Recently, I had reason to look back at the subject matter of some of the columns I have penned over the past three years and I realised just how much change has occurred to SMSFs over that time. While not all the changes proposed by the federal government, federal opposition and industry have gone ahead, there has been considerable debate over the proposals and the merits or otherwise of each.
If you run your own super fund and you’re not a professional super manager, I can understand that now, in the relative calm of the post-election period with the new financial year commenced, it could be confusing just to know where we are at.
While much of the focus in recent times has been on the rules concerning contributions and changes to the treatment of components, all increasing the complexity of superannuation, there are other areas of concern in the running of your SMSF. One of these is estate planning.
How well do you feel you understand the taxation of superannuation death benefits? What about the area of gifting? Do you know what happens if an SMSF member becomes incapacitated? They are just some of the many issues that need to be dealt with every day within super funds and can have a dramatic impact on the fund and its members if not managed correctly.
The latest ATO statistics show there were 597,000 SMSFs at the end of 2018 and those funds have 1.1 million members. A great percentage of these members are high net worth individuals and the evidence is, similar to the long-standing statistics of underinsurance in Australia, many of these individuals overlook the need for detailed estate planning, or don’t commit the time to the subject, and naturally this extends to their SMSF.
While much of the focus in recent times has been on the rules concerning contributions and changes to the treatment of components, all increasing the complexity of superannuation, there are other areas of concern in the running of your SMSF.
If we just look at the simplest of scenarios in estate planning, that is, the passing of a member and the death benefit payment to an individual, do you know who a super death benefit can be paid to? The Superannuation Industry (Supervision) Act sets out the rules regarding who can receive a super death benefit directly, but what if the benefit is to be paid as a pension? In this case, the Income Tax Assessment Act 1997 comes into play, setting out who can receive a pension and what to do when the death benefit cannot be received in the form of a pension.
Then there is the need to understand the taxation of superannuation death benefits. How will the death benefit be taxed? Here there are a number of considerations, including whether the payment is a lump sum or pension, is the payment made to a tax dependant or tax non-dependant and, if the payment is a pension, the age of the beneficiary.
In some cases, the death benefit might be paid to the estate of a deceased person. What does one need to consider in this circumstance? Well, that depends on whether the benefit will be paid as a lump sum and the tax will depend on the beneficiary, which is calculated as though the beneficiary had received the benefit directly.
As you can see, in just the simplest of events, there are a multitude of factors to consider, many of them consequential to an earlier action, so it becomes pretty obvious you need to set up your fund correctly or you’ll likely end up in a complex situation.
There are myriad events you are likely to encounter in the lifetime of your SMSF. The implications of binding death benefit nominations and the effect of an enduring power of attorney, both very common tools to define how benefits will be managed or applied, can often only be fully understood at the time of the death of a member, and at that point, if not understood and used in the correct manner, can play out only with legal help, and that’s a poor and often expensive way to find out a mistake was made. For all these reasons, it makes complete sense to find and use the expertise of an appropriately qualified adviser to ensure you make the right decisions and regularly review these in light of the constantly changing super landscape.