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About Thalia Dardamanis

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So far Thalia Dardamanis has created 13 blog entries.

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

Estate Planning When Entering or Exiting Relationships – Are All Things Equal Between Married and De Facto Couples?

No matter what your view is on the marriage equality debate, understanding the rights of a married couple compared to a de facto (including same sex) couple is critical to enable a meaningful discussion with clients who are entering or exiting relationships about their plans on death and incapacity.

 

The difference between proving a marriage and a de facto relationship

At the very core, marriage is based on a couple’s mutual promise to one another and need only be proved by the production of one document (a marriage certificate) at most. It is immediate and undeniable.

A de facto relationship must be proved by evidence relating to living arrangements, sexual relationship, finances, ownership of property, etc. It often requires one or both partners to spend significant amounts of time, money and unnecessary stress to produce the necessary evidence.

Although most states allow de facto couples to register their domestic relationship a prescribed set of criteria must be met to allow the registration.

Interestingly, couples do not need to prove any of the above criteria to enter into a marriage and, in fact, may choose to not share any during their relationship.

 

Differences for estate planning

Although estate planning laws differ in each jurisdiction, marriage usually revokes a Will whereas entering into a new de facto relationship does not. So if, for example, a person made a Will, then entered into in a de facto relationship and then died, the Will would remain valid. The de facto partner would have a right to make a claim against the estate, if the Will did not make sufficient provision for them.

Similarly, divorce (but not separation) will usually revoke any gift made in a Will to the ex-spouse whereas ending a de facto relationship will not revoke gifts made to the former partner.

Married and de facto spouses have an entitlement to a portion of a deceased’s estate if the deceased dies without a Will however a de facto partner must prove their relationship before becoming entitled. This can be a challenge for the de facto, especially where the relationship was not a long continuous one or where the parties did not live together at all times.

The laws relating to powers of attorneys differ from those applying to Wills in several critical ways. For example, if a person nominates their spouse (whether de factor or married) as medical and financial attorney, and the relationship subsequently breaks down, the appointment still stands. For this reason, if you have a client whose relationship ends, it is important to prompt them to immediately review their powers of attorney as well as their Will.

 

If you would like assistance in helping clients entering or exiting relationships prepare or update their estate planning documents please contact Bernie O’Sullivan or Thalia Dardamanis on 1300 267 529.

By |September 28th, 2017|Uncategorised|0 Comments

Just in the knick of time! Deciding whether to apply the super reform CGT relief

The transitional CGT relief in the superannuation reform allows an SMSF to reset the cost base of any assets reallocated or re-apportioned from retirement phase to accumulation phase to comply with the transfer balance cap or new transition to retirement pension arrangements.

The relief applies where the re-allocation or re-apportionment occurred between 9 November 2016 and just before 1 July 2017.

Ordinarily, if a pension is commuted from retirement phase to accumulation phase, the earnings on assets supporting the commuted balances will become taxable.

The relief operates to ensure that tax does not apply to unrealized capital gains that have accrued on assets that were used to support pensions up until that time. The rationale for this treatment is that such gains would have been exempt from tax if the SMSF had realized those assets prior to commutation.

The relief is provided by deeming the fund to have sold and reacquired the relevant asset for market value. This means that when the asset is eventually sold, tax is only payable in relation to capital growth that accrued after the application of the CGT relief (i.e. tax will only apply to gains that accrue once the asset no longer supports, or supports to a reduced extent, a pension in retirement phase).

The conditions that must be met to apply the relief depend on whether the SMSF applies the segregated method or the proportionate method.

Regardless of which method is used, the fund must make an irrevocable election to apply the relief and notify the Commissioner of the election in the approved form (i.e. the CGT schedule) on or before the due date of the fund’s 2016-17 income tax return. That is, the election must be made:

  • for funds that lodged their 2015-16 return late, by 31 October 2017;
  • for new funds, in February 2018 (although it is unlikely that new funds will be eligible for the relief since it only applies to assets held by the fund from 9 November 2016); and
  • for other funds, when the fund lodges its tax returns, and that could be as late as May 2018.

Now is therefore the time to determine if the relief will be applied and to then prepare for it. As with most things involving superannuation, deciding whether to apply the relief will depend on each fund’s individual circumstances.

Below are some hot tips in relation to making that decision:

 

1. The relief is not an ‘all or nothing’ approach

The relief applies on an asset-by-asset basis. This means that a fund can choose the assets to which it wishes to apply the relief.

Further, where the capital gain on a fund’s asset can be deferred (i.e. if using the proportionate method), the fund can choose the assets for which the fund will defer recognizing the taxable capital gain.

 

2. Electing the relief may not be the best outcome

If the fund is using the proportionate method to apply the relief, then it must pay tax on the taxable portion of the capital gain built up after 1 July 2017 on an asset at some point. That is, the fund gets to choose when it sells the assets and to that extent the fund may control the tax return in which it will include the gain, but it must eventually realize the gain and pay tax in respect of the gain on an asset for which the fund has claimed the relief. The fund cannot later try to revoke or unwind the use of the relief.

If a fund is likely to have a higher proportion of its assets in pension phase when it sells the asset in the future (say if an additional member in the fund moves their benefits into retirement phase in a few years’ time), it may be best not to elect to apply the relief so that more of the gain is exempt from tax when it is sold.

 

3. Don’t forget the basic rule for the CGT discount

Given that applying the relief will deem the fund to have sold and then reacquired the asset, applying the CGT relief would reset the 12-month eligibility period for the CGT discount.

In addition, any subsequent events that affect the asset’s cost base under taxation law apply to the reset cost base amount (e.g. costs incurred in repairing or maintaining a real property asset are able to be added to the reset cost base).

Therefore, it may not be wise to choose to apply the relief in some circumstances. For instance, if there has only been a small capital gain on the asset from the time of its acquisition, and it is likely the trustee will need to sell the asset within 12 months of the reset period, the fund will be able to obtain the CGT discount if it does not claim the relief.

 

4. Get the reset date right

If the proportionate method applies, the date of the cost base reset of those assets for which relief is selected will always be 30 June 2017.

If the segregated method applies, then the date of the cost base reset of those assets for which the relief is selected will be the date the asset stopped being segregated (i.e. any date between 9 November 2016 and 30 June 2017).

The date the asset stopped being segregated could be the day any pension accounts were partially commuted for transfer balance cap purposes (e.g. 30 June 2017), the day the fund stopped being a segregated fund or even the day the fund received a contribution.

 

5. Only members affected by the reform can take action

Whilst not detailed anywhere in the reform legislation, the ATO has consistently stated that only members who have been affected by the pension changes can elect to apply the CGT relief.

That is, if members (other than those in receipt of transition to retirement pensions – see below) did not need to commute any superannuation pension to comply with the new transfer balance cap of $1.6m by 30 June 2017, they should not apply for the relief. Be aware that if the fund claims the relief in circumstances where the fund is not entitled to do so it may subject the fund to scrutiny by the ATO.

 

6. Special treatment for transition to retirement pensions

Given that transition to retirement pensions are deemed not to be in pension phase from 1 July 2017, funds providing such pensions can elect the CGT relief even where:

  • the pension remained in place beyond 30 June 2017;
  • the pension was commuted back to accumulation phase because it would no longer receive a tax exemption on its pension income; or
  • the pension balance did not exceed $1.6 million.

If you would like assistance in assessing your client’s fund circumstances, deciding whether the fund should make the election to apply the CGT relief and preparing for the election, please contact Thalia Dardamanis or Patrick Cussen on 1300 267 529.

By |September 28th, 2017|Uncategorised|0 Comments