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Planning for the Inevitable

Planning for the Inevitable 

Estate Planning is the process of planning during your life time to ensure that your income and asset arrangements are tax-effective and meet your requirements, both now and after death when your will takes effect.

 

·           estate planning looks at your affairs both now and after your death;

·           control of assets, now and after your death, is a critical issue;

·           you need to consider both income and assets;

·           the process is one of planning – something many talk about but do not implement.

 

Good estate planning requires a team approach.  Your lawyer, financial planner and accountant are critical participants to a good estate plan.

 

Wills

 

Most people know that a person's will is the primary document for dealing with their estate after death.

 

Great care is required in drafting wills.

 

The Supreme Court of Queensland case of O'Brien & Anor v Smith & Anor [2012] QSC 166 is a good example of how things can go wrong with a do it yourself Will.

The testator in the case made a Will leaving specific cash gifts to certain beneficiaries and then gifted his residuary estate to "a trust or other entity to be set up by my Executors...and administered by them as they shall see fit." 

The matter went to the Supreme Court because the executors were unable to determine who the beneficiaries of the residuary estate would be.  It was argued, and accepted by the Court, that the clause referring to the trust failed. For any trust to arise, there must be certainty as to the intended beneficiaries and in this case, there was no such certainty.  The end result was that there was an intestacy as to the residue which means it had to be dealt with under the Succession Act as if the testator died without a Will.

A number of parties were involved in the litigation including the executors, beneficiaries and guardians of minor beneficiaries.  The Court made orders that the costs of all parties were to be paid by the estate which is to be expected given all parties had a legitimate interest in determining the correct construction of the Will. However, such costs would have been substantial and could have been avoided only if the testator had made his Will with his solicitor.

 

If you die without a will – intestacy

 

If you die without a will then intestacy occurs.

 

Where there is an intestacy the Succession Act provides by formula who will receive your property and the share which they will take.  In many cases of intestacy it is necessary for a representative to make application to the Court for Letters of Administration which empower the representative to deal with the estate property according to the statutory formula.  This will result in additional costs to the estate administration process.

 

This article was provided by Donnie Harris Law - We provide affordable legal advice and drafting services in respect of succession, estate planning, Wills and EPOAs.  Contact Donnie Harris Law.  Visit www.dhlaw.com.au or phone or 07 4724 1016.

 

 

What is Required in an Investment Strategy?

 

What is Required in an Investment Strategy?

As a trustee of an SMSF you are required by law to formulate and implement an investment strategy and review it on an ongoing basis. Specifically subregulation 4.09(2) of the Superannuation Industry (Supervision) Regulations 1994 specifically states the following:

The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

(a)    the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;

(b)   the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c)    the liquidity of the entity's investments, having regard to its expected cash flow requirements;

(d)   the ability of the entity to discharge its existing and prospective liabilities; and

(e)   whether the trustee of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

Where the above requirements are not fulfilled the SMSF auditor is required to inform the ATO via an Auditor Contravention Report. 

Importantly this regulation falls under the operating standards of the Superannuation Industry (Supervision) Act 1993 and therefore is subject to the new penalty regime imposed by the ATO from 30 June 2014. This holds a possible charge of $3,400 per trustee so it is very important to follow the requirements set out above.

 

What is Business Real Property?

 

When dealing with Self Managed Superannuation Funds (SMSF's) the term business real property is often used. One of the most frequently asked questions is what is business real property?

The term is defined in subsection 66(5) of the Superannuation Industry (Supervision) Act 1993 as follows:

"business real property" , in relation to an entity, means:

(a)    any freehold or leasehold interest of the entity in real property; or

(b)   any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

(c)    if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph--any interest belonging to that class that is held by the entity;

where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

Key terms in relation to the Business Real Property Definition:

·         "Business" includes any profession, trade, employment, vocation or calling carried on for the purposes of deriving a profit. This includes primary production and professional services, but does not include occupation as an employee.

·         "Real Property" refers to land, which can generally be identified by reference to titles held over particular parcels of land. It is important to note that fixtures, including buildings, which are attached to the land form a part of the real property.

·         "Freehold interest" entitles the owner to exclusive possession of the property for an indefinite time period. It's possible for an entity to co-own real property and still hold a freehold interest, or for an entity to hold a freehold interest in a property that is strata titled.

·         "Leasehold Interest" conveys a right on the part of the entity holding the interest to exclusively possess the property for a period of time that is either pre-determined or capable of being determined.

·         "Crown land" is land vested in the Commonwealth, a State or a Territory of Australia.

The business use test - wholly and exclusively used in one or more businesses

Assuming that the SMSF holds an eligible interest in real property the underlying land must then satisfy the business use test in the definition. This requires the real property to be used wholly and exclusively in one or more businesses carried on by an entity. Of note is that this does not need to be the SMSF itself.

The character of the real property's use determines whether the business use test is satisfied. This will depend on questions of fact and degree. A holistic assessment of all facts and circumstances relating to the use of the property is made when working out whether the test is satisfied.

This assessment must be determined at the relevant point in time. For example, the test is applied when an eligible interest in real property is acquired by an SMSF from a related party. Nevertheless, the periods surrounding the acquisition also need to be considered. For instance, if there have been changes in the use of the property, these must be of a substantive and enduring nature to be considered in the business use test.
 

Additionally the business use test need only be applied to the underlying land that is the subject of the interest held by the relevant entity. For example, an owner of land may grant a lease over part of that land. In these circumstances, the lessee holds a leasehold interest in the land and therefore holds an eligible interest. If the business real property definition is being applied to the lessee, the business use test need only concern that part of the land that is subject to the lease. The mere granting of rights in relation to land such as a lease does not satisfy the business use test unless the activities, operations or actions carried on by the person who acquires these rights meet the business use test.  

 

A minor or insignificant non-business use of the property will generally still satisfy the 'wholly and exclusively' requirement.

 

For additional information and case studies in relation to business real property please see Self Managed Superannuation Funds Ruling: SMSFR 2009/1 - Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993.

 

Why is this important to an SMSF?

Under subsection 66(1) of the Superannuation Industry (Supervision) Act 1993, an SMSF trustee or investment manager cannot intentionally acquire assets from a related party.

Importantly under subsection 66(2) Business Real Property is an exception to this prohibition.

Additionally, under section 83 of Superannuation Industry (Supervision) Act 1993, in-house assets are restricted to 5% of the total assets of the SMSF. However where the asset is business real property and leased to a related party it is exempt from the in-house asset rules.

 

Loan to a Member versus Access to Benefits

Whilst working for the Self Managed Superannuation Fund (SMSF) regulator the question would often arise as to whether an amount paid to a member of an SMSF was a loan or access to benefits without meeting a condition of release. Often the hardest question would be to find out the intention at the time the money was accessed. Was there an intention to repay the money?

 

Subsection 65(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) prohibits trustees from lending money and giving financial assistance to members or their relatives.

 

Subsection 10(1) of the SIS Act defines the term 'loan' as including:

…the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings.           

 

As this definition is inclusive, a 'loan' can be any or all of the following:

·         a loan according to the general or legal usage of the term;

·         the provision of credit; and/or

·         any other form of financial accommodation.

 

General meaning of "loan"

 

The term 'loan' is defined in the Macquarie Dictionary 5th Edition as:

 

1.    the act of lending; a grant of the use of something temporarily: the loan of a book.

2.    something lent or furnished on condition of being returned, especially a sum of money lent at interest…

 

The definitions above point to a loan involving something being given temporarily with the intention that it will be returned. Other indicators include a loan agreement, the charging of interest and commencement of repayments from the member to the fund. Also please note that under the new penalty regime failure to comply with section 65 of the SIS Act could result in a possible charge of $10,200 per trustee. Where a loan cannot be substantiated the money paid could be deemed to be access of the member's benefits.

 

When a benefit can be accessed

 

The payment standards are prescribed in Part 6 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) and the conditions of release are set out in Schedule 1 of the SIS Regulations. 


SIS Regulations subparagraph 6.17(2)(a)(i) states that a member's benefits in a fund may be paid by being cashed in accordance with Division 6.3.

SIS subregulation 6.18(1) states that a member's preserved benefits in a regulated superannuation fund may be cashed on or after the satisfaction by the member of a condition of release.

 SIS subregulation 6.01(2) defines a condition of release to mean a condition of release specified in Column 2 of Schedule 1 and, subject to regulation 6.01B, a member of a fund is taken to have satisfied a condition of release if the event specified in that condition has occurred in relation to the member.

 

The conditions of release listed in Schedule 1 include:

 

  • Retirement
  • Death
  • Terminal medical condition
  • Permanent incapacity
  • Temporary resident permanently departing Australia
  • Termination of gainful employment with a standard employer-sponsor of the regulated superannuation fund on or after 1 July 1997 (where the member's preserved benefits in the fund at the time of the termination are less than $200.
  • Severe financial hardship
  • Attaining age 65
  • Compassionate grounds
  • Termination of gainful employment with an employer who had, or any of whose associates had, at any time, contributed to the regulated superannuation fund in relation to the member.
  • Temporary incapacity
  • Attainment of preservation age. 

 

Where the member has not met any of the conditions of release shown above the member will be assessed as having accessed benefits without meeting a condition of release. Therefore the amount paid to the member will be assessed as part of their normal assessable income.

 

Please note that this regulation falls under the operating standards of the SIS Act and therefore is subject to the new penalty regime imposed by the ATO from 30 June 2014. This holds a possible charge of $3,400 per trustee so it is very important to follow the requirements set out above.

 

 

 

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When selecting an SMSF auditor there are number of questions to ask, below are the major ones you will need to consider:

  • Is your SMSF auditor registered with ASIC? To search for the auditor's details please follow this link to search the SMSF Auditor Register.
  • Whilst searching the SMSF Auditor Register you should also take the time to search the Banned and Disqualified SMSF auditor list to ensure that your SMSF Auditor does not appear in the list.
  • Is the SMSF firm a specialist, do they offer other services? There has been a recent crackdown on independence of SMSF auditors by ASIC and the ATO. Where firms offer multiple services independence may be an issue.
  • Will your SMSF Auditor outsource your SMSF Audit to another firm? Will they send your audit overseas? What are the risks of outsourcing your audit/s to a foreign country?
  • Similarly you must question where your data is being held and the method of providing information to your SMSF Auditor. Where data is being held overseas you should be aware of the risks involved.
  • In terms of the actual work of the audit the following questions should be raised:
    • Does the SMSF Audit firm provide you with a document or 'trustee' checklist showing all documents required to complete the audit?
    • What time frame will the audit be completed in? How much of an effect will this have on your requirements at peak times?
    • Are issues noted within the audit management letters? If issues have not been noted and you are aware they exist, the audit may not have been completed in alignment with the Guidance Statement GS 009 'Auditing Self Managed Superannuation Funds'
    • When a breach is identified do you have the opportunity to talk to the auditor about rectifying the breach and the methods to use, such as enforceable undertakings, to ensure compliance with ATO requirements?
    • Does the SMSF Audit firm offer additional guidance and at what cost?

 

SMSF's lending money to members of the fund and related parties is specifically prohibited by the guiding legislation: Superannuation Industry (Supervision) Act 1993. Trustees must understand that providing loans or financial assistance to members and their relatives is not permitted.

The reason for this is because the purpose of the SMSF is to provide benefits to the members of the SMSF upon their retirement or death. Therefore providing benefits prior to this time is not allowed.

A relative of a Self Managed Superannuation Fund include a members or member spouses:

  • Parent;
  • Grandparent;
  • Brother/Sister;
  • Uncle/Aunt;
  • Nephew/Niece;
  • Lineal descendants; or
  • Adopted Child

Approximately 25% of all breaches reported by SMSF Auditors involve loans to members or member's relatives. With this alarming statistic the Australian Taxation Office (ATO) is now targeting this breach heavily.  

Recently the ATO issued a new compliance regime which has a breach of this nature attracting up to 60 penalty points or $10,200 per trustee so if an SMSF had 4 trustees the penalty would be 4 x $10,200 or $40,800. Please note this is payable by the trustees themselves and cannot be paid by the SMSF's assets.

Additionally the ATO can issue a rectification directive which will set out how the trustees must rectify the breach.

Remember it is you as the Trustee of your SMSF that is ultimately responsible and therefore you must make sure you understand your duties, responsibilities and obligations.

 

 

The Australian government has announced the commencement of the Entrepreneurs' Infrastructure Program, which will be released in three phases:

•    First Phase – Business Evaluation and Business Growth Grant, which is now fully operational.
•    Second Phase – Research Connections Program commences in September 2014.
•    Third Phase – Commercialising Ideas commences in November 2014.

The Business Evaluation and Business Growth Grant will be available for businesses operating in the following industries:
•    Defence
•    Energy, Water and Waste Management
•    Freight and Logistics
•    Infrastructure-related Construction
•    Information and Communication Technology (ICT)
•    Manufacturing or Manufacturing-related Services
•    Medical and Pharmaceutical
•    Professional Services
•    Resources Technology
•    Creative Industries
•    Tourism (some sectors)

The program is also available to businesses operating in remote Australia, who meet the remote Australia turnover requirements, which is a minimum of $750,000.

The turnover requirements for creative industries and tourism sector is $1million per annum.  Each of the other industries require a minimum turnover of $1.5million.  In every industry, category and remote Australian businesses, the maximum turnover is $100million.

For businesses located in remote Australia, applications will be accepted from businesses with an Australian Business Number (ABN) or an Australian Company Number (ACN).  For all other industry applicants, the applicant must have an ACN.

The applying business must have operated for three consecutive years.

In the first instance, the applicant will be given a business evaluation by a business advisor employed by the Department of Industry.  Following that evaluation, the Department of Industry may issue an invitation to the business to participate in the Business Growth Grant.

The Business Growth Grant offers a grant of up to $20,000, excluding GST, on a 50% grant basis.  To apply for the Business Growth Grant, the business:
•    must have received a business evaluation report in the previous six months;
•    must be planning to implement one or more of the eligible recommendations identified in the business evaluation report;
•    must be solvent; and
•    must be able to pay its share of the cost.

The work that can be undertaken is virtually any activity, which will improve the business performance of the applicant.

Article provided by ess biztools - business advisory products for accountants
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Value Assets at Market Values

Commencing for the financial year ending 30 June 2013 the Superannuation Industry (Supervision) Regulations 1994 state that the fund's assets must be recorded at its market value.

 

Although this poses little problem for assets such as cash, term deposits or shares the introduction of this requirement has larger implications for assets such as real estate, collectables and other real assets.

 

Market value is defined in the Superannuation Industry (Supervision) Act 1993 as:

 

'market value', in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

                    (a) that the buyer and the seller dealt with each other at arm's length in relation to the sale;

                    (b) that the sale occurred after proper marketing of the asset;

         (c) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.'

 

Often real property will need to be valued by an expert such as a registered valuer or real estate agent. However in cases where this is impracticable, reasonably objective and supportable data will suffice.

 

Additionally, forcing the SMSF assets to be valued at market value rather than historical value should ensure SMSF members receive more accurate information of their fund's financial position.