self-managed superannuation fund administrators

The Super Brief Newsletter – Issue – January / February 2016

nest eggProtecting the SMSF nest egg with a “Superannuation Agreement”

The overwhelming purpose of Superannuation is to build up a lump sum nest egg in order to create an income in retirement. Typically, the focus of clients with an SMSF is to select those assets, usually property that can be retained or sold for these purposes. For clients running a business, SMSFs provide a valuable asset protection structure, since assets held in a Super Fund, are with a few exceptions, protected from creditors and in the event of bankruptcy or insolvency.

ABS statics indicate that in 2014 there was over $20 billion in wealth lost from divorce in Australia and this excludes domestic relationship and same sex relationship breakdowns. Given that there is over $2 trillion in superannuation assets of which SMSFs represent almost $600 billion, the risk of wealth lost to SMSFs from relationship breakdown is significant, particularly when about 50% of relationships end in separation.

It is relatively unknown that from a separation point of view, the assets of the SMSF can be protected by a Superannuation Agreement made under Section 9OMH of the Family Law Act 1975. A Superannuation Agreement is a formal written agreement entered into between the parties to a marriage or a defacto relationship. The agreement can be a standalone agreement or can represent dedicated clauses in a Binding Financial Agreement dealing with other matrimonial assets. It can be made prior to a relationship, during or when it ends.

By itself the Superannuation Agreement will only deal with how the assets of the SMSF should be divided or used on separation. In this format it won’t affect how the remaining matrimonial assets will be divided, which, for many couples, will be more agreeable.

Use of a Superannuation Agreement

A Superannuation Agreement is useful in the following circumstances:

  1. A second relationship where there are key assets to be protected for children of an earlier relationship;
  2.  A relationship where key inherited assets have found their way into the SMSF that are to be protected;
  3. A second relationship where children of a member are occupying or using property of the SMSF that needs to be protected for those children;
  4. Both members of the SMSF are aged, have limited resources and don’t want to sell or divide the SMSF assets in order to protect their retirement income.
  5. One of the member couples has failing health and likely to move into aged care. The couple wans to avoid the risks of the “separation” being used to divide the SMSF assets when they are needed for aged care funding, as was attempted in the case of Stanford.

In each of the above scenarios, a Superannuation Agreement can provide certainty by creating restrictions and “pre-allocating” specific assets to a member or create rules on how they are to be used or sold. The agreement could even be creative. It could retain and segregate key assets and restrict their use and allocation of income from those assets for a period of time or even until the death of the member. This is particularly beneficial for a couple who recognise that that they will both be worse by dividing SMSF assets and want to formally retain them but preserve them for the estate of one or both members.

If you want to explore the use of a Superannuation Agreement, please contact our office.

Reversionary Pensions and Death Benefit Nominations – a potential death trap for clients !   tug

At the present moment there is a great deal of uncertainty as to whether the terms of a pension income stream that is being paid to a member and expressed to be “reversionary” override what is stated in a Death Benefit Nomination or Binding Death Benefit Nomination for that matter. Typically, pension income streams that are set up where there is a husband and wife or couple members of the Fund will usually, for better tax efficiency, stipulate that on the death of the member, the pension reverts automatically to the surviving spouse.

At Hill Legal we review pension documents and particularly death benefit nominations and more frequently we are coming across Pension Agreements which provide for a reversionary pension to the spouse on the death of the member but a death benefit nomination which says that on the death of the member, all of the members benefits are to be paid to their estate.

In many cases the Will directs all of the super (along with all other assets of the estate) to the spouse but in the case of blended families the Will may distribute a portion of the estate to children from an earlier relationship and another portion, usually the most significant, to the surviving spouse. In these circumstances, does the spouse receive the entirety of the super account in the form of a pension because it is reversionary and therefore all of the super benefits or only a portion? Alternatively, if it is intended that the spouse is to receive all of the super from the estate, does the Super Fund have to close and transfer the superannuation death benefits to the estate, losing important tax concessions, because the death benefit nomination prevails over the reversionary pension?

Which is Binding?

Many superannuation commentators simply respond to this question by stating that “a reversionary pension takes precedence over a binding death benefit nomination” meaning that there is effectively no death benefit payable when the original pension member dies. However, despite this view, which is prevalent within the industry, there is no legal authority for this proposition either in the SIS Act, the SIS Act Regulations or the Income Tax Assessment Act 1997. Further, most superannuation deeds on the market are silent on this issue. It is the writer’s view that if such an issue comes before the court, in the absence of anything stated within the provisions of the Pension Agreement, the death benefit nomination or the rules of the

fund which gives priority, it is open for a court to take the view that as a death benefit nomination is a document containing “testamentary wishes” it should have priority over a reversionary Pension Agreement that was written during the members life and with the purpose of providing an income stream during the life of the member.

This view is most likely to be adopted by a court, if the death benefit nomination directs the superannuation death benefits to the estate and the claim to the superannuation fund is made by the executor of the Will (who may not be the surviving spouse).

Can an Ex-Spouse Claim my Super…?

We have come across one scenario where a client started an accounts based pension when he was aged 55. Unbeknown to him, when he completed the paperwork for his pension his adviser had checked the box stating that the pension would be automatically “reversionary” to his named spouse. About 5 years later when the client was aged 60, he and his spouse had divorced and they completed a property settlement. This was the second spouse of the client. The client did not re partner but made a death benefit nomination leaving his entire super to his “estate” to be distributed to his children who were not children of his ex- wife.

If the client had died without his circumstances changing, the ex-spouse would have a claim to the superannuation benefits. She would argue, based on the prevailing view above that:

  • She is not a “dependent” within themeaning of the SIS Act because she is not a spouse of the deceased member;
  • However, it does not matter that she is a spouse because there is no payment of a “death benefit”
  • There is no death benefit that is capable of being paid to a dependant because the pension is reversionary
  • She is named in the pension agreement as the recipient of the reversionary pension; and
  • While she is not eligible to receive a lump sum death benefit she is eligible to receive an income stream as a “tax dependent” and that income stream becomes her income stream that she is free to commute or access at any point in time.

As a result of these concerns and to avoid litigation over a superannuation death benefit it is prudent to insert a “paramountcy clause” in the death benefit nomination which states that the provisions of the death benefit nomination prevail only to the extent that it is not inconsistent with any previously made Pension Agreement. In these circumstances the Pension Agreement should be reviewed to avoid the problem described above.

ATO confirms ban on use of SMSFs for Buy Sell Insurance

In the October 2014 edition of the Super Brief we discussed a private ruling that was handed down by the ATO on the l2th March of that year, when the ATO took the view that the use of a policy of insurance in an SMSF as part of a Buy Sell Agreement was treated as a breach of the sole purpose test under Section 62 of the SIS Act. Despite that private ruling a number of commentators in the industry remained of the view that using an SMSF to fund a Buy Sell Agreement was still permitted particularly because the insurance was only paid out in the event of death, and this constituted “the provision of benefits in respect of a member of the Fund on or after the members death” [section 62 (1)(a)(iv)]. Despite this view the ATO have now handed down an interpretive decision released in ATO ID 2015 /10.

In that decision the ATO were asked “does a Se/f Managed Super Fund contravene section 62 and paragraph 65 (1)(b) of the SIS Act by purchasing a /ife insurance po/icy over the /ife of a member of the SMSF where the purchase is a condition and consequence of a Buy Se// Agreement a member has entered into. . .” In response the ATO has said “yes”, the Trustee will contravene these provisions in these circumstances. The reason according to the ATO for why this was in breach is because there is a benefit albeit indirect to the other co-owner of the business who receives a transfer of the business entity in consideration of the member’s receipt of the insurance proceeds. Such a benefit is not incidental or remote.

In the example raised, the other business co- owner was a brother of the deceased member and the ATO took the view that by the insurance proceeds being paid out to the spouse of the deceased member in exchange for the brother receiving a transfer of the business entity without having to purchase it from his brothers estate, the brother, who was a “relative” of the member, received financial assistance from the Fund. This contravened section 65 of the SIS Act.

In addition, the use of the policy of insurance within the Fund was said to breach the sole purpose test because the reason for the policy of insurance was not to provide a retirement benefit for the provision of benefits upon the death of the member but rather to facilitate the exchange of the interests held in the business entity without the surviving co- owner having to buy out the deceased members interests in the business entity.

If you have any Buy Sell Agreements in place where you are using a Self Managed Superannuation Fund to pay the insurance premiums of the Buy Sell Agreement, these arrangements need to be reviewed. Failure to do so will attract an administrative penalty for breach of an operating standard of the SIS Act of $3,600 (20 penalty units).

The Year ahead…

We expect 2016 to be an interesting year for SMSFs particularly with the federal election looming and rumours abounding with regard to changes to taxation of super funds. We will keep you abreast of any changes as they come to hand. We are also pleased to advise that we have recently moved into our new premises at 22A Mi|gate drive Momington. In the year ahead we plan to run some in- house workshops and seminars on current and relevant topics of interest relating to SMSFs, Estate Planning and Age Care related issues. As always we welcome your feedback and suggestions on any topics of interest relating specifically to SMSFs that may interest you or your family.

SMSFChris Hill

 

 

 

 

 

LL.B; B.Juris; Dip.FP; CFP; TEP; Liv Accredited Specialist; SMSF Specialist Advisorm

 

Principal

 

Hill Legal

Lawyers and Consultants

Disclaimer

The material contained in this publication is general reading only information and does not constitute advice on the subject matter. While every effort has been made to ensure accuracy, you should not rely on the information provided without seeking professional specialist SMSF advice on your individual needs and circumstances and the relevance and appropriateness of the ideas and strategies mentioned. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and Hill Legal, Lawyers and Consultants will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader acting upon any such information or recommendation.

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