The Super Sleuth - February 2010

You may be able to access your benefits earlier than you think.
Access to superannuation benefits is determined by the preservation status of you superannuation account.
More...

Self Managed Superannuation Fund’s vs. Family Trusts
Many people are now considering Self Managed Superannuation Funds (SMSF) over the traditional family trusts in order to pool their assets and allow for assets to be passed from generation to generation.
More...

Acquiring property from a SMSF member - it can be done.
Recently a private ruling was successfully granted to a taxpayer, allowing a group of six residential properties to be included in the definition of Business Real Property (BRP).
More...

Estate Planning - SMSF Wills
SMSF wills can be tailored and customised to form an effective estate planning structure that suits the needs of both member and beneficiaries.
More...

10% Test & Tax Deductions
Not all individuals are considered employees for Superannuation Guarantee (SG) reasons, and as such, are eligible to claim a tax deduction for personal contributions they make to superannuation.
More...

Changes to Contribution Caps
Changes that were made to the concessional contribution caps on 1st July 2009 have resulted in strategic, risk and cash-flow implications for many SMSFs.
More...

Death benefits to a child paid as a pension
When considering the payment of death benefits to a child in the form of a pension, be aware that this can only be done under the following circumstances...
More...

ATO focuses on SMSF compliance
The ATO has increased their focus on SMSF compliance, which as led to an increase in funds being made non-complying.
More...

Did you know you are able to have more than one ‘account’ within your superannuation member balance?
One member can have an accumulation account plus an infinite number of separate pension accounts
More...

You may be able to access your benefits earlier than you think.
Access to superannuation benefits is determined by the preservation status of your superannuation account. There are three categories of preservation that determine when and how you can access your benefits; Preserved Benefits – preserved benefits are the most common form of benefits for non-pensioner members. These type of benefits are only accessible once a condition of release is satisfied (thereby converting the preserved benefits to Unrestricted Non-Preserved “URNP” Benefits) or via a Transition to Retirement (TTR) pension once a member reaches preservation age. Restricted Non-Preserved (RNP) Benefits – RNP benefits can be accessed (that is, they are converted to URNP benefits) once employment is terminated with an employer who has made contributions into that super account on your behalf. Alternatively they can be accessed under the same circumstances as preserved benefits. Unrestricted Non-Preserved (URNP) Benefits – these are the most ideal form of superannuation benefits as they are accessible by an individual at any point in time, regardless of age or employment status.  Furthermore, URNP benefits can be accessed via a lump sum, pension or a combination of both.
URNP benefits can be created under several circumstances which include satisfying a condition of release and receiving a marriage breakdown payment from a spouse with URNP benefits. For example, a 35 year old full-time employee could access their super, up to the level of any URNP benefits they are entitled to (although tax consequences will apply). The preservation status of your superannuation should be detailed on your annual superannuation member statement. What is a Condition of Release? Satisfying a condition of release will allow you to convert any preserved or RNP benefits to URNP benefits, allowing unrestricted access, at any time. There are many different conditions of release that can be satisfied, however the most common include; Permanent retirement after reaching preservation age Reaching 65 years of age Change in gainful employment after age 60 Terminal Illness Permanent incapacity Death (benefits can be accessed by beneficiaries) Important Things to Consider Before Accessing Your Superannuation Benefits Before you decide to access your superannuation benefits, there are several important issues you will need to consider; - How long will you require your superannuation benefits to last? Early access may mean your superannuation benefits expire earlier then expected. This can create significant problems if you are still dependant on the benefits to fund your retirement and lifestyle. - How do you want to access your superannuation benefits? Superannuation benefits can be accessed via a pension or lump sum payment, however, the options available will depend upon your individual circumstances. Both options can have significant tax advantages over the other, so these must be carefully considered. - How much tax will you pay by accessing your superannuation benefits? This is dependant upon the tax components of your superannuation account, as well as your age, at the time of withdrawal. Tax is only payable on the Taxable Component of your superannuation account. Any Tax Free Component is non-assessable income. Your annual superannuation member statement should specify the tax components of your account. Currently, individuals who have reached 60 years of age should pay no tax on any withdrawals from superannuation. Tax concessions are also available for those people who have reached preservation age (which is dependant upon your date of birth). - Does your Superannuation Trust Deed allow the withdrawal? Each Trust Deed is different, and must be reviewed to ensure any withdrawal complies with the rules of the Fund. An old or outdated Trust Deed may prohibit access to certain benefits. - Have you completed all the necessary procedure and paperwork? This can include registering your superannuation fund for Pay As You Go Withholding (PAYGW) and paying the required PAYGW liability, plus the completion of minutes and resolutions to document the approval and payment of the benefit(s).

	Self Managed Superannuation Fund’s vs. Family Trusts
	Many people are now considering Self Managed Superannuation Funds (SMSF) over the traditional family trusts in order to pool their assets and allow for assets to be passed from generation to generation. Both entities have their advantages and disadvantages. Personal circumstances, as well as objectives and goals will ultimately determine which structure is right for you. The increasing popularity of SMSF’s can be attributed to several key features. These include; Tax Effectiveness – SMSF’s are granted concessional tax treatment. As a result, any income received by an SMSF is taxed at a maximum of 15%. Gains on assets held for more than 12 months are taxed at 10% - a 33% capital gain discount.
Furthermore, once a fund is 100% pension phase, all earnings and gains are exempt from tax. Asset Protection – Generally speaking, the assets of an SMSF cannot be claimed by creditors should one of the members become bankrupt, resulting in a very high level of asset protection. Investment Control – Each member of an SMSF is also a trustee, or a director of the corporate trustee, of the fund. Therefore, each member has control over the assets of the fund. This can be extremely beneficial, for example, when adult children and their parents are in an SMSF together as it allows the children to maintain the assets, should their parents become incapable of doing so. Below is a table summarising some of the differences between family trusts and SMSFs, however , as previously mentioned, whether an SMSF is more appropriate than a family trust will depend upon your specific circumstances which need to be carefully considered before a decision is made; Feature SMSF Discretionary (Family) Trust Investment Powers Subject to several restrictions to protect assets e.g. cannot operate a business No restrictions Regulatory Control Highly regulated Less regulated Contributions Contribution caps apply. Some contributions are taxable, but can also be deductible e.g. self employed individuals. No contribution caps. Contributions aren’t taxable but no deduction can be claimed for contributions made. Distributions Money cannot be accessed until a Condition of Release is satisfied or benefits paid out to beneficiaries upon death of a member. Trustee can decide how income is distributed. Distributions to minors taxed at penalty rates. Taxation of Earnings Flat 15% on income or 10% on long term capital gains. Once fund is in pension phase, income and gains are non-assessable. Distributed income taxed in the hands of beneficiaries at marginal rates. Retained earnings taxed at 46.5%. Taxation of Distributions Before age 60 – taxable, with concessions in some circumstances After age 60 – any withdrawals are tax free Distributed income taxed in the hands of beneficiaries at marginal rates. Permissible Beneficiaries Limit of 4 members who are subject to eligibility criteria e.g. a person who is bankrupt cannot be a member of an SMSF No limits, unless family trust election made which limits beneficiaries to those related to the ‘Test Individual’ Length of Operation Indefinite Maximum of 85 years Asset Protection Very High Not as tight as SMSF protection Intergenerational Wealth Transfers Death benefits can only be retained in fund by way of pension paid to spouse or child under 25 years of age. Assets can be retained for the life of the trust Source: Townsends Business & Corporate Lawyers

Acquiring a property from a SMSF member - it can be done.

Recently a private ruling was successfully granted to a taxpayer, allowing a group of six residential properties to be included in the definition of Business Real Property (BRP). Usually, SMSF’s are prohibited from acquiring residential property from a member, however exemptions apply if the property is considered BRP. Therefore, the ruling allowed the taxpayer’s SMSF to acquire the six residential properties, where the income would be taxed at a maximum of 15%.

	Estate Planning - SMSF Wills
	SMSF Wills can be tailored and customised to form an effective estate planning structure that suits the needs of both members and beneficiaries.  An SMSF Will allows a member to; specify which SMSF assets to leave to each beneficiary (i.e. dependants, non-dependants and legal estate) while maximising the tax efficiency of doing so. This is similar to making bequests in a Will. appoint an executor to take the place of the member upon their death, until the SMSF Will is carried out.
Importantly, an SMSF Will allows a member, with several superannuation interests (see article below) to specify which superannuation interests should be paid out to each beneficiary. This can result in significant tax savings, as illustrated below;

Jeff, 61, has commenced two separate pensions within his SMSF. As a result, Jeff has a $1 million pension made up entirely of Taxable Component and a second $900,000 pension made up entirely of Tax Free Component. Jeff has two sons, Chris aged 24 years (and financially independent) and Michael aged 10 years. Jeff has established an SMSF Will as part of his estate planning. As part of his SMSF Will, Jeff has nominated for Chris to inherit the Tax Free Components pension, with Michael to receive the Taxable Component pension. As Michael is a minor, he will not pay any tax on receipt of the Taxable pension. However if Chris were to receive the Taxable Component as a death benefit, he would be taxed at 16.5% (a potential tax saving of $165,000). Instead, Chris will receive the $900,000 of Tax Free benefits, paying no tax upon receipt. Therefore, Jeff has minimised the amount of potential tax payable upon his death, when benefits are paid out to his beneficiaries.

10% Test & Tax Deductions

Not all individuals are considered employees for Superannuation Guarantee (SG) reasons, and as such, are eligible to claim a tax deduction for personal contributions they make into superannuation. To be able to claim a deduction for the personal contributions, the individual making the contributions must pass the “10% test”. In order to pass the 10% test, the member’s employment income e.g. salary and wages must be less than 10% of their overall assessable income + reportable fringe benefits. In previous years, employment income included salaries, wages, commissions, director’s fees, employment termination payments and workers compensation payments. However, with new legislation introduced 1 July 2009, reportable employer superannuation contributions (salary sacrifice contributions) will also count towards employment income. As a result, people who previously salary sacrificed 100% of their employment income, and claimed a tax deduction against other assessable income, using personal super contributions, can no longer receive the tax deduction. For example: Tom is 53 years old In the 2008/2009 financial year, Tom earns $10,000 from employment activities + an additional $20,000 that is salary sacrificed into superannuation. Tom also earns $100,000 as a net capital gain from the sale of a property. This gives Tom $110,000 assessable income and therefore he satisfies the 10% test – enabling Tom to claim a deduction for any personal concessional contributions made. i.e. $10,000 / $110,000 = 9% However assume that Tom sold the property and made the $100,000 gain in the 2009/2010 financial year instead. Tom again has $10,000 income from employment + an additional $20,000 salary sacrificed.  $100,000 capital gain and $20,000 RESC. Tom no longer satisfies the 10% test, as his salary sacrificed contributions are considered employment income.  i.e. ($10,000 + $20,000) / $110,000 = 27% Therefore, if you have claimed a self-employed contribution deduction in previous years, you need to re-consider your situation to ensure these provisions still apply from 1 July 2009.

Changes to Contribution Caps

Changes that were made to the concessional contribution caps on 1 July 2009 have resulted in strategic, risk and cash-flow implications for many SMSFs. As the contribution caps have been reduced, many members (especially those with salary sacrifice arrangements in place) run a very real risk of breaching the new contribution limits and incurring Excess Contributions Tax (ECT). Furthermore, any excess concessional contributions are then counted towards your non-concessional contribution cap. The table below shows the old and new concessional contribution caps and the excess contributions tax rates which will apply for the 2009-2010 year Age of Member Contribution Cap 08/09 Contribution Cap 09/10 ECT Under age 50 $   50,000 $ 25,000 31.5% Over age 50 $ 100,000    $ 50,000^ 31.5% ^ From 1 July 2012, this figure will be further reduced to $25,000 per annum The effect of the reduced contribution caps is shown in the following example; Jeff is 52 years old and has assessable income of $150,000 pa. 2008-2009 FY 2009-2010 FY Assessable Income p.a.  $ 150,000  $ 150,000 Less:     - Salary Sacrifice ($ 100,000) ($   50,000)   $50,000 $100,000 Less;     - Tax Payable (Rounded) ($9,600) ($26,950)   $40,400 $73,050 Less;     - Living Expense ($   40,400) ($   40,400) Disposable Income $ NIL  $   32,650  With the remaining $32,650 disposable income in the 2009-2010 financial year Jeff could; a)    Make a non-concessional contribution into superannuation (up to a maximum of $150,000 pa or $450,000 over three years) b)    Invest the money in his personal name However both scenarios have positive and negative aspects. If Jeff decided to invest the $32,650 in his personal name, any earnings would be counted towards his assessable income, and therefore taxed at his marginal tax rate. If Jeff decided to contribute the $32,650 to superannuation as a non-concessional contribution, the earnings on the balance would be taxed at a maximum of 15%. If Jeff invests the money outside of superannuation, he will have immediate access to the asset if required. However, if the money is contributed into superannuation, Jeff would need to wait until a condition of release is satisfied. If you currently have a salary sacrifice arrangement in place, it is extremely important that you review your salary package to ensure you remain within the new concessional contribution caps and avoid paying excess contributions tax.

Death benefits to a child paid as a pension

In terms of the payment of death benefits to beneficiaries, many people do not realise that  a pension can only be reverted to a members child under the following circumstances;   The child is under the age of 18 The child is aged between 18 and 25 years and is financially dependent on the member The child is aged 18 years or older and suffers from a disability Failure to satisfy one of these requirements would mean the member’s death benefit would have to be paid to the child in the form of a lump sum payment.

ATO focuses on SMSF compliance

The ATO has increased their focus on SMSF compliance, which has led to an increase in funds being made non-complying. For the financial year 2008/09, the ATO has made 74 SMSFs non-complying with another 53 underway. This represents a 25% increase from the previous year.  The main breaches which have resulted in a fund being made non complying (effectively meaning that half the value of the fund will be lost) include; Providing financial assistance to members e.g. loans Breaching the In-House Asset rules Failing to satisfy residency requirements Early access to superannuation by members

 

Did you know you can have more than one 'account' within your superannuation member balance?
In fact, it is Cutcher & Neale’s opinion that most pension members should have multiple superannuation interests. The following diagram provides an example of how members can structure their accounts;

As illustrated, one member can have an accumulation account plus an infinite number of separate pension accounts (but please note, a member cannot have multiple accumulation accounts). Each account is a separate superannuation interest.

This is common for Transition to Retirement “TTR” individuals who are drawing a TTR pension, from a pension account, while still contributing towards an accumulation account (like Mrs ABC).

The concept of separate superannuation interests is also extremely useful in terms of ‘recycling’ taxable superannuation benefits. When Taxable benefits are drawn from and re-contributed back into a fund as Tax Free benefits (via the use of non-concessional contributions) they can be segregated into a separate pension account, quarantining the Tax Free benefits from any Taxable benefits (as demonstrated in Mr ABC’s member account). This can have significant tax advantages for pensioners less than 60 years of age, as well as significant estate planning benefits for members with non-dependant beneficiaries.

To illustrate the tax advantages, consider Mr ABC, aged 55. He has two pension accounts – one made up of 100% Taxable Component, and one made up of 100% Tax Free Component. Mr ABC’s minimum pensions would be as follows;

Pension 1;       $   8,000.00 ($200,000 x 0.04)

Pension 2:       $   6,000.00 ($150,000 x 0.04)

                Total:               $ 14,000.00

Pension 2 is non-assessable as it is made up entirely of Tax Free Component. Therefore, any pension taken in excess of the $14,000.00 may be from Pension 2. This means Mr ABC would only be liable for tax on the $8,000 pension taken from Pension 1. This would result in a significant individual tax saving for Mr ABC, especially if he was a high income earner for that particular financial year.