. However, the TTR moves into retirement phase and the fund earnings become tax exempt as they accumulate, when the member:

• Attains age 65, regardless of whether they have notified the fund trustee, or

• Notifies the fund trustee that they satisfy one of the following conditions of release:

‒ terminal medical condition;

‒ permanent incapacity;

‒ retirement; and

‒ reverts to a reversionary beneficiary irrespective of meeting the above conditions

Finally, a TTR is only a credit to the members transfer balance account and tested against their TBC when it moves into retirement phase or at age 65.

Despite the lack of exempt fund earning prior to reaching retirement phase, a TTR still has a number of benefits including:

• The pension payments from preservation age to 59 are taxed at marginal tax rates less a 15% rebate

• From age 60 onwards, TTR pension payments received are tax free to the individual

• Locks in the tax free/taxable proportions

• Providing an income stream supplement for those who are transitioning from full time to part time work

• Can be made reversionary thereby making it a death benefit pension

Automatically moves into retirement phase upon reversion – tax free earnings

The tables below summarise the key issues discussed so far:

a. From age pension age, accumulation accounts are deemed and asset tested for Centrelink

b. Pension payments from age 60 received tax free to beneficiary

Member pension benefit tax payable

Member tax rate on pensions Tax Free component Taxable taxed component

ABP and TTR under preservation age 0%

ABP and TTR preservation age to 59 0%

ABP and TTR 60 and above

TTR last bite strategy #1

Commence TTR at preservation age, even though fund earning will be taxable, and salary sacrifice exchanged amount into super because:

• Exchanging high tax salary for lower tax pension payments – even the TTR pension at marginal tax rate less 15% rebate is an improvement

• Increased amount into super will be taxed at only 15% rather than marginal tax rate in own hands and it is this tax differential that creates the benefit

• Lower personal tax impost due to salary sacrifice arrangement

• Can be used in conjunction with the carry forward of unused concessional contributions (allowing a higher salary sacrifice amount than the annual cap of $27,500) where member total superannuation balance (TSB) is less than $500,000 at previous 30 June

• Achieves more money into super’s tax advantage environment both now and for use at retirement (60+) where there will be zero tax on earnings and pension payments

TTR last bite strategy #2

As above but begin from age 60 onwards or continue from pre-preservation age strategy. All the above benefits apply with the added bonus that the pension payments are now tax free – members can now exchange high tax salary for zero tax pension. This makes the salary/pension tax arbitrage even more attractive - see the worked example in the presentation.

TTR last bite strategy #3

Still require insurance? As one gets older insurance premiums tend to increase so funding those premiums via superannuation is very attractive:

• Premiums deductible to the member account; and

• Premiums not paid from household income.

The bonus available here is that where the premium is paid from a pension account -including a TTR –any insurance proceeds inherit the tax free /taxable proportions of the member account from which they were paid. This contrasts starkly with the situation where the premiums are paid from a member accumulation account and the proceeds being 100% taxable.

Imagine fine tuning this strategy with a $330,000 bring forward non-concessional contribution being made to a separate account (to avoid mixing with any other accumulated balance with taxable component) with a TTR commencing immediately locking in a 100% tax free TTR account from which insurance premiums are being deducted from. The result is the insurance premiums is tax deductible as the TTR is not in retirement phase with all the above benefits as discussed above plus 100% tax free insurance proceeds in the event the policy is called upon.

Carry forward unused concessional contributions

From 1 July 2018, individuals may be able to carry-forward any unused concession. An individual’s concessional contributions cap is increased for any unused amount over previous 5 years. The first year this can be used was the 2019/20 financial year. Two key conditions must be met:

• The member’s total super balance must be less than $500,000 on the previous 30 June; and

• The member’s concessional contributions exceeded the member’s general concessional contributions cap for a financial year.

This translates into potential concessional contributions caps of:

• As at 30 June 22 up to $102,500 concessional contribution available

• First full 5 years of operation of the rule, up to $157,500 concessional contribution available

• Future maximum possible up to $165,000 (where a max of $27,500pa is available) concessional contribution available

Carry forward strategies – general every day

Increasing concessional contributions via either salary sacrifice or personal deductible contributions to reduce personal tax is always a valuable tax effective strategy. It can become particularly useful if you run a strategy to stockpile your unused concessional contributions for use in years of high income:

• Years in receipt of big salary bonus

• Large capital gain from sale of investment asset

Carry forward strategies – slightly outside the square

Consider using this strategy in the following circumstances:

• Direct distributions from discretionary trusts to beneficiaries with higher carry forward amounts. Has the potential to widen the distribution net without increasing the tax burden

‒ May be particularly useful where child beneficiaries are turning 18

‒ Consider using with a First Home Super Saver Strategy whereby the concessional contribution becomes any eligible FHSSS contribution

• Want to transfer personal assets into super? This is a CGT event so the ability to access carry forward unused amounts to offset such gains would be very useful

• Foreign residents and ex-pats with a property portfolio in Australia can access the carry forward arrangements to their benefit

• Can be particularly beneficial when approaching retirement:

‒ As investment debt is often cleared or is substantially lower as an individual approaches retirement , resulting in a significant reduction in tax deductible expenses to offset income. The carry forward unused concessional strategy could be very useful replacement strategy

‒ Income is often higher in final year of employment due to payment of stockpiled service entitlements making personal contribution deductions particularly useful

‒ Such ‘last minute contributions’ close to retirement could be immediately accessible too

‒ Generally, an excellent catch-up opportunity for those who have been unable to contribute regularly to super in previous years – e.g. self-employed

Work test and non-concessional bring forward rules – more time for a last bite

From 1 July 2022, individuals who are between 67 to 74 years old will be able to make or receive personal contributions (after tax) and salary sacrificed contributions without meeting the work test, subject to the existing contribution caps.

Note that individuals will still be required to meet the work test from age 67 onwards to claim a deduction for personal contributions.

With no work test requirement to age 74, there are 8 extra years to make up to 10 years worth of contributions when combined with the bring forward. This could be further enhanced if used with the downsizer contribution albeit that individuals would need to watch the impact of the timing of the non-concessional contributions and the downsizer to effectively manage the members total superannuation balance

Bring forward rules to age 75 – more time for the last bite

The ability to utilise the non-concessional bring forward rule has also been extended to age 74. It will mean that those approaching age 75 will potentially have ability to use the bring forward rules in the year they turn 75 – that is, it is available as long as the individual is 74 on 1 July and makes the full nonconcessional bring forward contribution prior to turning 75 or latest within 28 days of the end of the month that the individual turns 75. The normal requirement in relation to the members total superannuation balance and their ability to make non-concessional contributions continue to apply

This creates a unique opportunity for potentially three more cycles to undertake a “pension refresh” strategy to greatly increase the tax free component. This is a great estate planning opportunity to keep the children happy!

Downsizer – an earlier bite

From 1 July 2022, the age for the making of a downsizer contribution is reducing from 65 to 60. All the other criteria continue to apply:

• From 1 July 2022, being 60 years or older when downsizer contribution is made (there is no maximum age limit)

• Up to $300k each from the proceeds of selling home

• Home owned by you or spouse for 10+ years prior to the sale – generally calculated from the settlement dates

• Home must be in Australia - not a caravan, houseboat or mobile home

• Sale proceeds either exempt or partially exempt under the main residence exemption

• Contribution within 90 days of receiving sale proceeds

• No previous downsizer contribution

It is worth noting that the ATO has recently confirmed that provided all the conditions above are met, there is no need to trace through how the contribution is funded – that is, in-specie assets instead of actual cash proceeds from the sale can be contributed up to the $300,000 limit.

The strategy value adds here are:

• Additional 5 years of increased flexibility for retirement planning of downsizing

• Ability for a couple age 60 or older to get up to $600k into super

• Exempt from non-concessional cap – with bring forward rule, up to $1.26m for a couple!

• All forming part of the tax-free component

Every little bite helps irrespective of age

There are several Government tax breaks and contributions that when combined, can make a surprisingly positive impact on an individual’s wealth creation journey.

Low-income super tax offset

The LISTO is a government payment of up to $500 to help boost the super savings of low-income earners. If eligible for a low-income super tax offset, the government will automatically refund the tax an individual has paid on any before-tax contributions (such as personal deductible and employer contributions).

You are eligible for the LISTO if you satisfy all of the following requirements:

• You or your employer pay concessional contributions for the year – including SG amounts

• Your adjusted taxable income is $37,000 or less a year

• You have not held a temporary resident visa at any time during the income year

• 10% or more of your total income comes from business and/or employment

The offset is calculated as 15% of the concessional contribution up to a maximum of $500. This equates to a maximum effective contribution of $3,333 pa ($3,333 x 15% = $500)

Strategically, if appropriate have clients look for tax deductions that reduce adjusted taxable income such as income protection premiums and business expenses to the level eligible for LISTO. Also remember that if you are eligible for LISTO, super co-contribution could be a consideration.

Co-contribution

The super co-contribution is to assist eligible individuals to save for their retirement. If you are eligible and make personal super contributions during a financial year, the government will pay a super cocontribution up to certain limits.

You should be eligible for a Government Co-contribution if:

• Total income for the 2021/22 financial year is less than $56,112

• After-tax super contributions have been made and a deduction has not been claimed for it

• You haven’t contributed more than the non-concessional contributions cap

• A tax return for that year of income must be lodged

• Must be a permanent resident of Australia and under 71 years of age

• Must supply your Tax File Number, and

• at least 10% of your ‘total income’ comes from employment-related activities, and/or running a business.

Broadly, on meeting the eligibility criteria above, the full Government Co-contribution of up to $500 is available by contributing $1,000 into a super fund by the end of this financial year.

The last word on the last bite

There are many strategies available to get money into superannuation. How effective and which are most appropriate will depend on a range of factors. If you have clients approaching retirement, it is certainly a good idea to review all possible strategies as this is the last prime chance for them to maximise contributions to super. Make sure you review all the possible options to achieve the best outcome.

Advice Foundations

Structures to die for

DISCLAIMER: FINANCIAL ADVISER USE ONLY

This information has been prepared by Netwealth. Whilst reasonable care has been taken in the preparation of this booklet using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information.

Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No. 230975) and Netwealth Superannuation Services Pty Ltd (ABN 80 636 951 310), AFS Licence No. 528032, RSE Licence No. L0003483 as the trustee of the Netwealth Superannuation Master Fund, is a provider of superannuation and investment products and services. Information contained within this presentation about Netwealth’s products or services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealthcom.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

Taxation considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Information in this document may contain forward looking statements regarding our reviews with respect to potential regulatory changes. Unless specified, all information in this document is current as at May 2022

Financial adviser use only – This document is intended for adviser use only Unauthorised use, modification, disclosure or distribution to any other party without Netwealth’s express prior written consent is prohibited.

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Structures to die for Introduction

As the old saying goes … there are only two certainties in life – death and taxes! We often spend a great deal of time and worry trying to minimise taxes and so we should probably spend similar resources on planning effectively for our demise – otherwise known as estate planning.

Estate planning is a very wide field. It can be as simple as “leaving everything equally to the kids” to far more complex (and expensive) structures that attempt to control events and decisions from beyond the grave.

There is in fact a third certainty in life and that is change. In this fast-paced life, we can be certain that what seems an appropriate decision at the point in time when it is made, will most likely need to be reviewed and changed at some future point – it’s just a matter of “when” rather than “if”.

The “legal landscape” is littered with cases where estates have been challenged or the validity of superannuation nominations called into question. Often the result is that the deceased’s wishes are not complied with, and a large proportion of the estate assets are lost to legal fees.

This section explores some alternate strategies that might be considered when looking at a client’s estate planning options. We also highlight some very bad ideas (in part 2) that should be avoided at all costs.

Testamentary trusts

What is a testamentary trust?

A testamentary trust is simply a discretionary trust (like a family trust) that is established by the will of the deceased person. That is, it is a discretionary trust established after death.

Upon the death of a Will-maker, some or all of the assets of the deceased are distributed to the trustee(s) of the testamentary trust which then hold(s) the assets for and on behalf of the nominated beneficiaries. These assets can be sourced from both super and non-super assets.

Some wills may establish a single testamentary trust for a single or multiple beneficiaries or a number of trusts for a number of different beneficiaries. In any case, rather than the assets being transferred directly to the individuals, the trustee holds the investments as trust assets on behalf of the beneficiaries and distributes income and /or capital either in accordance with the trust rules or at their discretion. When compared to a lifetime trust a testamentary trust has a number of additional benefits because it is dealing with the assets of a deceased person.

Tax ramifications – paid from superannuation

Member super benefits can be paid to the deceased person’s estate - their legal personal representative – and from there, the will can direct the assets to a testamentary trust.

The tax implications of a super transaction can be quite complex and can take place at different structural levels – for example when the fund trustee pays the benefit to LPR (and hence to the testamentary trust), possible tax is payable by the beneficiary/estate upon receipt of the benefit and tax payable on disposal of the asset by the super fund. There are a number of specific factors to consider including:

• Whether the super fund was in accumulation or pension mode

• Whether the assets were segregated or unsegregated

• Whether the beneficiary(s) were death benefit dependants or not

• The tax free/taxable component split

At its simplest level where, for example, the deceased member was 100% in pension mode with a binding nomination to the estate and a will creating a testamentary trust with the spouse as the only beneficiary – the process and result would be as follows:

• No CGT payable by the trustee on disposal of the assets to the estate as the member account was in pension mode and the legislation extends the pension tax exemption until the death benefits are paid out of super

• The benefit exits the concessional super environment upon payment to the estate or legal personal representative (LPR)

• The administrator of the estate (LPR) pays no tax upon receipt of the super benefit because it is being paid through to a death benefit dependant being the spouse

‒ ITAA s302-10 provides that where the LPR receives the benefit as trustee to the estate and the beneficiary benefited, or may be expected to benefit, from the superannuation death benefit, is a death benefit dependant, treat it as if it had been paid to the death benefit dependant

‒ ITAA s302-60 – makes death benefit payments to death benefit dependants’ tax free

• This is the ideal situation as no tax is payable on liquidating the assets in the fund and on payment of the death benefit to the estate, ending up in the testamentary trust for the benefit of the spouse. The money in the testamentary trust is now “non-super” money and taxable and the normal tax rules apply in regard to the distribution of income and capital gains from discretionary trusts.

At a more complex level for example, the member dies in accumulation phase, pre-preservation age, has no super death nomination and the will creates a testamentary trust for a financially independent adult child – the process and result would be rather different as follows:

• The trustee of the super fund pays the benefit to the LPR

• As the fund is in accumulation phase and the assets are disposed of to pay the death benefit lump sum, the fund trustee may be liable to pay tax under the normal rules

• The death benefit exits the concessional super environment upon payment to the estate or legal personal representative (LPR).

• The administrator (LPR) of the estate will need to withhold tax payable on any taxable component as the benefit is being paid to a non-death dependant.

‒ ITAA s302-10 says to the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit, the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant.

‒ ITAA s302-60 – does not apply to non-death benefit dependants and therefore tax of 15% will apply

It can get even more complex where the super death benefit flows to a testamentary trust with both death benefit dependants and non-death benefit dependants nominated as beneficiaries. In this case, the executor is required to withhold tax on the full super proceeds as if the benefit was paid to a non-tax dependant. An exception may exist if the executor can determine the amount of the death benefit that flows via the testamentary trust for the benefit of a tax dependant. Where it is desirable to have a testamentary trust that has both dependent and non-dependent beneficiaries, it generally required that it is drafted to incorporate a ‘sub-trust’ to effectively isolate super proceeds for the benefit of tax dependant beneficiaries.

Tax ramifications – non-super assets

The general rule that applies is that “death is not a CGT event”. The tax Act specifically provides that when you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying, is disregarded. Further, where the asset passes to either the beneficiary or the LPR, they are taken to have acquired the asset on the date of death, and in the case of an asset acquired after 20 September 1985, it is acquired at the deceased persons cost base. If it is a pre CGT asset, then the cost base is the market value on the date of death.

The CGT event – gain or loss - will come to account only when the asset is disposed of by the beneficiary.

Where the asset passes into a testamentary trust, then broadly stated, the ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party).

Tax ramifications – income and capital distributions

Testamentary trusts can also offer a significant advantage when it comes to paying distributions.

Firstly, as a discretionary trust, the trustees have discretions on the distribution and can direct income and capital payments to beneficiaries in the most tax efficient manner. Tax treatment of distributions from a testamentary trust is no different to that from a lifetime family discretionary trust ie provided it is distributed it will not be taxed in the trust but flow through and be taxed in the hands of the beneficiaries as appropriate.

Secondly, an important difference though to lifetime trusts, income from testamentary trusts in certain circumstances, can fall within the definition of “excepted income”. This is particularly useful when distributing to minors as it means that that such income is taxed at the same rates as if they were an adult. This is crucial as income to minors which is not excepted income is subject to a reduced tax-free threshold, therefore mostly taxed at the highest marginal tax rate, and from 201112 does not benefit from the low income tax offset.

Resident Minors Tax Rates

Excepted income includes:

• Employment income

• Taxable pensions or payments from Centrelink or the Department of Veterans’ Affairs

• Compensation, superannuation, or pension fund benefits

• Income from a deceased person's estate, including income derived by a testamentary trust from property of the deceased person's estate

• Income from property transferred to you as a result of the death of another person or family breakdown, or income in the form of damages for an injury you suffer

• Income from your own business

• Income from a partnership in which you were an active partner

It also includes:

• Net capital gains from the disposal of any property or investments listed above

• Income from the investment of any of the amounts listed above.

For many years, income received from property transferred to a testamentary trust that was not part of a deceased estate could also be excepted trust income and taxed at normal adult rates. This allowed further money to be added to the testamentary trust from other sources not related to the deceased person’s estate. The trusts could also borrow to invest and the income derived was treated as excepted income.

However recent changes to the law have narrowed the circumstances when income distributions can be treated as excepted income.

From 1 July 2019, only income from property/assets “transferred from the estate of the deceased person concerned, or income from property/assets that represents an accumulation of income from property/assets from the deceased's estate will be excepted trust income. Furthermore, the ATO view appears to be that income earned from assets acquired from the leveraging of assets which produce excepted income, will not be considered as excepted income.

Under the new rules only property transferred from a deceased's estate can generate excepted trust income and only that portion of income that arises to the decease estate assets will be excepted income.

The formula to calculate the proportion of excepted trust income is as follows:

$Amout deceased assets/total trust assets x minor beneficiary $entitlement = excepted trust income

Distribution from a family trust to a testamentary trust

Lavender Trust is a testamentary trust established under a will of which Alex is a beneficiary. Alex is 14 years old. As a result of the will, $100,000 is transferred on 17 July 2020 to the trustee of Lavender Trust from the deceased estate. Shortly after, the trustee of a family trust makes a capital distribution of $1 million to the trustee of Lavender Trust. The trustee of Lavender Trust invested the entire amount of $1.1 million in listed shares.

In the 2020-21 income year, the trustee of Lavender Trust derives $110,000 of dividend income from the investment in the listed shares. The net income of Lavender Trust for that year is $110,000. Alex is made presently entitled to 50% of that amount, which is $55,000.

Under the old pre 1 July 2019 rules, the full $55,000 income to Alex would have been excepted trust income and taxed at adult rates.

Under the new post 1 July 2019 rules, Alex's excepted income is $5,000. This amount is the extent to which the $55,000 of income resulted from the $100,000 transferred from the deceased estate (worked out as $100,000 ÷ $1.1 million × $55,000). The remaining $50,000 is income that resulted from the $1 million capital distribution from the family trust, which is unrelated to the deceased estate. It is not excepted income and taxed at the penalty rates for a minor.

Testamentary trusts may also provide other benefits:

Creditor protection To protect the bequest from creditors of a beneficiary.

Divorce

The Family Court’s view on a Testamentary Trust is that it is a “financial resource” of a party as opposed to a “divisible asset”. This means that the trust assets will not form part of the matrimonial pool for division and, will remain the property of the nominated beneficiary.

Education

Beneficiaries in high risk occupations

Surviving spouse remarries

Children with issues

Older beneficiaries

Disabled children

Consider leaving bequests via a testamentary trust for payment of school fees for children as this can be more tax effective than leaving bequests directly to the parents or children.

Where beneficiaries may be in a profession or business where they may be subject to negligence claims.

Providing for a spouse is important but if they remarry, a testamentary trust may stop the new partner having undue influence or diverting family assets to the new family.

In the case of spendthrift children/gambling difficulties/drug addiction for example, consider providing for such a child/ren through a trust ensuring his/her share is kept intact.

If beneficiaries receive the estate in a trust, and it remains in the trust, as it is not in their estate it cannot be subject to a Will challenge when they die.

Where you need to ensure that any disabled or intellectually impaired children are looked after. Consideration may also need to be given to a Special Disability Trust for possible better Centrelink outcomes

Testamentary trusts and Centrelink

If a testamentary trust is activated by the death of the testator after 31 March 2001, the surviving partner will be attributed with the assets and income of the trust if:

• The surviving partner has control of the trust (irrespective of whether the surviving partner is a beneficiary), or

• an associate of the surviving partner has control of the trust, and the surviving partner is a potential beneficiary.

This is because if the surviving partner directly controls the trust, they can simply appoint themselves as a beneficiary or alternatively exert their powers to obtain benefit informally.

If an associate has control and the surviving partner is a potential beneficiary, a reasonable assessment of the situation is that the surviving partner will enjoy the benefits of the trust.

If the surviving partner (or an associate of the surviving partner) does not control the trust, attribution may be made, via the normal attribution rules, to the person/s or members of a couple who have control of the trust.

Child account based pensions

Child account based pensions (CAPs) seem often to be a forgotten tool in estate planning. While they may be more limited in terms of duration in comparison to testamentary trusts, they can have other advantages including tax and potentially lower establishment and on-going costs.

The basics

A CAP is simply a death benefits account based pension payable from a deceased member’s super account to a child beneficiary who is under age 18, or aged between 18 and 25 and is financially dependent upon the deceased member or where the child is permanently incapacitated at the time of death.

Child pensions can be commenced via trustee discretion, by a binding death benefit nomination or where the beneficiary is a reversionary beneficiary of a pension which was previously payable to the deceased member.

It has the normal pension payment rules – a minimum but no maximum payment - which provide a great deal of flexibility. Partial or full commutations are available and will be tax free.

If not exhausted by the time the beneficiary has reached age 25, it must (unless the beneficiary is disabled) be commuted and cashed out of the superannuation system. As a death benefit pension, it cannot be rolled back to accumulation by the beneficiary but on the positive side, is tax free when paid out as a lump sum.

Child pensions can also be paid to individuals who have already attained age 25, but only if they are disabled at the time of the member’s death – that is, there is not an upper age limit.

Tax implications

As an account based pension, normal pension tax rules in retirement phase apply ie fund earnings including realized capital gains on assets accrue tax free.

The pension payment (as opposed to distributions from a testamentary trust) receives favourable tax treatment as the tax free proportion is always tax free and the taxable component proportion is taxable at adult marginal rates (irrespective of the child’s actual age) less a 15% rebate (an important tax advantage over testamentary trusts) and if the deceased is age 60 or above, the pension payment is simply tax free. The tax free/taxable proportion that applies is locked in at the commencement of the CAP.

How much can you have in a CAPs – TBA considerations

While this area can be quite complex, the general rules are as follows:

• A child has a modified personal transfer balance cap which is dependent upon a number of factors outlined below

• The modified personal TBC ceases when the CAP ceases – that is the earlier of age 25 or when the capital is exhausted, or, in the case of a disabled child (of any age), when the capital is exhausted

• Where the deceased parent does not have a pension that is in retirement phase, the child’s modified TBC is the general cap - $1.7m

‒ If there is more than one child beneficiary to receive the CAP, their modified TBC is their proportion (%) multiplied by the general cap. For example, 2 children with a 50% share each would be 50% x $1.7m = $850k each modified TBC

• Where the deceased parent has a pension in retirement phase, the child’s modified TBC is the share of the deceased parent’s actual pension

‒ Parent died with a pension in retirement phase valued at $200,000 at death. It is split between child A (60%) and child B (40%)

‒ Child A has a modified TBC of 60% x $200,000 = $120,000

‒ Child B has a modified TBC of 40% x $200,000 = $80,000

‒ Note: should the parent have additional funds in accumulation, these cannot be used to commence a CAP

• Their own future TBC will not be affected by the modified TBC

How do testamentary trusts and CAPs compare?

They each have their own place, and which is best will depend on the facts of the case. Keat provided this comparison at the Roadshow to illustrate the key differentials.

John, aged 45 and married with 2 children, 8 and 6 years old. His wife, Betty, does not work. John dies with a super fund balance of $100k plus $1.5m insurance cover in the fund. Assume 100% taxable component. Which option is better - child pensions + spouse ABP or testamentary trusts?

Scenario 1: Super ABP’s for all

Split 50% Betty /25% for each child

Betty ABP = $800K (earning $64k)

Child 1 ABP = $400k (earning $32k)

Child 2 ABP = $400k (earning $32k) Total min pension payments @ 4% = $64k

Scenario 2: Testamentary trust with 3 dependent as beneficiaries

100% to a Testamentary Trust (2) with all 3 as beneficiaries

$1.6m earning 8% = $128k/3 = $42,667 each Total drawings = $64k

Notes to table:

1.Tax calculations exclude Medicare Levy. Ignore tax offsets..

2. While a Testamentary Trust gives you the benefits of discretionary distribution and allows minors to be taxed as adults, all income and realised capital gains must be distributed to avoid being taxed at the highest marginal tax rate. This compares to using ABP (including child pensions) where you can elect any pension above the minimum, are not forced to distribute any earnings, pay no tax on the funds earnings. Only the taxable component of any pension payment is taxable at marginal tax rates (where both deceased and recipient where under 60 at point of death), with a 15% rebate available. In addition, minors receiving child pensions will be taxed as adults.

Summing up

So, are testamentary trusts as good as they used to be? Probably not due to the fact you can no longer add amounts external to the deceased assets and have it treated as excepted income. CAPs are also limited to the assets from the deceased super account and by the child’s modified TBC. Both allow a minor child to be taxed as an adult and this is a key benefit, with a possible additional tax rebate advantage with CAPs.

Testamentary trusts are probably more expensive and administratively expensive than CAPs, particularly CAPs provided via retail platform – no additional trust deed or trustee requirements, comparable or cheaper administrative costs and less possible ATO scrutiny. CAPs can be established post death which testamentary trusts cannot

Bottom line is that they both have significant advantages, each have their place and could work very effectively together. The biggest mistake would be to ignore CAPs when considering your clients estate planning options.

DISCLAIMER: FINANCIAL ADVISER USE ONLY

This information has been prepared by Netwealth. Whilst reasonable care has been taken in the preparation of this booklet using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information.

Licence No. 528032, RSE Licence No. L0003483 as the trustee of the Netwealth Superannuation Master Fund, is a provider of superannuation and investment products and services. Information contained within this presentation about Netwealth’s products or services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

Taxation considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Information in this document may contain forward looking statements regarding our reviews with respect to potential regulatory changes. Unless specified, all information in this document is current as at May 2022.

Financial adviser use only – This document is intended for adviser use only. Unauthorised use, modification, disclosure or distribution to any other party without Netwealth’s express prior written consent is prohibited.

Advice Foundations

Structures not to die in

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Structures not to die in

While dying is not a particularly good idea at any time, there are some “ideas” that should be avoided at all costs!

Dying intestate

Essentially this is legal speak for dying without a will. Estate legislation is State and Territory based in Australia and so the ramifications can be different depending on which set of legislation is operative.

That said, there are numerous common problems that arise as a result of dying intestate. These include:

• If there is no will, there is no-one legally able to step in and formally attend to the estate issues such as payment of the deceased persons debts and gathering and distributing the assets. Application to the court is required to appoint a responsible person.

• Getting a “grant of probate” – the authority issued by the court to someone to deal with the estate assets where there is a valid will. Where there is no will, an application for a grant of letter of administration is usually made to the court. In this case, a beneficiary of the intestate estate will apply to be granted the formal right to administer the estate. This often means the closest surviving “next of kin” of the deceased person, which is not always the best person or the person the deceased would have chosen under the circumstances - for example it might end up being an estranged spouse.

• Under any circumstances, the distribution is no longer the deceased choice, and the assets are often distributed according to a formula or the rules of each State or territory

‒ It is possible for the estate to end up with the State where there are no living relatives

• Creation of much uncertainty and delays as there can often be a number of people who think they should be in charge or control of the distribution of the estate.

Apart from these issues, there are number of other disadvantages which may include:

• No ability to tailor the distribution of assets to specific beneficiaries. For example:

‒ Assets and/or cash may go directly to beneficiaries with Centrelink issues thereby adversely affecting their entitlements. Under a well structured will, these assets could have been directed to a Special Disability Trust or similar to lessen any Centrelink impact

‒ Distributions to spendthrift beneficiaries or to minor children generating adverse tax situations. Again, a well constructed will could be used to direct assets to a testamentary trust to better manage these issues.

• A significantly increased risk of dispute or challenge to decisions made

‒ Multiple marriages and blended families are particularly at risk

• Often more expensive to administer as there are more legal processes to go through and formal legal advice may be required

• If there are minor children involved, often a “guardian” will need to be appointed

• Conflict of interest - This is becoming of particular concern with the increasing role that superannuation plays in individual’s wealth creation

‒ A number of recent court cases have highlighted that where there is no reversionary or super death benefit nomination the LPR is under obligation to claim the deceased members death benefit on behalf of the estate to be distributed under the rules or formulae of intestacy even where the LPR/administrator can prove interdependency. To not do so creates a conflict of interest – McIntosh v Mcintosh (2014) QSC 99

SMSF’s …. Don’t get old and die!

SMSF’s are wonderfully flexible and can allow access to more specialised investment strategies, investments and closer alignment between personal life/business and investment options.

However, they can have a “use by” date! As an SMSF member/trustee gets older:

• The investment strategy may become less active and the use of SMSF becoming less relevant

• There is probably a greater focus on stability and income generation

• Increasing regulation and tighter reporting requirements can become more onerous – increasing penalty regime and far less “wiggle room

• Declining mental capacity can impact on ability to manage effectively

• Impact of death on members

‒ Surviving spouse may not want or have capacity to be trustee

In the event of a “trustee void” – member/trustee dies leaving spouse who does not have sufficient mental capacity to be a trustee – who takes over? How do you appoint a replacement trustee?

Many of these issues can be resolved/avoided by rolling to a retail platform at the appropriate time. Death in an SMSF can be particularly problematical for blended families. Take the very common situation of a re-marriage where each partner has children from the previous marriage. One member dies leaving the (second) spouse as the only trustee.

• Who appoints the second trustee?

‒ What happens if the surviving spouse appoints their children thereby cutting out the deceased’s children?

‒ Will the surviving spouse follow the deceased instructions or contest any death nomination? –Legal case of Wooster V Morris is a typical life example

‒ If surviving spouse is reversionary, can they be relied upon to leave lump sums on their death to the deceased partners children? Cascading nominations are problematical and may not provide sufficient certainty

‒ What happens in the event of no or an invalid nomination? Children may get nothing –as demonstrated in the cases of Ioppolo v Conti and Munro v Munro

Very careful planning before death is required in all cases BUT it is particularly important in the case of dying in an SMSF.

No super death nomination

There are various types of death benefit nominations:

• Binding, either non-lapsing or lapsing with expiry date usually up to 3 years

‒ Only to dependants

‒ If valid, the trustee has no discretion and must follow the instructions

‒ If invalid, reverts to trustee discretion or fund rules – see notes below

• Non-binding – subject to trustee discretion but generally must be followed unless trustee has good reason not to

‒ Only to dependants

‒ Less certainty

‒ No potential time limits

• Reversionary pension nomination only to dependant

‒ Pension continues – if valid then no trustee discretion

‒ Can be a reversionary child pension

Can you have both a binding death nomination and a reversionary pension nomination? There is nothing in the formal law that says you cannot but practically it would seem to be unwise and would probably cause only confusion, uncertainty and delays!

If a trustee is faced with a valid reversionary nomination and a valid binding death nomination for the same person, which one should they follow? The Australian Tax Office view is that a reversionary pension does not cease and simply continues to the reversionary pensioner. In that case, the binding nomination probably never operates as there is never a lump sum to distribute. There are some legal opinions that argue that a binding nomination is enshrined in the legislation while a reversionary nomination is a fund rule. The binding nomination is therefore the “stronger” legislation overriding the requirement for the pension to revert.

As you can see, having a binding nomination alongside a reversionary pension is likely to cause more problems and confusion than any benefit it seeks to achieve. It is therefore generally best to have in place either a reversionary or a binding death nomination but not both at the same time. As with any general rule, there will always be exceptions, but the fact is that these are few and far between.

For example, in a perfect world with a harmonious family, dying in an SMSF with no nominations probably gives the greatest possible flexibility as the SMSF trustee is able to distribute the member benefit at their discretion. The reality is that with discretion usually comes confusion, dissent and a whole lot of complexity and confusion:

• What if the trustee has just died? Who decides?

• What if the remaining trustee does not have mental capacity?

• How to appoint a new trustee if the final trustee just died or has insufficient capacity?

• What if remaining spouse is a result of a re-marriage? What control can the deceased own children have?

These are only some of the common questions that may arise where there is no valid reversionary or binding nomination.

On the flip side, dying in a retail super fund with no reversion or nomination will usually mean that the trustee is compelled under the rules to pay the member benefit to the deceased members LPR. This avoids the trustee having any involvement in potential family disputes.

One big issue is the inability to commence a death benefits income stream for a dependant if the benefit is paid to the estate. The LPR is not a dependant and so the super lump sum exits the super environment at that point. Tax will be payable but as explained previously, ITAA 1997 section 302-10 provides a look through so that should the death benefit be paid to a dependant, it will be taxed as if it was paid to them directly. Nevertheless, as the super benefit has exited super upon payment to the LPR, a death dependant may receive the lump sum tax free but LPR cannot offer to pay it as a death benefit income stream. It is therefore very important to check the rules of your preferred provider and have the appropriate nominations to ensure you can achieve your recommended solutions.

Conclusion

Death may be inevitable, but it does not have to be “inconvenient”! There are many very effective strategies that can be employed and a number of mistakes that should be avoided. When it comes to a wholistic approach to estate planning, it should be more comprehensive than a simple referral to a third party. With super forming an increasingly important role in client’s wealth creation, understanding the details and preparing a robust estate plan is becoming increasingly important.

Advice Foundations

Sharing is caring

DISCLAIMER: FINANCIAL ADVISER USE ONLY

This information has been prepared by Netwealth. Whilst reasonable care has been taken in the preparation of this booklet using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information.

Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No 230975) and Netwealth Superannuation Services Pty Ltd (ABN 80 636 951 310), AFS Licence No. 528032, RSE Licence No. L0003483 as the trustee of the Netwealth Superannuation Master Fund, is a provider of superannuation and investment products and services. Information contained within this presentation about Netwealth’s products or services is of a general nature which does not take into account your individual objectives, financial situation or needs Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at wwwnetwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product

Taxation considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Information in this document may contain forward looking statements regarding our reviews with respect to potential regulatory changes. Unless specified, all information in this document is current as at May 2022.

Financial adviser use only – This document is intended for adviser use only. Unauthorised use, modification, disclosure or distribution to any other party without Netwealth’s express prior written consent is prohibited.

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Sharing is caring

Sharing is caring, as the saying goes, should make everything better. This section looks at a number of strategies where sharing and “unsharing” investments and super with your partner can be surprisingly beneficial.

Spouse contribution splitting

Individuals may be able to split up to 85% of concessional contributions with their spouse on an ongoing annual basis, enabling the boosting of their spouse's super savings with some of their own.

Generally, the request can only be made to split contributions from the last financial year unless starting a pension, rolling over to another fund or exiting super, in which case the splitting request can be made in the same financial year as the contribution. The fund has the discretion to allow or not allow the request.

From 1 July 2019, individuals may be able to use the spouse contribution splitting opportunity in conjunction with the carry forward of unused concessional contributions, which effectively increases the scope of this strategy. The giving individual must be eligible to access the carry forward of unused concessional contribution arrangements.

Contributions that can be split include:

• Employer contributions including SG

• Salary sacrifice contributions

• Personal contributions that you can claim a deduction for

• Contributions made by family and friends (other than those made by your spouse or for a child under 18 years old)

The following contributions cannot be split:

• Personal contributions that you can't claim a deduction for

• Contributions you make with a capital gains tax (CGT) cap election for small business

• Contributions you make with a personal injury election

• Contributions made by your spouse to your super

• Contributions made for you if you are under 18 years old (unless made by your employer)

• Transfers from foreign funds

• Allocations from reserves (other than where they assessable income to the fund)

• Rollover super benefit

• Contributions that have already been split

• Government co-contributions

• Government low income super tax offset contribution

• First home super saver scheme contributions

• Downsizer contributions

• Temporary resident contributions

• Trustee contributions

• A super interest that is subject to a family law payment split

The giving individual can contribution split at any age. However, the receiving spouse must be:

• Under age 65, and

• if greater than preservation age, has not retired.

Note: Eligibility of the receiving spouse remains under 65, which is the age condition of release allowing withdrawal of benefits. This has not increased to age 67 in line with the changes to the worktest requirements.

Other key points to remember are:

• The original contribution counts against the giving spouse’s caps

• The giving spouse must lodge an ITAA 1997 sec 290-170 “Notice of intend to claim a deduction” either prior to or on the day of requesting the split

• The benefit is treated as a rollover to the receiving spouse

• The receiving spouse does not pick up the giving spouse’s eligible service date

Planning to make the most of this strategy can include the following benefits:

• Split to a spouse who may be able to access the super at an earlier age

• Split to a younger spouse to shelter assets from Centrelink age pension asset test

• Equalising balances between spouses provides better tax planning opportunities if taking super pensions prior to age 60 and allows more flexible planning in the future against any detrimental super tax changes

• Can help manage or make more targeted use of various caps

‒ If giving spouse approaching $1.7m TSB, consider splitting to spouse

‒ If spouse has TBA cap space, consider building that account via splitting

• Account equalisation can also provide greater estate planning opportunities

Spouse contribution offset – sharing an 18% bonus

Spouse contributions allow a spouse to make a non-concessional contribution from their own money to their spouse’s super account. As well as building a higher balance for your spouse – with the benefits discussed below - you may be able to claim a tax offset of up to $540 where:

• Contributions are made to a complying super fund on behalf of a spouse.

• Both spouses are Australian tax-residents (and not permanently living apart).

• The receiving spouse:

‒ Was under age 75 when the contributions were made

‒ Must not exceed their non-concessional contributions cap for the financial year

‒ It counts against the receiving spouse’s non-concessional cap

‒ Must have a total super balance less than the general transfer balance cap ($1.7m in 2021/22) on 30 June of the prior financial year

‒ Had assessable income, reportable fringe benefits and reportable employer super contributions of less than $40,000 in the financial year the contribution is made.

The maximum tax offset of $540 is available where the above criteria are met, and a contribution of $3,000 is made ($3,000 x 18% = $540). If a lesser contribution is made, the tax offset is 18% of the lesser amount. The tax offset progressively reduces as the receiving spouse income rises above $37,000 and is $nil when it reaches $40,000pa.

This strategy reaps many of the benefits mentioned under contributions splitting with the added bonus of up to a $540 tax rebate to the giving spouse. Under the appropriate circumstance, this can be more effective that making a $3,000 non-concessional contribution for yourself or by the spouse.

Total super balance (TSB) – make use of both spouses

We each have a total super balance (TSB) which limits the available superannuation concessions in a number of areas, so it makes sense to use both to the maximum. Doing so provides many potential benefits including:

• Maximising assets in the tax advantaged super environment

• Maximising concessional super tax contribution strategies

• Increased ability to increase tax free components via re-contribution strategies

• Maximising ability to use pension accounts – tax free earnings and pensions in retirement phase

• Tax splitting between spouses on pensions pre and post age 60 – added protection from potential future tax hikes

• Sheltering of assets from Centrelink testing where there is a younger partner

• Enhanced estate planning – can be dealt with outside the estate to avoid challenges, can be directed to child pensions for disabled children of any age, can be paid to special disability trusts etc

Apart from the obvious strategies of maximising contributions, perhaps consider from age 60 onwards, withdrawing (where possible) from own superannuation account tax free to reduce own TSB:

• Particularly useful if approaching TBC and still a high salary earner

• Recontribute to self to increase tax free component

• Recontribute to spouse with lower TSB and increase the family unit’s tax free components and ’freeing up space’ for further contributions

• Make use of new contribution rules with no work test allowing contributions all the way through to age 75

• Consider commencing a pension – account based or TTR – to lock in tax free proportions

• Where appropriate, consider Centrelink benefits by recontribution to younger partners

Assess and share transfer balance cap (TBC)

An individual’s TBC is the maximum amount they can have in the tax free retirement phase of super. Generally, this is going to apply to those 60 years and over which is also when payments of lump sum and pensions are tax free. These are great years to make the most of these concessions.

Everyone has their own personal TBC, and from 1 July 2021 – for those who have not yet triggered their transfer balance account, it is $1.7m, while for those who had triggered it (commenced an income stream in retirement phase) prior to 30 June 2021, it will be between $1.6m and $1.7m, so care is needed to ensure that this is accurately identified.

Let’s make use of both spouses TBC. In this way, individuals as a family unit will get the maximum amount into the tax free retirement phase. Consider a situation where one spouse has maxed out the TBC but still has money in accumulation and the other partner has not. Generally, if someone has maxed out their TBC (obviously must have met a condition of release), they will be 60 years or older and so they can withdraw the accumulation account tax free. Given the new modified contribution rules, non-concessional contributions and bring forward contributions can be made for the spouse up to age 75. This will allow the earnings on these contributions to be tax exempt in the spouse account rather than remaining in accumulation phase taxed at 15%.

Even in death, sharing is caring! Consider making any super pensions reversionary so that it continues to be paid to the reversionary spouse. Under current laws, a reversionary pension is not reported as a TBA credit to the beneficiary until 12 months after the date of death. This means that for that 12 month period, the beneficiary can continue to operate the reversionary pension with no impact on their own TBC.

Consider the situation where both spouses have account based pensions and have “maxed out” their individual TBC. One spouse dies:

• If the deceased pension was not reversionary

‒ It would cease as a pension at death and become a death benefit to the surviving spouse. As the surviving spouse’s TBC been “maxed out”, no further death benefit pension can be started while maintaining their own pension. It cannot stay in accumulation, so the only option is to pay it out tax free as a death benefit lump sum

‒ Alternatively, the surviving spouse may be able to roll back their own pension to accumulation and keep all or a portion of the deceased benefit up to their personal TBC as a death benefit income stream

‒ Either way, only one of the pensions can remain within the tax-free area of super.

• If the deceased pension was reversionary,

‒ The reversionary pension would continue on death to the surviving beneficiary. The TBA credit would not be recorded until 12 months after the date of death and will be based on the value of the pension account at date of death i.e. any further gain in value of the portfolio in that 12 months period will not be recorded against the TBC.

‒ The surviving spouse has an additional 12 months with two pensions in retirement phase to:

• Enjoy the tax free earnings and extra pension

• Use the extended time to effectively manage the tax affairs – ie sell down capital gains positions while in pension mode

• Choose at the end of 12 months which pension to keep - whether to roll their own pension to accumulation or cash out one of them

• If at any time during that 12 month period the situation changes, the reversionary pension can be cashed out tax free any way

Estate planning – sharing it equitably

Estate planning is a huge topic and so it is not the intention for this section to be a complete guide. Rather, we will look at a few strategies that we think you may find useful and that may provide some planning opportunities.

The basics – why is it important?

Estate planning is all about passing the wealth onto the next generation. The aim should be to maintain trust and confidence amongst the beneficiaries to lessen the potential for challenges to the estate. Tax is the obvious enemy to estate planning, but so to are the following issues:

• Fairness (equitable) and keeping the family peace

• Minimising challenges and legal costs

• Making sure the right people get the right assets

‒ Dealing with age – both young and old

‒ Centrelink and disabilities and addictions

‒ Family businesses

‒ Family farm

•

Impact of a lack of liquidity

As harsh as it may sound, do not ever believe that children will always live in harmony after your death and the estate needs to be divided. Unfortunately, this is often when the worst in people comes to the surface with bitter squabbles over everything from personal items to large valuable assets.

Not even a well drafted will can guarantee that challenges will not be made and someone who considers themselves a beneficiary can make a claim if they can show that they have not been adequately provided in the will.

There is no foolproof solution here, just be aware of the potential beneficiaries, be aware of the family undercurrents and try and talk to family about the issues to avoid any unexpected outcomes.

Planning ahead is paramount when it comes to age related scenarios. For instances:

• It’s too late to establish an enduring power of attorney (EPoA) once the individual no longer has sufficient mental capacity

• If you have established an EPoA, it can be acted upon and used to amend or change many documents including:

‒ A binding death benefit nomination on the individual super account.

‒ Step in as trustee to the SMSF

• However, an EPoA dies with the individual so it cannot change the nomination after your death nor any other documents.

After death is the province of the executor or legal personal representative (LPR). These positions need to be appointed before losing mental capacity and prior to death. So, the strategy here is to:

• Seriously consider making a binding death nomination and / or reversionary nomination with super assets and review it on a regular basis

• Appoint an EPoA for the period prior to death and have a valid will appointing an executor (LPR) and review both on a regular basis

Keeping it equal – an insurance solution

Life insurance policies can be used to provide cash to those beneficiaries who do not want or are not suited to take control of physical assets. For example, the parent has built up a successful business over many years and one of the children has been an integral part of that business and will take complete control of the business upon the parent’s death. A second child has no interest or involvement with the business.

Upon the death of the parent, there needs to be a solution to allow the second child to receive an adequate amount of the estate. Not to make such an allowance is to invite a challenge plus all the associated costs and family bitterness. If the parent had provided for an insurance policy to be in place, the proceeds could have been used to compensate the second child. Certainly, one would need to consider the cost of maintaining the policy especially as the parent gets older.

Investment bonds may provide a solution here. With sufficient time, contributions to an investment bond may also provide the appropriate lump sum payout to the second child. This may be preferable as it can be funded over a longer period and has the investment element plus power of compounding rather than relying simply on the payment of premiums. Investment bonds allow nomination of either paying to the estate or directly to the individual avoiding any possibility of estate challenge.

Sharing equally – an after tax solution

A common mistake is to focus on the simple dollar amount. In fact, when considering estate equalisation, it is the after tax value that is most important. Determining the after tax amount can be a different process depending on the assets. For example, in a blended family situation, a spouse makes a binding nomination of the super benefit of 50/50 split to second wife and own children. The problem here is the surviving spouse will get the benefit tax free while the adult child will pay 17% tax.

Is equal always fair?

Equal dollars is not always fair. Consider the situation where parents and 2 children grow up on the family farm. The parents have lived and worked on the farm all their lives. Child 1 works on the farm and will inherit it and continue to work it. Child 2 moves to the city and makes a career for themselves. The father dies, child 1 receives the farm and child 2 an equivalent value in cash. Is this fair?

• Child 1 has worked and contributed to the value of the farm – child 2 has not

• Child 2 has cash which is liquid and tax free – Child 1 has no liquidity and could face taxes on the sale of the property

• The mother continues to live on the farm drawing an income from the farm revenue – child 2 is not contributing to mother living costs

It is interesting to note that the courts recognise that “equal” and “fair” are not necessarily the same, and that there is no legal requirement for all children to be treated equally under a Will.

Case ref: Beatrice McCleary v Metlik Investments Pty Limited Beatrice McCleary v Benedict Chan; Clement Chan v Benedict Chan [2015] NSWSC 1043

Until tax do you part… unwinding joint tenants

Many people hold their investments “jointly”. Often this is without any “commercial thought” as to the implications – for example, what happens if all or part of the holding needs to be sold. Depending on the individual’s other circumstances, the impact can be very different.

Understanding the basics – joint tenants

For CGT purposes, joint tenants are treated as tenants in common owning equal shares in the asset. Effectively, each single asset is divided into 2 separate CGT assets each with the same cost base at the date of purchase. This is best explained with a simple example:

• John and Betty jointly own one share at a cost of $10. As it is jointly owned, there is one share but two (2) CGT assets. John has 50% of 1 share with a CGT cost base of $10 and Betty has 50% of the share also with a cost base of $10

Let’s move on 5 years and the share is now valued at $20. John wants to “sell” his share but Betty does not wish to sell her share. Normally, the share would be sold and they would each share in the $10 capital gain, but this does not have to be the case. It is possible to unwind the joint tenancy ownership of the share so that Betty ends up owning 100% of the share but the result is it will have two (2)cost bases.

• John completes an off market transfer form in favour of Betty for no consideration. This is a CGT event (deemed disposal at market value) and the process works as follows:

‒ Betty’s 50% share does not change. For Betty, there is no change in the beneficial ownership of her 50% and therefore no CGT implications

‒ John has a CGT event (A1) being the disposal of his half share to Betty. His CG is calculated as ($20 - $10) x 50% = $5.00 for CGT purposes

‒ Betty now owns 100% of the share but has two (2) cost bases to record – 50% of the share at the original $10 and 50% of the share at the acquired price of $20 making her effective cost base $15

John has no further ownership but a $5.00 capital gain to deal with. Perhaps he has a tax loss he can offset this against?

‒ Betty has no tax issues to deal with – yet – and still has ownership of the share with an adjusted cost base of $15

Imagine this scenario with 1,000 or a 1,000,000 jointly owned shares and you can appreciate the administration and record keeping, the future reporting and recording for tax purposes will become quite complex. On the other hand, there are some interesting strategic and planning implications because of the ability to create a gain or a loss for just one of the owners rather than the actual physical selling and creating of a gain or loss for both partners. There will be many cases, where one partner does not want or cannot effectively use the loss or gain generated while the other can. This unwinding of joint ownership strategy allows the ability to tailor the loss or the gain to party best able to utilise it. The other advantage to this strategy is that ownership of the asset can remain within the family group for possible future benefit.

Finally, death does not mean that you stop “sharing the love”. Crystallised losses are wasted on the dead because they do not carry forward on death. With a bit of planning, you may be able to take advantage of a bad situation by making sure that where an individual has losses, sell profitable positions prior to death to soak up the losses.

Uncrystallised losses (or rather the original cost bases, other than pre cgt assets) do carry forward to final beneficiaries. Consider leaving losses uncrystallised and pass these loss making assets through to beneficiaries with profitable investment positions. Death itself is not a CGT event, it is the eventual sale of the inherited asset by the LPR or beneficiary that creates the CGT event. Under this scenario, the beneficiary can sell the inherited asset for the loss and use it, or carry it forward for future use, offset any gains in their own portfolio.

Conclusion

There are certainly many ways to turn lifelong partnership arrangements into financial advantage, we just need to look for them closely. We have provided an overview of some of these from the common superannuation strategies to the more unusual strategies involving estate planning and even death. Using these principles and with a little more thinking, there are probably many more situations that will prove that sharing is caring.