One on one with…Brian Hor

Brian Hor

Townsends Business and Corporate Lawyers special counsel Brian Hor recognised the importance of estate planning early in his SMSF-related career. He reinforces the continued significance of this area with Darin Tyson-Chan and expresses his frustration with the constant tinkering with the retirement savings system.

How did your involvement in the SMSF sector happen?

After finishing a law and economics degree at university I was trying to look at what area of law I wanted to get into and I settled on tax law. So I started out in one of the big four accounting firms as a tax adviser. Later I moved to a mid-tier law firm in Parramatta to provide tax advice to their fledgling financial planning operation, which was unique in the late 1980s, and when I was there I became involved in wider legal aspects, including what were known as excluded funds, now SMSFs. My initial introduction to the sector involved updating hundreds of trust deeds for changes in law to excluded funds. Subsequently I became an in-house lawyer at a firm that had many financial services arms, including financial planning, accounting and funds management. It was here I began specialising in estate planning. I then moved to a major trustee company where I was doing work around reasonable benefit limit pension strategies. A few forays into running my own practice followed before the opportunity to join Townsends Business and Corporate Lawyers came about, which was perfect. The focus of the role was on both SMSFs and estate planning.

What motivated you to specialise in estate planning?

The importance of estate planning in conjunction with SMSFs became very apparent to me years ago and this is particularly true these days. Probably more than half of my clients are in blended family situations where you’ve got a second spouse and children from a previous relationship. The number one thing they are concerned about when it comes to their super isn’t so much returns per se, it’s certainty. This is certainty around what happens to their super and making sure, for example, the super is what’s used to look after their current or subsequent spouse, with the rest of the estate left to look after the children. Or it might be the other way around. This can only be achieved through a binding death benefit nomination, in particular one that’s flexible enough to take into account the blended family circumstances. Estate planning is so important, especially now increasingly a lot of someone’s wealth is tied up in his or her SMSF. Since the Simpler Super reforms were brought in, I’ve seen clients who have millions and millions of dollars in their SMSF, it’s a major part of their wealth, and it’s so important to make sure it goes to the right people when they pass away.

What impact have the current super reforms had on estate planning?

An enormous impact. Clients who had millions in their SMSF enjoying a nice tax-free pension based on that had to change their arrangements to commute a large proportion of their pension back into accumulation phase to ensure they didn’t exceed the $1.6 million transfer balance cap. So now the issue is what do they do with their accumulation balance and so again the importance of having a binding death benefit nomination to make sure that balance goes where it’s meant to go has increased.

Do you think the effect of the super reforms on estate planning was deliberate?

I don’t know how hidden the motives were. The government did say from its point of view SMSFs, and superannuation in general, is meant to be for retirement planning and not meant to be for estate planning. Particularly where there were reserves in the fund where people built these reserves, they then passed on to the family’s next generation. That all got wound back, so I think it was deliberate in an effort to curtail the use of superannuation as an estate planning tool.

What other strategic areas or structures have these changes affected?

Wills that contain the use of testamentary discretionary trusts have become more important from an estate planning perspective because trustees have to decide what to do with accumulation balances within super. They can pay it out directly to the surviving children, for example, but there is always the question of how tax-effective that action might be and whether it is wise for the children to be left a large amount of money in that fashion. So people often like to have binding death benefit nominations to direct superannuation monies on their death into their estate to fund a testamentary discretionary trust. That way the children will have financial security whereby the money can be looked after by a trusted person until the children are old enough to manage it themselves.

For those people who do have the ability to make a related-party loan, in accordance with all the rules, it still provides the opportunity to be able to accelerate their accumulation of super effectively by passing the restrictive low contribution limits that are in place now

Brian Hor

Have trust deeds had to be changed dramatically to allow SMSFs to comply with the super reforms?

Trust deeds with a large degree of flexibility built into them have not needed amending significantly. However, some trust deeds of clients I’ve seen, who have come to me with trust deeds sourced from elsewhere, have provisions dictating what type of binding death benefit nomination they are able to make that are not up to scratch. So more often than not I’ve found that SMSF trust deeds have had to be updated to provide greater flexibility in terms of being able to make death benefit nominations that are consistent with the strategy they want to put in place. This can be with regard to managing the treatment of the accumulation account balance upon death or indeed the surviving spouse’s superannuation balance when both members have passed away.

The landscape for limited recourse arrangements has dramatically changed. Is the use of these facilities still a viable SMSF strategy?

For those people who do have the ability to make a related-party loan, in accordance with all the rules, it still provides the opportunity to be able to accelerate their accumulation of super effectively by passing the restrictive low contribution limits that are in place now. Use of an LRBA is still subject to the total super balance rules, but it is still a good strategy for clients with a business real property who have the opportunity to find a way to use an LRBA to enable the fund to purchase the business premises. The benefits of a strategy like that are still far too great to ignore.

What are your thoughts about Labor’s proposed franking credit refund ban for certain individuals?

It’s just part of Labor’s strategy to claw back some government expenditure. We’ve had 10 years now of consecutive multi-billion-dollar budget deficits and super has been raided through the super reforms, introduced by the coalition government, to help rectify the situation. So denying the refund of excess imputation credits is yet another pot that can be raided as it were and that’s a policy favoured by the Labor Party.

Is the proposed policy fair when it comes to SMSFs?

I think for the Labor Party’s perspective fairness is not really a priority. It’s my own personal opinion that lobbying from the large public offer industry funds is very effective and anything they can do to influence government policy to make SMSFs less attractive and provide fewer reasons for people to pull money out of the other superannuation sectors into SMSFs, they will do. That’s what they are trying to achieve and on face value they’re being quite successful. So unfortunately fairness isn’t really part of the equation.

What’s the most significant change to the SMSF sector you’ve seen?

The two most significant changes have been the 2007 Simpler Super reforms and the current round of reforms that came into effect in 2017. Before 2007, the focus was on reasonable benefit limits. Then everything changed and suddenly it was almost a free for all for superannuation and probably a golden age for SMSFs. They were invited to put $1 million into their SMSF back then to kick things off with some generous non-concessional contribution rules. But suddenly last year having the brakes put on all that and taking some of the attractiveness away from super was another big change. So in my career to date they have been the two big turning points.

What would be the one thing you would change about the sector?

I think if the government could just provide greater certainty and settle on what it wants to have happen in terms of superannuation is what I’d like to see. If the government could put in place a set of rules it commits to not changing, or at the very least not changing for a particular period of time, to promote that greater certainty for people, that would be good. One of the things clients constantly tell me is just how complicated their super is and to me it is unnecessarily complex. So if the government could just commit to not changing the super rules so often, I think that would be the single most beneficial thing I would like to see happen to superannuation to increase consumer confidence.

What’s the biggest challenge facing SMSFs in the coming year?

I think it’s the constant attacks on SMSFs, particularly those with lower balances. The focus on the investment returns and so forth of SMSFs to me is important, but should not be the primary focus. It’s really about control and certainty, but the constant attacks on SMSFs means the greatest challenge will be to resist suggestions like funds under $1 million are not viable. It’s really not about that and it’s really important for representatives of the SMSF industry to be able to continually get that point across.

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