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About Thalia Dardamanis

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So far Thalia Dardamanis has created 15 blog entries.

Critical Decision Regarding Sole Purpose Test for Superannuation Funds

On 10 August the full Federal Court handed down its judgement for Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122.

This case may have significant implications for the sole purpose test under s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires a trustee of a regulated superannuation fund to maintain it solely for the purpose of providing retirement benefits to its members.

The Court found that the leasing of a residential property owned by a father’s self managed superannuation fund (SMSF) to his daughter did not breach the sole purpose test (although the SMSF did breach the in-house asset rules).

 

The facts

Mr Benson is the sole member of the Benson Family Superannuation Fund (the Fund), of which Aussiegolfa Pty Ltd is the trustee (Aussiegolfa).

Aussiegolfa, Mr Benson’s mother and a superannuation fund of Mr Benson’s sister and her partner (the Related Parties) invested in the DomaCom Fund. This involved the purchase of a student accommodation property in Burwood (the Burwood Property), which was the sole asset of a sub-fund of the Domacom Fund. Aussiegolfa and the Related Parties were the sole unit holders of this sub-fund. Aussiegolfa invested approx. 8% of its assets in the DomaCom Fund.

In April 2017, and after two previous tenants had rented the Burwood Property, it was then leased to Mr Benson’s daughter at market rent.

The ATO declared, among other things, that the Fund breached the sole purpose test because the Burwood Property had been leased to Mr Benson’s daughter. This was confirmed by the Federal Court last year.

Aussiegolfa then appealed this decision to the full Federal Court.

 

The decision

On appeal, the full Federal Court held that leasing the Burwood Property to Mr Benson’s daughter was not a breach of the sole purpose test.

In coming to this decision, the Court placed emphasis on the way in which the Fund was objectively maintained, rather than subjective factors or whether the Fund was dealing with related parties.

A determinative factor was that the Burwood Property was leased to Ms Benson at market rent. Due to this, any non-financial benefit or current day benefit of comfort, convenience or accommodation derived from the arrangement was incidental or not relevant.

Additionally, the Court took into consideration the fact that two non-related parties had leased the Burwood Property prior to Ms Benson.

However, the Court cautioned it would have “probably” come to a different conclusion if the lease was not at market rent or if the investment policy of the SMSF had been affected by the leasing of the property to Ms Benson.

Further, the Court held that the investment was an investment in an in-house asset (i.e. an investment with the Related Parties directly into the sub-fund of DomaCom) and confirmed that the ATO had the power to deem the investment to be an in-house asset under the in-house asset anti-avoidance provision in section 71(4) of the SIS Act.

 

Implications

This decision is significant for trustees of superannuation funds regarding how they invest and the use of SMSF assets.

In the past, the ATO and SMSF auditors have taken a broad view of the sole purpose tests so as not to allow related party use of SMSF owned residential property. The full Federal Court’s ruling indicates that in certain circumstances (including where there are arm’s length terms) there is scope for related party use without triggering a breach of the sole purpose test.

If you or your clients are contemplating an SMSF investment and require assistance please contact Thalia Dardamanis. Any permissible related party use of SMSF assets is highly circumstantial and requires appropriate consideration and advice.

 

By |September 17th, 2018|Uncategorised|0 Comments

Binding Death Benefit Nominations and Enduring Powers of Attorney: New Developments

The Supreme Court of Queensland in Re Narumon Pty Ltd [2018] QSC 185 has recently considered:

  • whether an ineffective variation to a fund’s trust deed means that a subsequent variation to that deed will also be ineffective and any resulting death benefit nomination;
  • whether lost documents establishing a reversionary pension means the pension cannot revert to the reversionary beneficiary; and
  • whether financial attorneys have the power to make, renew and/or amend a binding death benefit nomination.

 
The judgement handed down on 24 August of this year related to the John Giles Superannuation Fund (the Fund) – an SMSF of which Mr John Giles was a member.

Mr Giles passed away on 14 June 2017 leaving behind his wife Mrs Narumon Giles, their son Nicholas, four adult children from a previous relationship and a sister Mrs Roslyn Keenan. Mr Giles’ estate (over which a family provision claim was made by one of Mr Giles’ adult children) had a net value of approx. $200,000. Outside of Mr Giles’ estate were his benefits in the Fund, comprising an accumulation account of approx. $1 million and a lifetime complying pension with a value of approx. $3 million.

Mrs Giles, as the then sole director of the trustee of the Fund (Narumon Pty Ltd), sought declarations from the Court regarding the administration of the Fund, including how to pay Mr Giles’ reversionary pension and death benefits.

Of particular importance was the declaration sought regarding whether a binding death benefit nomination (BDBN) signed by Mr Giles’ financial attorneys in 2016 was valid. This is the first time the courts have had to consider such an issue.

 
Background

History of trust deed variations

The Fund’s trust deed was amended multiple times in its history of its operation. An amendment made in 2007 (the 2007 Deed) was signed by Mr Giles in the wrong capacity and was therefore ineffective. To address this problem, a deed of ratification and variation was executed in 2014 (the 2014 Deed). Unfortunately, the recitals of the 2014 Deed referred to the ineffective 2007 Deed instead of the previous deed made in 2004. The 2014 Deed set out the requirements to make an effective BDBN.

Reversionary pension documents

The Fund’s financial statements showed that Mrs Giles was nominated as the reversionary beneficiary of Mr Giles lifetime complying pension. The documents establishing the pension and nominating Mrs Giles as the reversionary beneficiary could not be located, however, various correspondence between Mr Giles and his former adviser over several years referred to such arrangements. Further, material produced by the entity which prepared the pension documents confirmed that the pension would revert to Mrs Giles.

BDBN by financial attorneys

On 5 June 2013 Mr Giles appointed Mrs Giles and Mrs Keenan as his attorneys for financial matters pursuant to an enduring power of attorney. On the same day Mr Giles made a new BDBN (he had made several previous nominations) which was to expire 3 years later on 5 June 2016. It directed the trustee of the Fund to pay his death benefits 47.5% to Mrs Giles, 47.5% to Nicholas and 5% to Mrs Keenan.

Mr Giles lost decision making capacity soon after making this BDBN.

On 16 March 2016, Mrs Giles and Mrs Keenan, as financial attorneys for Mr Giles, signed an “extension of binding death benefit nomination” (the BDBN Extension). This extended the BDBN made by Mr Giles on 5 June 2013 for another three years.

At the same time (and in the alternative) Mrs Giles and Mrs Keenan signed a new BDBN (the New BDBN), which nominated Mrs Giles and Nicholas equally to receive Mr Giles’ death benefit. The reason for removing Mrs Keenan as a recipient was because she was not a dependant of Mr Giles’ for the purposes of the superannuation law.

 
Decision

Regarding the flawed trust deed variations, the Court found that signing the 2007 Deed in the wrong capacity made that deed ineffective. The Court also found that although the 2014 Deed referred to the wrong trustee power in its recitals, its operative provisions were drafted more broadly so that the amendment was valid and effective.

Regarding the missing reversionary pension documents, the Court was willing to accept the existence of a reversionary pension without locating the establishing pension documents. The evidence produced from the extensive search carried out by the trustee of the Fund and its advisers helped the Court to come to this conclusion.

Regarding the scope of the attorneys’ power to make the BDBN Extension and/or the New BDBN, the BDBN Extension was held to be a valid exercise of the attorneys’ power executed in accordance with the Fund’s current trust deed.

The Court considered the conflicts of interest at play. This being that Mrs Giles and Mrs Keenan were acting as attorneys whilst also recipients of Mr Giles’ death benefit.

However, the conflict had no bearing on the validity of the BDBN Extension because Mrs Giles and Mrs Keenan were confirming the pre-existing wishes of Mr Giles to ensure his estate planning wishes remained in effect.

The Court did not turn its mind to the New BDBN due to its findings on the BDBN Extension. However, it did caution that the fact Mrs Keenan was removed as a recipient could result in invalidity of the New BDBN.

 
Implications

This case demonstrates:

  • the lengths to which historical amendments to the trust deed of a fund will be analysed by litigants and the Courts to ultimately determine whether a death benefit nomination is valid;
  • the necessary document trail required to prove the terms of a pension and any reversionary beneficiary nomination;
  • the importance of having quality documents to govern any death benefit payment and seeking to update a trust deed which does not allow for non-lapsing death benefit nominations (if the member wishes to make such a nomination);
  • the tensions that can arise between superannuation arrangements and estate planning, particularly where family members may be acting in dual capacities. Conflict clauses can be inserted into powers of attorney, but this also requires careful consideration. Complications may manifest if an attorney is given too much power.

It is cause for reflection on the superannuation fund trust deeds and estate planning documents that your clients have in place. Should you require assistance or advice with this please contact Thalia Dardamanis.

By |September 14th, 2018|Uncategorised|0 Comments

The ATO’s concern over SMSFs using reserves

The recent release of regulatory bulletin SMSFRB 2018/1 highlights what will spark the ATO’s interest where an SMSF is using reserves. The bulletin was issued in light of the 2017 super reform and the ATO’s concern that some SMSFs are implementing reserving strategies designed to circumvent restrictions imposed under the new law.

Overall, the Commissioner considers that the small membership nature of SMSFs means that the need to maintain reserves in SMSFs is distinct from the need to maintain reserves in APRA regulated superannuation funds. Consequently, the Commissioner expects the use of reserves by SMSFs to be extremely limited and, where an SMSF does hold reserves outside of such limited circumstances, the Commissioner will consider whether the trustee is acting in accordance with their obligations under the sole purpose test (section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA)), the investment strategy of the SMSF and the anti-avoidance provisions (Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)).

 

What arrangements are concerning the ATO?

The types of arrangements concerning the ATO include (but are not limited to) the intentional use of a reserve to reduce:

    • a member’s total superannuation balance:
    • to enable them to make non-concessional contributions without breaching their non-concessional contributions’ cap; or
    • to fall below $500,000 in order to allow the member to access the catch-up concessional contributions arrangements; or
    • to fall below $1.6 million in order to allow the SMSF to use the segregated method to calculate its exempt current pension income; or
    • a member’s transfer balance account to fall below the member’s transfer balance cap to allow the member to allocate a greater amount to retirement phase and thereby having a greater amount of earnings within the SMSF being exempt current pension income.

To help withstand ATO scrutiny, SMSF trustees using reserves should:

    • have a clearly articulated purpose for the reserve;
    • use the reserve in a way that adheres to the sole purpose test (section 62 of the SISA) and the requirement to formulate, review regularly and give effect to a strategy for the prudential management of reserves consistent with the fund’s investment strategy and its capacity to discharge liabilities (section 52B(2)(g) of the SISA and regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994);
    • not use reserves as a means of circumventing restrictions imposed by the 2017 super reform measures (which were brought in to help ensure the system is not used for wealth accumulation, tax minimisation or as an estate planning vehicle)
    • not use reserves as a step in a scheme to achieve potential tax benefits to which Part IVA of the ITAA 1936 may apply.

 
What reserves are allowed and not allowed by the ATO?

The ATO has provided examples of types of reserves that the Commissioner is prepared to allow and not allow for SMSFs. An SMSF that purports to maintain a reserve not allowed by the ATO may be required to demonstrate that the use of the reserve is not part of a strategy employed for the primary purpose of circumventing restrictions in the law and obtaining a tax advantage to which Part IVA of the ITAA 1936 could apply.

Type of reserve ATO response Further ATO comments
Administration NO This describes a reserve being used to fund future administration and operational expenses.
For an SMSF, administration and operational costs should be met from the net assets of the fund as the costs arise.
Investment NO This describes a reserve being used to smooth the impact of market fluctuations.
Reserves for investment smoothing are considered to be unnecessary in SMSFs as investment gains and losses should be reflected in the members’ accounts in the years they occur.
Operational NO This describes a reserve used to meet a registrable superannuation entity’s Operational Risk Financial Requirement (ORFR) target amount.
Operational risk reserves are not necessary in SMSFs as the trustee is not required to meet the ORFR target amount set by the Australian Prudential Regulatory Authority.
Contributions YES This describes the suspense account used to hold contributions pending their allocation under Division 7.2 of the SISR to an accumulation interest of a member.
SMSF trustees are able to accept contributions to these accounts pending allocation to the relevant member in accordance with Division 7.2 of the SISR
Pension YES SMSF trustees are able to maintain ‘pension reserve accounts’ while the SMSF continues to pay:

  • a complying lifetime pension (described in regulation 1.06(2) of the SISR);
  • a non-complying lifetime/flexi pension (described in regulation 1.06(6) of the SISR); and
  • a complying life expectancy/fixed term pension (described in regulation 1.06(7) of the SISR).

The amounts in these accounts comprise an amount available to the trustee, not the member, to satisfy the trustee’s liability to pay the complying pension.
A pension reserve account cannot be maintained to support an account-based pension (described in regulation 1.06(9A)(a) of the SISR).
Some further concessions exist in relation to flexi-pensions.

Self-insurance NO This describes a reserve used in funds that are permitted to self-insure.
Self-insurance reserve should not be maintained in an SMSF because of the prohibition imposed by regulation 4.07E of the SISR (subject to certain circumstances that had a start date before 1 July 2016).
Insurance cover NO An SMSF trustee should refrain from taking out an insurance policy over a fund member in circumstances where the premiums from the insurance policy are sourced from a reserve and the proceeds from the insurance policy are paid into the reserve.
Anti-detriment NO The anti-detriment deduction is no longer available for lump sums paid on or after 1 July 2019 or where the deceased member died on or after 1 July 2017. As the deduction has been removed, there is no longer a need to create this type of reserve from 1 July 2019.

 

What action should your clients take?

The ATO has reported that it will not apply compliance resources to review arrangements entered into by SMSFs before 1 July 2017 provided that the reserve:

      • was permitted by the law (section 115 SISA);
      • was permitted by the governing rules of the SMSF; and
      • was not used as a means to circumvent the 2017 super reform (this will be determined according to the facts and circumstances of each case).

Additionally, the ATO will continue to monitor the use of reserves by SMSFs.  Any unexplained increases in new or existing reserves or the allocation of amounts from a reserve directly into the retirement phase will likely attract scrutiny from the ATO.

An amount allocated from a reserve before and after 1 July 2017 will generally be counted as a concessional contribution unless otherwise excluded because certain conditions are met. If existing reserve levels need to be progressively distributed to members, careful consideration should be given to the concessional contributions rules.

 

If you or your clients require any assistance in dealing with SMSF reserves, please contact Thalia Dardamanis or Patrick Cussen on 1300 267 529.

By Thalia Dardamanis

By |March 19th, 2018|Uncategorised|0 Comments

More Certainty for Victorians over their Medical Treatment Decisions

More Certainty for Victorians over their Medical Treatment Decisions

The law surrounding advance care directives and medical treatment decision-making has drastically changed with the introduction of the Medical Treatment Planning and Decisions Act 2016 (Vic) (“the Act”). The Act came into effect on 12 March 2018.

The Act repeals the Medical Treatment Act 1988 (Vic) and implements a single framework regarding medical treatment decision-making for people without decision-making capacity. This overhaul aims to ensure that people receive medical treatment that is consistent with their preferences and values. It is focused on personal autonomy.

The Act is in response to past legislative complexity and inconsistency. Previously, Victoria had four different Acts governing this area, each with their own definitions, tests for capacity and obligations. Now, medical treatment decision-making is solely governed by the Act.

The Act does not cover unlawful medical treatment, such as physician assisted dying.

 

What’s different?

Advance care directive (“ACD”)

The Act will enable Victorians (including some children) to create a legally binding ACD. The ACD can contain:

  • Instructional directives (specific, binding instructions on treatments that a person consents to or refuses); and/or
  • Value directives (which describe a person’s preferences and values that they would like to be taken into account when medical treatment decisions are being made for them).

ACDs will be relevant where a person does not have decision-making capacity and a medical treatment decision needs to be made for them. For example, patient X requires heart bypass surgery. In circumstances such as these, the health practitioner treating patient X is obliged to make reasonable efforts to locate an ACD. If patient X has an ACD in place that contains an instructional directive either consenting to or refusing heart bypass surgery, then the health practitioner is legally bound to follow that instructional directive.

It is important to note that ACDs must be witnessed by two people – one of them being a registered health practitioner.

 

Medical treatment

(a) Decision-makers

The Act also allows a person aged 18 or over to appoint a medical treatment decision-maker to make decisions for them if they lose decision-making capacity. Only one medical treatment decision-maker can be authorised to make decisions at any one time however back-up medical treatment decision-makers can be appointed. The first listed decision-maker maintains the power to make medical treatment decisions. If the first listed decision-maker is unable or unwilling to make these decisions then the second listed decision-maker has the power to make the decisions, and so forth.

A medical treatment decision-maker will be relevant where a person does not have decision-making capacity, a medical treatment decision needs to be made for them and:

  • There is no ACD in place; or
  • The person’s ACD does not contain any relevant instructional directive on the proposed medical treatment decision.

For example, patient X requires heart bypass surgery but he/she has no ACD in place. The health practitioner is then obliged to locate the appointed medical treatment decision-maker. This medical treatment decision-maker will make any necessary decisions on patient X’s behalf regarding heart bypass surgery.

In these situations, a single test is imposed on the medical treatment decision-maker when making decisions. This being that, their decisions must be consistent with the patient’s preferences, values and rights (i.e. no longer what is in the best interest of the patient but on the basis that the decision-maker reasonably believes that the patient would have made that decision if the patient had decision making capacity). Amongst other things, the medical treatment decision-maker will be required to consider relevant value directives contained in the patient’s ACD (if any).

The role of a medical treatment decision-maker comes second to any ACD that is in place and that contains a relevant instructional directive. This intends to give people control over future health choices, with an emphasis on ensuring that a person’s medical instructions, values and preferences are complied with when they have lost capacity.

 

(b) Support persons

The Act introduces the role of a “support person”. This is a completely new option with regard to medical treatment decision-making and can even be made by some children.

A support person can assist in making, communicating and giving effect to a person’s medical treatment decisions and representing that person’s interests whilst they still have capacity. For example, accessing medical records relevant to a decision or attending appointments with that person.

If a person loses decision-making capacity, the support person can continue to act as an advocate for that person. However, the support person cannot make medical treatment decisions on behalf of another person – only the medical treatment decision-maker has that power.

The role of a support person may be particularly relevant where a person is elderly or suffering from an ongoing medical condition.

A support person and medical treatment decision-maker can be the same person.

 

Impact on medical agents and enduring powers of attorney

A medical agent appointed under the Medical Treatment Act 1988 (Vic) prior to 12 March 2018 will still be effective and they will be deemed to be a medical treatment decision-maker under the Act.

Additionally, the Act does impact future enduring powers of attorney (for personal matters) made under the Powers of Attorney Act 2014 (Vic). Prior to the Act, personal matters was defined to include “health matters”. However, this definition has been amended by the Act to exclude “health matters”. Now, a person will no longer have authority to appoint an attorney for health matters under the Powers of Attorney Act 2014 (Vic). This ensures that medical decisions are solely governed by the Act.

The introduction of the Act, and its new framework for medical treatment decision-making, is cause for reflection on the appropriateness of any relevant documentation that may be in place.

 

Should you require further assistance in this area, please contact Bernie O’Sullivan or Thalia Dardamanis.

By Thalia Dardamanis and Carla Massaria

By |March 19th, 2018|Uncategorised|0 Comments