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ATO quarterly statistical report

The total value of SMSF assets has climbed to $892 billion during the 12 months to March, according to the latest ATO statistics.

The ATO’s SMSF Quarterly Statistical Report indicates there were 605,469 SMSFs at the end of March — an increase of 17,631 funds since March in 2021.

Total members of SMSFs jumped from 1,102,313 members in March last year up to 1,135,026 in March this year.

Total Australian and overseas SMSF assets increased $95.96 billion up to $892.04 billion over the 12 months to the end of March 2022.

The top asset types held by SMSFs in terms of value continue to be listed shares, which account for 28 per cent of total estimated SMSF assets and cash and term deposits at 17 per cent.

SMSFs slightly reduced their allocation to cash in the 12 months to March, however, with the total assets held in cash dropping from $149.29 billion down to $146.96. Assets in listed shares increased 12.6 per cent to $245.26 billion.

Over the past five years, the amount SMSFs have invested in overseas shares has seen a significant jump, with the asset class doubling in total value.

Collectables have also seen a sizeable jump over a longer five year period, increasing from $355 million back in March 2017 up to $525 million in March this year.

To view the ATO’s SMSF quarterly statistical report, click here

Source: SMSF Adviser

SMSF landlords reminded of allowable claims

SMSF trustees can claim tax on repairs to rental investment homes held within a fund provided such repairs are not classified as improvements, the ATO has stated as part of its end-of-financial-year guidance.

The regulator has pointed to its current guidance online to highlight the difference between repair, maintenance and capital expenditure in regards to a rental property and the associated tax deductions that can be made.

The guidance noted a repair was when something that is worn out, damaged or broken as a result of renting out the property is replaced, while maintenance is preventing or fixing the deterioration of an item that occurred while renting out the property. Capital expenditure is renovating or replacing an entire structure or adding a new structure to the property.

Breaking this down further, the ATO highlighted its top 10 tips to avoid taxation mistakes in relation to rental properties in the run-up to the end of the financial year.

“Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of you renting out the property can be claimed in full in the same year you incurred the expense,” it stated.

For example, repairing a hot water system or part of a damaged roof can be deducted from tax immediately.

“Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floorboards, are not immediately deductible, but a deduction may be claimed over a number of years as a capital works deduction,” the ATO said.

“These costs are also used to work out your capital gain or capital loss when you sell the property.”

It added that replacing an entire structure, such as a damaged roof, or renovating a bathroom are classified as improvements and cannot be deducted immediately.

“As a general rule, you can claim a capital works deduction at 2.5 per cent of the construction cost for 40 years from the date the construction was completed,” it said.

It also warned SMSFs to obtain clear evidence regarding income and expenses in order to claim entitlements.

“Capital gains tax may apply when you sell your rental property, so keep records over the period you own the property and for five years from the date you sell the property,” it said.

Source: smsmagazine.com.au

Younger trustees driving establishments

SMSF trustees aged below 50 have shown a strong interest in gaining control of their retirement savings, leading to an upturn in the total number of SMSFs, according to a long-running survey of the SMSF sector.

The 2022 “Vanguard/Investment Trends SMSF Report” revealed a spike in SMSF establishments during 2020 and 2021 driven by a ‘COVID cohort’ of younger trustees seeking control of their superannuation.

Data presented in the report showed net SMSF establishments had been declining since December 2012, when they represented 8.7 per cent of all SMSFs, down to 3.6 per cent in December 2019.

However, this turned from 2020 when the annual rate of establishment was 3.7 per cent and then surged to 4.8 per cent in December 2021, while annual wind-ups decreased from 17,098 in December 2019 to 10,210 in December 2021.

Speaking at a media briefing in Sydney today, Investment Trends head of research Irene Guiamatsia said: “On a net basis, we are certainly seeing a spike in the establishment rates, which then leads us to now over 600,000 SMSFs that are operating in the market.

“The latest figures show about 29,000 SMSFs were established last year. This is the highest [number] in the past three or four years.”

Guiamatsia added the research also examined the average age and balance at time of establishment from 2020 to 2022 and found both of those were at their lowest points since 2005.

“The key data point shows that the average age of establishment is the lowest that we have seen compared to some of the previous generations [of trustees],” she said.

“Now the average at which an SMSF has been established is 46 years of age and at an average balance of about $340,000.”

In comparison, the average starting balance for an SMSF established between 2015 and 2019 was $440,000 and the average establishment age was 50, while from 2006 to 2014, those figures were 51 years old and $530,000.

The last set of equivalent figures dates from before 2005 when the average age at establishment was 46 and average balances at the time of establishment were $380,000.

The 17th annual investor report from Vanguard and Investment Trends gathered information from 2430 SMSFs and was conducted between March and April 2022.

Source: smsmagazine.com.au

 

What the new super rules mean for those aged 67-75

For self-managed super fund trustees, July 1 will usher in a new era. For the first time, individuals aged between 67 and 75 will no longer need to satisfy a work test to make voluntary super contributions.

Part of a package of superannuation reforms introduced in the federal budget last year and legislated in February, this is designed to give older Australians greater flexibility to top up their superannuation.

This reform acknowledges that many people retiring today have been receiving compulsory superannuation only since 1992. This initiative will allow them to continue making voluntary contributions long after they have retired.

So, what does this mean in practical terms? First, the definition of a “voluntary contribution” is not limited to salary-sacrifice. It can also include small business capital gains tax (CGT) contributions and personal injury contributions, with the former particularly relevant to business owners.

Second, this change has implications for contribution caps. In all the fuss about removing the work test, it is important to remember not to exceed the contribution caps. Otherwise, you may be liable for additional tax on the excess contributions.

These caps continue to apply regardless of your age or employment status. It is also worth noting that if your total superannuation balance is greater than or equal to $1.7 million at June 30, 2022, your non-concessional contributions cap for 2022-23 is zero. That means that if you make any non-concessional contributions in 2022-23, they will be treated as excess non-concessional contributions.

Two options available

If you made excess non-concessional contributions, the ATO will send you a determination explaining that you can either elect to withdraw the excess portion and pay tax on the deemed earnings associated with the excess at your marginal tax rate, including the Medicare levy (option one), or you can retain the excess amount in your fund and pay 47 per cent tax on the entire excess amount (option two) – hardly an enticing option.

Option one is the default if you receive a determination and don’t choose within 60 days because this option attracts the least amount of tax.

Third, it is important to note that contrary to popular belief, the work test has not been completely removed from the legislation. From July 1, individuals between the ages of 67 and 75 will still need to satisfy the work test to be able to claim a member contribution as a tax deduction.

To pass the work test, the member must have been gainfully employed for at least 40 hours over 30 consecutive days in the financial year in which the contribution is made. There is no requirement for the work test to be met before the contribution is made. This means the work test can be met in the same financial year, but after the contribution is made.

Removing the need, regardless of your age or employment status, to satisfy the work test when making voluntary superannuation contributions is arguably the most important superannuation reform from the 2021 federal budget. But there were other changes that also take effect on July 1 that trustees need to be cognisant of and may need to get advice on. Downsizing is probably the most relevant.

The law has been amended to reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60. This change, combined with the proposals regarding the removal of the work test and ability to use the bring-forward rule later in life, will broaden the ability of SMSFs to contribute proceeds to superannuation.

It improves the flexibility for Australians to contribute to their superannuation savings and may encourage people to downsize sooner and increase the supply of family homes.

Remember, too, a downsizer contribution – it’s a one-off, applying only to the family home – does not count towards any of the contribution caps, meaning it can be made even if a person has a total superannuation balance exceeding $1.7 million or if they don’t meet the work test requirements.

In addition, a partner, provided they are 60 or older, can also make downsizer contributions to their own super of up to $300,000 from the sale proceeds even if they are not an owner of the property.

Written by John Maroney, CEO, SMSF Association
First published in the Financial Review on18 May, 2022.

Why poor SMSF planning will leave less for your heirs

A well-considered estate plan will make life easier for any beneficiaries – the invaluable parting gift. 

For self-managed super funds, now numbering around 600,000 and with assets approaching $900 billion, estate planning has never been more important. This is especially the case when the Productivity Commission estimate of a $3.5 trillion wealth transfer over the next 20 years is added to the mix. A sizeable percentage of this $3.5 trillion will reside in SMSFs.

Yet there is often confusion around this important aspect of SMSF planning, especially among trustees who don’t seek specialist advice in what can be a complex issue.

For those who don’t plan properly, the consequences can be disastrous – both for the intended beneficiaries and even the value of the inheritance. The instances where the lack of clear directions have resulted in bitter and costly disputes are well documented.

The result can be lengthy delays in settling an estate, divided families and the potential for higher taxes reducing the size of the inheritance.

The payment of a death benefit from an SMSF is a good example. The benefit needs to be paid as soon as practically possible but to whom? Under super law, a beneficiary includes a spouse (same sex, husband/wife or de facto), children of any age (including ex-nuptial, adopted or step) and any person with whom the person has an interdependency relationship.

The member may have made a death benefit nomination asking the SMSF trustees to pay the benefit to the nominated beneficiaries. Subject to the fund’s trust deed, a death benefit nomination can be either binding or non-binding on the trustees. Regardless of what type of nomination it is, the SMSF trustees must still ensure the nominated beneficiaries are entitled to receive the death benefit under the trust deed and super law.

It is possible for members to nominate that their death benefit be paid to their estate. The SMSF trustee may also choose to pay a member’s death benefit to the estate if the deceased member did not nominate a beneficiary. If the benefit is paid to the deceased member’s estate, the executor of the estate will then distribute the benefit according to the instructions in their will.

Payable as a pension

Then there is the issue of how they are paid. It can be paid as either a lump sum or as a retirement income stream – unless the beneficiary is an adult child of the deceased, in which case the benefit can only be paid as a lump sum. But if the child of the deceased is under 18 or is 18 or over but under 25 and financially dependent on the deceased or is disabled, it can still be paid as a pension.

When a death benefit is paid as a pension, it cannot be paid to an estate. Then there is the issue of reversionary or non-reversionary pensions. With the latter, it ceases being paid on the member’s death, so any remaining pension balance in the deceased’s super account will need to be paid as either a lump sum death benefit and/or as a new pension to the deceased’s dependants (subject to the rules explained earlier).

A reversionary pension, however, enables a dependant (generally a spouse or a child in the circumstances explained earlier) to be nominated to automatically receive the deceased’s super pension. A reversionary nomination makes it clear to the trustee of your super fund who you want to continue receiving your super pension on your death.

Be aware of tax benefits

There is no doubt that a reversionary pension comes with advantages, including giving the member certainty about who will receive their super benefit on their death. It is also a relatively seamless and easy way to transfer your benefit to your dependants and the assets remain in the super system to continue enjoying preferable tax treatment. But there can be a downside such as having a negative impact on social security benefits, and it eventually (12 months after your death) counts towards the transfer balance cap of the recipient of the reversionary pension.

There is also the issue of whether it is better for the death benefit to be paid directly to the beneficiary or the deceased’s estate. If paid directly, it is typically less complicated and a quicker process as there is no need to wait for probate or a letter of administration.

It also has the benefit of not exposing benefits to creditors of the deceased or notable estate claims, and there can be clear direction if there is more than one beneficiary.

Paying the benefit to the estate means there may be tax benefits as the Medicare levy does not apply and, as the benefit has been removed from the superannuation system, there are no knock-on transfer balance cap issues for the recipient of the benefit. If structured correctly, there may also be asset protection and capital preservation benefits.

All this suggests estate planning requires careful thought long before the inevitable occurs, especially as the sums involved are increasing exponentially. The added bonus is that a well-considered estate plan will make life easier for any beneficiaries – the invaluable parting gift.

Written by John Maroney, CEO, SMSF Association. 
First published in the Financial Review on 27th April, 2022

Stocks, crypto and property a big focus for younger SMSF investors

Millennials and Generation Z SMSF investors are mainly focused on investing in stocks, property and cryptocurrency, according to a survey by a social investing network.

A survey of Millennials, aged between 26 and 41, and Generation Z, aged between 18 and 25, involving over 1,000 respondents, including SMSF investors, revealed that younger investors are highly engaged with super, with just over a third of Millennials in the survey contributing between $5,000 and $10,000 annually to their SMSF each year.

Half of the Generation Z respondents in the survey contribute around $1,000 to $5,000 per annum.

A third of the respondents stated that they believed they could get a better return managing their own super than with a traditional superannuation fund.

The data found that a large majority of Millennials and Gen Z with an SMSF are focused on generating a diversified SMSF portfolio, filled predominately with stocks, crypto, and property.

Of Millennials invested in stocks, 45 per cent prefer the ASX market and 32 per cent opt for US markets, while the opposite is true for Generation Z, who favour US markets over the ASX.

Tech, energy, real estate and financial were the industries of choice for both cohorts, with healthcare a priority sector for Millennials and materials sectors a focus for Generation Z. 

Conversely, young investors shy from instruments with higher perceived risk like CFDs, options and FX. 

The survey also indicated some of the barriers to entry with setting up an SMSF, including not knowing where to begin, not knowing how it works and preferring someone else to manage their super on their behalf.

eToro Australia’s managing director Robert Francis said that despite stereotypical perceptions, Millennials and Gen Z Aussies are increasingly taking their superannuation and finances into their own hands.

“They are realising the importance of investing younger than their parents – many as soon as 18 – in order to put themselves in an advantageous position for a comfortable retirement,” said Mr Francis.

Source: SMSF Adviser

Planning your exit: A guide to SMSF succession planning — Part 2

This article is part of a series of articles on SMSF succession planning. In Part 2 of the series we examine the tax considerations that arise in relation to paying superannuation death benefits comprising a taxable component.

We also consider the options and pitfalls associated with planning to make a timely payment of benefits to a member who may not have long to live. 

Tax considerations on death 

The tax profile of death benefits is, of course, a relevant consideration in succession planning. 

Where a death benefit is paid to a tax dependant (ie, a death benefit dependant under s 302-195 of Income Tax Assessment Act 1997 (Cth) (ITAA 1997), the dependant generally receives the benefit tax free regardless of any taxable component that forms part of that payment.

A tax dependant means any of the following: 

  • the deceased person’s spouse or former spouse;
  • the deceased person’s child, aged less than 18 at the time of death;
  • any person with whom the person has an interdependency relationship; or
  • any other person who was a dependant of the deceased person just before he or she died.*

* NB — this limb of the definition imports the common law meaning of dependant, which is accepted to include financial dependency.

Accordingly, adult independent children do not generally qualify as death benefit dependants. Thus, the taxable component of any death benefit payment they receive (usually when there is no surviving spouse) will be subject to a ‘death tax’ — typically 15% plus the 2% Medicare levy. Only the tax free component is tax free.

When you consider that the average SMSF holds over $1 million in assets, the tax exposure of benefit payments made to adult independent children is likely to be significant.

Summarising the tax applicable on a lump sum payment of death benefits

The table below summarises the position in relation to payment death benefit lump sums:

 

Tax free component

Taxable component (element taxed in the fund)

Taxable component (element untaxed* in the fund)

Tax dependant  

Not included in recipient’s assessable income 

Not included in recipient’s assessable income 

Not included in recipient’s assessable income 

Non-tax dependant

Not included in recipient’s assessable income 

Included in recipient’s assessable income but the recipient is entitled to tax offset that ensures that the rate of income tax does not exceed 15% 

Included in recipient’s assessable income but the recipient is entitled to tax offset that ensures that the rate of income tax does not exceed 30% 

 

The above rates do not include the Medicare levy, currently 2%.

* Generally, there is no element untaxed in an SMSF. The one exception is where insurance is involved. Section 307-290 of the ITAA 1997 can operate to make a superannuation death benefit that is paid as a lump sum partly consist of the element untaxed, if the fund has previously claimed deductions for insurance premiums in respect of members, eg, life insurance. However, the element untaxed from an SMSF has no practical effect if it is received by a tax dependant or if the deceased attained age 65 or over prior to their death.

Planning for an exit 

Given the impact of the above effective death tax on death benefits paid to adult independent children, one option that some members consider is planning to withdraw their super benefits before they die. Naturally, we never know the ‘hour nor the minute’ of when death may strike. However, statistics suggest that the vast majority of people have some warning before they pass away.

Under the current tax rules, provided the member is over age 60 and has met a full condition of release (eg, based on retirement or attaining age 65), this allows their benefits to be withdrawn from the superannuation environment tax free. Given super is concessionally taxed, money invested outside super is generally not as tax efficient.

However, relying on this withdraw before you die approach is not always a straightforward exercise as the member and SMSF trustee may need time to:

  • pay required pro-rated minimum payments in respect of any pensions that are in place that will be commuted as part of a withdrawal;
  • commute one or more pensions prior to paying any lump sums;
  • sell off fund assets to obtain liquidity (eg, in relation to pension payments); or
  • transfer assets in specie (ie, as part of a pension commutation or a lump sum payment from accumulation phase benefits).

Thus, hoping for a quick exit in the future can be subject to a number of hurdles given that we cannot predict the hour or minute of our death.

Importantly, such an exit plan based on there being ample time to withdraw a super benefit is vulnerable due to the numerous hurdles that could result in such a strategy easily failing. For example, if the member loses mental capacity to make a decision, or otherwise is physically incapacitated due to rapidly deteriorating health, achieving a timely exit may not be possible in the time available.

Some suggest that appointing an attorney under an enduring power of attorney (EPoA) can be used to overcome these issues, however, this proposed solution is not so simple as we shall see. 

The risks associated with relying on attorneys under an EPoA and why the SMSF trustee is placed to implement an exit plan

Some seek to rely on a spouse or close family member, trusted friend or adviser to withdraw their benefit pursuant to an EPoA at the appropriate time.

However, relying on an EPoA in this situation involves a number of risks including:  

  • The legislation governing EPoAs differs between each state and territory and only the Tasmanian power of attorney legislation contains express language empowering an attorney to deal with a person’s superannuation interest(s). Therefore, it is recommended that any EPoA documentation contain express authority to deal with superannuation.
  • Without an SMSF deed expressly authorising an attorney under an EPoA to act for a member, the EPoA might not be effective, eg, in relation to the attorney exercising a member’s rights and entitlements under an SMSF deed as an SMSF is a form of trust and an EPoA does not authorise an attorney under a trust as the trust deed is the relevant document that governs the rights and obligations under the trust.
  • An attorney withdrawing a member’s benefit may not be acting in the donor/principal’s best interests if others (including the attorney) are attempting to benefit from the withdrawal. Indeed, the situation might give rise to a conflict unless the EPoA contains appropriate wording authorising an attorney to act (ie, on the basis of it being permitted conflict). 

Additionally, it is important to note that there is a difference between an attorney seeking to exercise membership rights and entitlements under an SMSF deed, and valid legal decisions being implemented at the trustee-level.

For instance, even if there is complete confidence in the attorney being authorised to deal with membership rights and entitlements (and assuming there is no conflict), there is still the question of properly implementing a timely payment at the trustee-level. 

As noted above, there are various steps that must generally be implemented by the SMSF trustee as part of an exit strategy, such as: 

  • payment of a lump sum from an accumulation interest; 
  • payment of the member’s required minimum pension payments in cash; 
  • commutation (in part or in full) of a pension interest and payment of the commuted amount outside of the superannuation environment (ie, as a lump sum); and
  • where assets are being transferred in specie, signing applicable transfer forms and updating legal registers, etc, in relation to ownership changes. 

Timely and legally effective decision-making by the trustee

Though it is readily accepted that having an EPoA is critical for SMSF succession planning, robust exit planning should also ideally focus on timely and legally effective decision-making at the trustee-level. 

After all, it is the trustee who holds legal title to the fund’s assets, and it is the trustee who must uphold and comply with the terms of the trust deed and comply with the payment standards in relation to voluntary cashing of benefits under the Superannuation Industry (Supervision) Regulations 1994 (Cth). An attorney who is not a trustee/director cannot generally control this process.

Thus, a robust exit plan generally requires putting in place appropriate succession planning arrangements which ensure that the SMSF trustee (generally this should be a special purpose company) is always in a position to make timely and legally effective decisions at the appropriate time. For instance, a sound succession plan should always include a clear path for the member’s attorney under an EPoA to become a director of the SMSF trustee in place of a member who cannot act or who has lost mental capacity. Naturally, the successor director provisions in DBA Lawyers’ company constitution provides a sound solution for this issue.

Of course, this kind of planning is not just relevant for making a timely payment of benefit as part of an exit strategy. It is also critical to helping ensure that a fund continues to meet the definition of an SMSF in s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) where a member can no longer act as a trustee/director (eg, due to being incapacitated). 

Conclusions

In Part 1 of this series of articles, we focused some of the key ingredients for successful SMSF succession planning, including how to plan for control of a fund in the context of death and loss of mental capacity.

In Part 2 of this series we examined the tax considerations associated with payment of superannuation death benefits, and some of options and pitfalls associated with planning to make a timely payment of benefits to a member who may not have long to live.

As you will appreciate, there is no easy ‘one size fits all solution’ for SMSF succession. However, the intention of this series is to inform the reader of some general considerations that should be taken into account as part of formulating a robust SMSF succession plan. Expert advice should be obtained if there is any doubt. 

By William Fettes , Senior Associate and Daniel Butler, Director, DBA Lawyers

Planning your exit: a guide to SMSF succession planning — Part 1

What is SMSF succession planning?

Succession planning is a critically important aspect of successfully operating an SMSF, though it is often overlooked. Every SMSF member should develop a personal succession plan to ensure there is appropriate planning in place to govern succession to the control of the fund and other succession arrangements appropriate for their individual circumstances. 

SMSF succession planning broadly aims to accomplish the following outcomes:

  • that the right people receive the intended share of SMSF money and assets; and 
  • that the right people have control of the SMSF to ensure that superannuation benefits are paid as intended.

An optimal SMSF succession plan should achieve these goals in a timely fashion, with minimal uncertainty and in the most tax efficient manner possible. However, it should also be recognised that trade-offs may need to be considered, as it would usually be considered preferable that the ‘right’ people receive a benefit and pay tax, rather than the ‘wrong’ people receive a benefit in a more tax efficient manner. Accordingly, there is no easy ‘one size fits all solution’ for SMSF succession. However, a well thought out SMSF succession plan should ideally address the following matters:

  • determine the person(s) or corporate entity who will occupy the office of trustee upon loss of capacity or death;
  • in relation to a corporate trustee, determine who the directors of the SMSF trustee company will be (ie, who will have control of the company) upon loss of capacity or death of each director/member;
  • ensure that the SMSF can continue to meet the definition of an SMSF under s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA);
  • determine what each member’s wishes are for their superannuation benefits; 
  • determine to what extent each member’s wishes should be ‘locked in’ through the use of an automatically reversionary pension and/or a binding death benefit nomination (BDBN); and
  • determine the tax profile of anticipated benefits payments. 

Many people have no succession plan in place for their SMSF which may result in considerable uncertainty arising in the future with respect to the control of the fund and the ultimate fate of their member benefits. 

Succession on loss of capacity — the role of an enduring power of attorney (EPoA)

With the passage of time, there is a significant risk that some SMSF members may lose capacity to administer their own affairs. In the absence of prior planning, this could result in major uncertainty and risk arising in relation to control of the SMSF. Having an EPoA in place can help overcome this problem, as an EPoA appointment is ‘enduring’, enabling a trusted person (ie, the member’s attorney under an EPoA) to continue to run the SMSF as their legal personal representative (LPR) in the event of loss of capacity. 

It is strongly recommended that every SMSF member implement an EPoA as a part of their personal SMSF succession plan. It would not be an exaggeration to say that being a member of an SMSF without an EPoA is courting with disaster. 

Naturally, given the important responsibilities of the position, the member must trust their nominated attorney to do the right thing by them. Only a trusted person should be nominated, and insofar as the member retains capacity, the EPoA should be subject to ongoing review to ensure its ongoing appropriateness. Consideration should also be given as to whether scope of the appointment should be general in nature (ie, a general financial power) or limited to the SMSF or to the trustee of the SMSF. For example, if the member wishes to preclude their attorney from exercising certain rights in relation to, say, their member entitlements or confirming, making or revoking their BDBN, this should be expressly covered in their EPoA.

It should be noted that, by itself, an EPoA is not a mechanism by which an attorney can actually step into the role of trustee or director of a corporate trustee. An EPoA merely permits the member’s attorney to occupy the office of trustee or director of the corporate trustee to help ensure the SMSF can continue to operate in a fashion consistent with the member’s wishes. This is because a member’s attorney appointed under an EPoA is expressly recognised as satisfying the criteria relating to the trustee-member rules in s 17A of the SISA. However, the attorney must still be appointed in the first place. The appointment mechanism which facilitates the LPR to step into the role of SMSF trustee or director of the corporate trustee is contained in the SMSF deed and the company’s constitution. For example, in the context of a corporate trustee, in the absence of other appointment provisions in the constitution, generally the shareholders must exercise their voting rights to appoint a director. 

Succession on death — the role of the executor as LPR

The death of a member is another case where succession to control of an SMSF should be carefully considered. 

Section 17A(3) of the SISA provides an exception to the trustee–member rules where a member has died. The exception in s 17A(3) provides that a fund does not fail to satisfy the basic conditions of the trustee–member rules by reason only that:

  1. A member of the fund has died and the [LPR] of the member is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during the period:

    1. beginning when the member of the fund died; and

    2. ending when death benefits commence to be payable in respect of the member of the fund.

This exception permits an LPR of a deceased member (eg, an executor of a deceased person’s estate) to be an individual trustee or a director of a corporate trustee in place of a deceased member until the member’s death benefits commence to be payable.

However, it is important to understand that this provision does not require or create this state of affairs. For example, for s 17A(3) to apply, an LPR must actually be appointed as either: 

  • A director of the corporate trustee of the fund pursuant to the constitution of the company; or 

  • An individual trustee of the fund pursuant to the governing rules of the fund. 

The operation of the provision in this way has been confirmed in numerous cases, particularly in Ioppolo v Conti [2013] WASC 389, Ioppolo v Conti [2015] WASCA 45 and implicitly in Wooster v Morris [2013] VSC 594. 

These cases underscore the fact that a deceased person’s LPR (ie, their executor) does not automatically step into the role of an SMSF trustee or director upon a member’s death. Broadly, it depends on the provisions of the SMSF deed (most SMSF deeds do not have a mechanism for this to occur) and whether there are other appropriate legal documents in place to ensure this can occur.

The role of the Corporations Act 2001 (Cth) in respect of corporate trustees

Section 201F of the Corporations Act 2001 (Cth) empowers the personal representatives of a sole director and sole shareholder in a private company to appoint new directors for the company on the death or loss of mental capacity of the principal (ie, the sole director/shareholder). 

Thus, if an SMSF was a sole member who is also the sole director/shareholder of the corporate trustee, s 201F can assist in relation to the member’s LPR exercising powers to take control of the SMSF trustee after their death (or loss of legal capacity).

However, it is important to understand the limitation of this provision. For instance, s 201F cannot assist where an SMSF member has died and SMSF trustee company has more than one director or shareholder, or where the shareholder is a person other than the sole director who has died. 

Accordingly, relying on s 201F is not a sound strategy in many cases. 

Successor directors 

By ensuring that the company constitution of the SMSF trustee contains successor director provisions, it is possible to plan for succession to the role of a director in a variety of circumstances without the limitations of:

  • Appointing a new director via the usual rules in the corporate trustee’s constitution (eg, by majority shareholder vote); or

  • The limited flexibility in s 201F of the Corporations Act 2001 (Cth).

Making a successor director nomination allows a director (ie, the principal director making a nomination in accordance with an appropriately drafted constitution prepared by DBA Lawyers) to nominate a person to automatically step into the shoes of the principal’s directorship role immediately upon loss of capacity, death or another specified event occurring. 

The successor director strategy is designed to work in conjunction with a member’s overall estate and succession plan to enable an attorney appointed under an EPoA or an executor of a deceased member’s will to be automatically appointed as a director without any further steps involved. 

Naturally, a successor director strategy relies on the right paperwork being in place, including the right constitution and related successor director nomination form. 

Written By William Fettes, senior associate and Daniel Butler, director, DBA Lawyers

Protecting your SMSF assets

It is essential that self-managed superannuation fund trustees make sure that all the accounts and investments are held in the right name. It sounds obvious, but simple oversights can prove costly.

Included in the compliance obligations that apply to SMSFs are eight core trustee covenants. These include a requirement that trustees keep the money and assets of the fund separate from any personal assets. They are also required to act in the best interests of the fund’s beneficiaries and to exercise care, skill and diligence when making investment decisions.

If a covenant is breached, the trustees are at risk of being sued. A beneficiary of the fund who suffers a loss because of the breach can take action to recover those losses. This might not seem to be an issue for couples in an SMSF. However, in the event of a divorce, or on the death of a member, things can change. The beneficiaries of a deceased member may become an aggrieved party if things go wrong.

As a rule, the assets in your SMSF are protected from your creditors. For that protection to work, SMSF trustees must ensure that the accounts and investments of the fund are held in the correct name.

Where the fund has individual trustees, purchase contracts and assets must be held in the name of all the individual trustees as trustees for the super fund. Similarly, where a company is used, the assets must be held in the name of the company as trustee for the super fund.

Any time there is a change of trustee, it is important to ensure all the fund’s bank accounts and investments are updated. For bank accounts, often a new account will be required.

Any time an asset is acquired by the SMSF, the documentation must note the change of ownership and record the change of name or title. This includes where a member makes an in-specie contribution. In-specie contributions are where a contribution is made to the fund by transferring personal investments rather than depositing cash. Use of this strategy is restricted to specific types of assets and includes listed shares and business real property.

Changing the asset title can be overlooked where the SMSF has individual trustees. One common misunderstanding is where an asset is held personally, and the individuals are also trustees of the SMSF, that no further action is required.

Trustees must ensure that the appropriate contracts and transfer documents are completed. These must clearly show the change in ownership to the SMSF. Where property is concerned, stamp duty may also apply.

In WA, land titles only record the name of the trustees. The SMSF’s name will not appear on the certificate of title with Landgate. It is therefore important that documents such as a declaration of trust and caveats are put in place to register and protect the SMSF’s interests.

It is important that appropriate legal advice is obtained to ensure that all the essential documents are put in place, stamped (if applicable) and registered.

A recent case in WA highlighted several key issues surrounding the separation of personal and SMSF assets. These included the importance of not mixing super fund monies with personal proceeds and getting the documentation and registered name for the investment right. The court noted that minutes alone are insufficient. Further, registering the SMSF’s tax file number with a share registry or changing an account “nickname” in an online banking facility does not change the ownership of those assets.

It is essential that self-managed superannuation fund trustees make sure that all the accounts and investments are held in the right name. It sounds obvious, but simple oversights can prove costly.

Included in the compliance obligations that apply to SMSFs are eight core trustee covenants. These include a requirement that trustees keep the money and assets of the fund separate from any personal assets. They are also required to act in the best interests of the fund’s beneficiaries and to exercise care, skill and diligence when making investment decisions.

If a covenant is breached, the trustees are at risk of being sued. A beneficiary of the fund who suffers a loss because of the breach can take action to recover those losses. This might not seem to be an issue for couples in an SMSF. However, in the event of a divorce, or on the death of a member, things can change. The beneficiaries of a deceased member may become an aggrieved party if things go wrong.

As a rule, the assets in your SMSF are protected from your creditors. For that protection to work, SMSF trustees must ensure that the accounts and investments of the fund are held in the correct name.

Where the fund has individual trustees, purchase contracts and assets must be held in the name of all the individual trustees as trustees for the super fund. Similarly, where a company is used, the assets must be held in the name of the company as trustee for the super fund.

Any time there is a change of trustee, it is important to ensure all the fund’s bank accounts and investments are updated. For bank accounts, often a new account will be required.

Any time an asset is acquired by the SMSF, the documentation must note the change of ownership and record the change of name or title. This includes where a member makes an in-specie contribution. In-specie contributions are where a contribution is made to the fund by transferring personal investments rather than depositing cash. Use of this strategy is restricted to specific types of assets and includes listed shares and business real property.

Changing the asset title can be overlooked where the SMSF has individual trustees. One common misunderstanding is where an asset is held personally, and the individuals are also trustees of the SMSF, that no further action is required.

News of the cheques follows inquiries to Brookfield by Your Money after readers made contact about payments received from a share buyback program conducted by the infrastructure giant late last year.

Trustees must ensure that the appropriate contracts and transfer documents are completed. These must clearly show the change in ownership to the SMSF. Where property is concerned, stamp duty may also apply.

In WA, land titles only record the name of the trustees. The SMSF’s name will not appear on the certificate of title with Landgate. It is therefore important that documents such as a declaration of trust and caveats are put in place to register and protect the SMSF’s interests.

It is important that appropriate legal advice is obtained to ensure that all the essential documents are put in place, stamped (if applicable) and registered.

A recent case in WA highlighted several key issues surrounding the separation of personal and SMSF assets. These included the importance of not mixing super fund monies with personal proceeds and getting the documentation and registered name for the investment right. The court noted that minutes alone are insufficient. Further, registering the SMSF’s tax file number with a share registry or changing an account “nickname” in an online banking facility does not change the ownership of those assets.

In this case, several bank accounts, an online share trading account and several investment properties were held personally in the name of a member. These assets were of notable value and represented a significant value of the fund. The couple’s bankruptcy trustee sought to claim these assets for creditors and was successful.

The judge noted that while the “family nature” of an SMSF might suggest a less strict approach, the law imposes strict compliance obligations on trustees.

When it comes to your SMSF, details matter. So, what’s in a name means everything.

Written by Tracey Scotchbrook, SMSF Association

Director IDs and Corporate SMSF Trustees

If you have a self-managed super fund (SMSF) with a corporate trustee, then you need to be aware of the new requirement to apply for and obtain a Director Identification Number (Director ID).

The introduction of Director IDs is part of ongoing attempts to modernise and streamline record-keeping systems used by the government, including details on directors of companies. Essentially this new system is designed to improve the integrity of records that are kept.

The measure is also part of a wider government crackdown on illegal activity. It is hoped that recording the identity of company directors will increase the transparency of companies and discourage illegal activity.

While all directors of companies and registered Australian bodies are affected, this article will focus solely on how these changes relate to SMSFs with a corporate trustee and the process required to comply with the new requirements.

Keep in mind that all members of an SMSF with a corporate (company) trustee are required to be a director of that company.

Also note that the same registration requirements apply if you are acting as a trustee (director) in place for another person under an authority given to you (such as an enduring power of attorney or guardianship arrangement), or where you are acting as an alternate director for a company.

What is a Director Identification Number?

A Director ID is a unique 15-digit identification number given to a director after they have verified their personal information and identity with the Australian Business Registry Services (ABRS).

As mentioned earlier, a Director ID will then be used to verify the identity of directors when dealing with government departments. Overall, it should assist in streamlining the process to identify an individual.  

Once issued, the Director ID then ‘attaches’ to the applicant and will remain in place throughout their life. So only the one Director ID can be applied for and issued per individual.

A Director ID will remain attached to your records even if you resign as a director or leave Australia.  

When do you need to apply?

This will depend on when you were appointed as a director of the corporate trustee for your SMSF.

Before 31 October 2021: If you were appointed as a director before 31 October 2021, you will need to apply for your own unique Director Identification Number by 30 November 2022.

Between 1 November 2021 and 4 April 2022: If you were/are appointed as a director between these dates, you will need to apply within 28 days of being appointed.

If you are setting up an SMSF with a corporate trustee after 4 April 2022, then you will need to apply for and obtain your own unique Director ID before the SMSF and corporate trustee can be established. 

It is important to note that you will need to go through the Director ID application process yourself. No one else can complete the application process for you. If you have a professional that assists you with your SMSF, such as an accountant or tax agent, then they are not allowed to apply for a Director ID for you. It would however be prudent to inform your accountant or tax agent once you have obtained your Director ID.

How to apply

Applications can be made using one of the following processes:

  • Online through the ABRS website
  • Telephone
  • Paper application form.

The information required to complete the application will depend on which process you use. Details of these requirements are provided below.

Online application through the ABRS website

This is the quickest way to apply for a Director ID, but you must have a myGovID account already set up. Note that this is different to a myGov account. 

myGovID is an app that you can download to your phone or tablet designed to confirm your identity with different online government departments. 

Step 1: If you don’t have a myGovID set up, click here first and follow the required process. Once completed, go to Step 2.

Step 2: If you already have a myGovID set up, click here. You will then need to login to myGovID and follow the required process under ‘Apply now with myGovID’.

Step 3: Provide relevant details and supporting information.

Information you will need to have at hand:

  • Your Tax File Number (TFN)
  • Details of your residential address
  • Two sources of identity verification documentation including:
    • Bank account details (BSB and account number) where interest has been earned or where a tax refund has been paid into by the ATO
    • An ATO notice of assessment from the last five years. You will need the date of issue and the reference number. See the top right of the assessment
    • A dividend statement from the last two years. You will need your investor reference number
    • A Centrelink payment summary
    • A PAYG payment summary.

Telephone application

Step 1: Phone 13 62 50 from within Australia. If you are overseas, phone +61 2 6216 3440.

Step 2: Provide all relevant information as requested during the call.

Information you will need to have at hand:

  • Your Tax File Number (TFN). This is optional but using your TFN can expedite the application process
  • Details of your residential address
  • Two Australian identification documents including:
    • One primary document: Australian full birth certificate, Australian passport, Australian citizenship certificate, ImmiCard or Visa
    • One secondary document: Medicare card, Australian driver’s licence
  • Confirm your identity by responding to two questions based on information already known about you
  • Acceptable identity verification documentation including:
    • Bank account details (BSB and account number) where interest has been earned or a tax refund has been paid by the ATO
    • An ATO notice of assessment from the last five years. You will need the date of issue and the reference number. See the top right of the assessment
    • A dividend statement from the last two years. You will need your investor reference number
    • A Centrelink payment summary
    • A PAYG payment summary.

Paper application form

Step 1: Go to the ABRS website and download this form.

Step 2: Gather the information specified on the form.

Step 3: Complete the form with all required information.

Step 4: Sign the declaration at the bottom of the form.

Step 5: Send the form with certified copies of required documents to:

Australian Business Registry Services
Locked Bag 6000
ALBURY NSW 2640
Australia

Final thoughts

The Director ID system does not replace any of the existing requirements around updating company records. The existing requirements to inform and update ASIC on changes to company details will continue.

You may want to consider applying for your Director ID before the required ‘due date’ as there will be a large number of applications around those dates. It would be prudent not to leave your application to the last minute.

Source: Superguide.com.au