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So far Thalia Dardamanis has created 15 blog entries.

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

Tick-Tock, Tick-Tock: The Transfer Balance Cap Countdown is On!

With 1 July 2017 fast approaching, many accountants and advisers are working feverishly to help clients needing to act before then to ensure they do not exceed the $1.6 million transfer balance cap. Requests are being made to the trustee of their self managed superannuation fund (SMSF) to commute some or all their pension phase superannuation income stream(s), and, either roll them over as an accumulation interest within the SMSF, or, withdraw them from the SMSF as a lump sum payment.

In theory, commuting amounts from pension phase is simple (i.e. pension balance(s) less $1.6 million equals the amount to be commuted). However, most SMSFs do not operate on real time reporting so a member will not know the amount of their pension balance(s) until well after 30 June 2017 – thereby making the task of determining the exact amount that needs to be commuted from pension phase under the new relevant tax laws, practically speaking, impossible. Acknowledging this practical difficulty, the ATO has issued a practical compliance guideline (PCG 2017/5 Superannuation reform: commutation requests made before 1 July 2017 to avoid exceeding the $1.6 million transfer balance cap (the Guideline)) setting out the Commissioner’s practical administration approach to the new laws. Where a taxpayer follows the guideline in good faith, the Commissioner will administer the law in accordance with the approach described in the Guideline.

Specifically, the Commissioner will not apply compliance resources to review the commutation of a superannuation income stream a member has in an SMSF that is made before 1 July 2017 where the member request and trustee acceptance to commute:

  • are both made in writing;
  • before 1 July 2017;
  • specifies a methodology to calculate the precise commutation amount. The precise commutation amount must be worked out by the SMSF trustee and reflected in the SMSF's financial accounts for the year ended 30 June 2017, no later than the due date of the SMSF's annual return for the year ended 30 June 2017;
  • specifies the income stream(s) subject to the commutation and, where there are multiple income streams, the order of priority in which the commutations will occur;
  • do not conflict with a similar agreement with a trustee of a different superannuation fund;
  • cannot be subsequently revoked or altered.

Additionally, the Guideline identifies the circumstances where the Guideline will not apply.

Please contact Thalia Dardamanis if you or your clients require assistance in preparing the relevant member request and trustee acceptance documentation before 30 June 2017.

By |June 9th, 2017|Uncategorised|0 Comments

Superannuation Reform: Re-thinking Death Benefit Payments & Reversionary Pensions

Legislation implementing the Government’s Superannuation Reform Package passed through Parliament late last year. Most changes are set to apply from 1 July 2017 and will impact, among other things, the payment of superannuation death benefits and reversionary pensions. Understanding how the changes will affect death benefit payments and reversionary pensions is critical to enabling you to help your client review their death benefit payment plans and/or reversionary pension plans, discuss potential issues and even determine how to restructure such plans to ensure the desired outcome can still be achieved.

This article covers the following areas with practical tips to assist you:

  • Cashing of superannuation benefits on death
  • Form of death benefit payments to pension dependants
  • The new transfer balance cap
  • Death benefit pensions and the TB Cap
  • Modifications for reversionary pensions
  • Roll-over of death benefits
  • Modifications on TB cap for child dependants
  • Considering a testamentary trust for death benefits paid out of the superannuation system


1. Cashing of Superannuation Benefits on Death

When a member dies their superannuation benefits (i.e. death benefits) must be ‘cashed’ as soon as practicable after that member’s date of death.  ‘Cashed’ includes:

  • a single lump sum or an interim lump sum and a final lump sum (so that the benefits are paid out of the superannuation system); and
  • provided the governing rules of a fund permit a pension to be paid, by way of one or more pensions or the purchase of one or more annuities (so that the benefits remain in the superannuation system).


2. Form of Death Benefit Payments to Pension Dependants

Death benefits of a member can only be paid as a pension to a ‘pension dependant’, that is, someone who at the time of the member’s death was:

  • a spouse of the member;
  • a child of the member that:
    • is under age 18
    • is under age 25 and financially dependent on the member; or
    • has a disability as defined in subsection 8(1) of the Disability Services Act 1986; or
  • someone in an interdependency relationship with the member.

Where a child of a deceased member under age 25 receives death benefits as a pension, they must commute such benefits (i.e. paid as a lump sum) on turning age 25 unless they have a disability.


3. The New Transfer Balance Cap

From 1 July 2017 the Transfer Balance (TB) cap will apply to limit the amount of capital individuals can transfer to retirement phase to support pensions. The TB cap will, in turn, limit the amount of super fund earnings that are exempt from tax.

An individual’s TB cap (also known as a transfer balance account) will be $1.6 million for the 2017-18 financial year and will be subject to proportional indexation on an annual basis in $100,000 increments in line with CPI.

The following amounts will be credited to an individual’s TB cap:

  • the value of all superannuation interests that support pensions in the retirement phase on 30 June 2017;
  • the commencement value of new pensions (including new death benefit pensions – discussed below) in the retirement phase from 1 July 2017;
  • the value of reversionary pensions at the time the individual becomes entitled to them (although the time the credit arises is deferred – discussed below); and
  • excess transfer balance earnings that accrue on excess TB amounts.

Once a pension commences, changes in the value of its supporting interests are not counted as credits or debits to the individual’s TB cap.

If any capital from a pension in retirement phases is commuted as a lump sum (whether it be retained in the accumulation phase within the superannuation system or paid outside the superannuation system to the individual personally), it will give rise to a debit to the individual’s TB cap. A debit will also occur for other specified events that reduce the value of an individual’s retirement phase interests.

If an individual exceeds their TB cap, the Commissioner will direct the individual’s fund to commute/reduce the excess and any associated earnings. The individual will also be liable for excess TB tax on their excess. First-time breaches and all breaches made in the 2017-18 financial year will be taxed at 15%. Second and subsequent breaches occurring in the 2018-19 and later financial years after will be taxed at 30%.


4. Death Benefit Pensions and the TB Cap

The value of a death benefit pension paid to a dependant will be credited to the dependant’s TB cap and will include investment gains accrued to the deceased member’s superannuation interest between the time the deceased died and the death benefit pension became payable to the beneficiary.

A death benefit beneficiary must therefore manage their affairs to ensure that a death benefit pension does not result in them exceeding their TB cap. If a death benefit pension in combination with the beneficiary’s own pension results in the beneficiary exceeding their TB cap, they must decide which pension to commute.

A death benefit cannot be held in an accumulation interest as this contravenes the requirement to cash the benefit out of the system as soon as practicable (regulations will soon be introduced to require pensions to be held in retirement phase to ensure that any death benefit pension paid to a dependant must be within their TB cap).

  • TIP: A death benefit beneficiary could choose to receive a death benefit pension and commute their own pension from the retirement phase to the accumulation phase. This would minimise the amount that must be paid to the beneficiary as a death benefit lump sum outside of the super system and cap the tax on earnings generated from such benefits to 15% in the fund rather than their marginal tax rate outside of the fund).


5. Modifications for Reversionary Pensions

Reversionary pensions are different to other death benefit pensions because they revert to the beneficiary immediately on the death of the member (rather than at the discretion of the fund’s trustee). That is, the next pension benefit payment (whenever that may be) is payable to the beneficiary.

The resulting credit in the beneficiary’s TB cap is the value of the pension at the time it becomes payable to the beneficiary and does not include investment gains accrued between the death of the pensioner and the pension becoming payable to the beneficiary. However, a modification applies to defer the time the credit arises in the beneficiaries TB cap to 12 months after the pension benefit first becomes payable to the beneficiary – thereby giving the beneficiary sufficient time to adjust their affairs before any consequences arise (e.g. breaching their TB cap).

This deferral also applies to individuals already receiving a reversionary pension on 30 June 2017. Specifically, the credit for this arises on the later of 1 July 2017 (where the pension benefits became payable before 1 July 2016) or 12 months after the pension benefits became payable to that beneficiary.

  • TIP: Subject to the impact caused on any Government benefits your client may be receiving (including a Commonwealth Seniors Health Card), it may be preferable for your client’s current pension to be restructured as reversionary pension so that the beneficiary who will receive the pension benefits on the member’s death will have 12 months to order their affairs before that pension is credited to the beneficiary’s TB cap.


6. Roll-Over of Death Benefits

The new laws will allow the beneficiary of a death benefit pension to choose the super fund from which their pension will be paid (by enabling the beneficiary to roll-over the death benefit to such fund without having it treated as a contribution).


7. Modifications on TB Cap for Child Dependants

The TB cap for child dependants receiving a death benefit pension from a deceased parent is subject to modification to allow the child to receive their share of the deceased parent’s retirement phase interest without prejudice to the child’s future retirement. That is, the child’s cap will be set by reference to their portion of the deceased parent’s retirement phase interests rather than the general TB cap. The child’s TB cap will generally extinguish when they reach age 25 and are required to cash out the death benefit pension or earlier than this if the capital is exhausted. This ensures that the child does not exhaust their TB cap before they retire. Specifically:

  • For death benefit pensions that commenced before 1 July 2017, the child’s TB cap is $1.6 million; and
  • For death benefit pensions that commence from 1 July 2017:
    • Where the deceased parent did not have a TB cap, the child’s TB cap is:
      • If the child is the sole beneficiary of the deceased parent’s superannuation interests – the general TB cap; or
      • If the child is not the sole beneficiary of the deceased parent’s superannuation interests –  the child’s proportionate share of the parent’s interests multiplied by the general TB cap;
    • Where the deceased parent does have a TB cap, the child’s TB cap is their portion of the parent’s interest that were in the retirement phase that the child received as a pension. For a reversionary pension, the child’s TB cap is deferred for 12 months. To be within the child’s TB cap, the death benefit pension the child receives must be sourced solely from the retirement phase of the deceased parent (amounts outside of the retirement phase will generally result in the child having an excess TB with associated tax payable). Similarly, if the child’s death benefit pension is only partly sourced from the deceased parent’s retirement phase interests the amount of the child’s TB cap will equal only this part (amounts sourced from the accumulation phase interest will generally exceed the child’s TB cap). Generally, an amount is sourced from the deceased parent’s retirement phase interest if it can be shown that the amount came from superannuation interests that supported superannuation pensions payable to the parent just before their death (i.e. their retirement phase interest).
      • TIP: If a parent dies with both an accumulation phase interest and a pension phase interest, consider paying the pension phase interest to the child as a pension and the accumulation phase interest to the spouse as a pension.
    • Where the deceased parent had an excess TB, the child’s TB cap is reduced if their deceased parent had an excess TB just before their death. The child’s cap is reduced by their proportionate share of their parent’s excess TB. However, their cap is not reduced to the extent that the child receives their entitlement to the deceased’s retirement phase interest as a death benefit lump sum (instead of a pension).
    • Where both parents die, the child’s TB cap is the sum of amounts worked out in relation to each parent.

Additionally, there may be some rare circumstances where a child has a TB cap before they start to receive a death benefit pension as a child recipient. In these circumstances, the child’s TB cap is increased by the sum of the cap increments discussed above.

Once a child recipient’s TB cap ceases (because, for example, they turn age 25 or the capital is exhausted), their entire position with respect to TB cap is generally reset. When the child subsequently retires, they can start a new TB cap based on the general TB cap at that time.


8. Considering a Testamentary Trust for Death Benefits Paid Out of the Superannuation System

Given that death benefit payments exceeding the TB cap or modified TB cap for children (excess death benefits) must be paid out of the superannuation system, advisers and their clients may wish to consider the financial outcomes and practical and legal risks of paying such excess death benefits (or any death benefits, for that matter) into a testamentary trust.

To estimate the financial benefits of paying excess death benefits into a testamentary trust one of the first matters that needs to be determined is whether the beneficiaries of the testamentary trust are limited to death benefit dependants.  If they are, then the benefits will be paid tax-free.  If they are not, then death benefits tax will most likely apply but without the imposition of the Medicare levy.
Once the excess death benefits are invested, the testamentary trust structure can permit income to be distributed to minors as excepted trust income with the minors taxed as adults (i.e. approximately $20,000 can be paid tax free to each minor).  Perhaps most usefully, if the testamentary trust is a ‘discretionary trust’, different amounts of income can be allocated to different beneficiaries which may optimize the after-tax returns to the family group and give flexibility depending on the needs and circumstances of the beneficiaries. However, payment of excess death benefits to a testamentary trust that includes beneficiaries who are non-death benefit dependents will result in the death benefits tax applying, even if some or the ‘principal’ beneficiaries of the trust are death benefit dependents.
If excess death benefits are paid into an estate they become part of the ‘pool’ of assets which may be subject to a family provision claim. This is one potential shortcoming of paying superannuation into an estate which could concern clients (particularly in a blended family situation) and the better option may therefore be paying excess death benefits to the beneficiary personally.
The transfer of excess death benefits to a testamentary trust can offer asset protection. It will generally preclude a beneficiary from becoming the ‘owner’ of the assets. As such, if the beneficiary is being pursued by creditors then those creditors may not be able to access the assets. Additionally, where a beneficiary is under a disability or has a problem such as gambling, drug dependency, etc. a testamentary trust controlled by an independent trustee can protect assets from being misused and at the same time look after the beneficiary’s long term interests (as well as the interests of others such as the beneficiary’s children).

  • TIP: Existing death benefit nominations and reversionary pensions should be reviewed and potentially amended to enable amounts exceeding a beneficiary’s TB cap to be paid to the deceased’s legal personal representative (i.e. the estate) and then into a discretionary testamentary trust for the primary benefit of the dependant beneficiary.

Please contact Thalia Dardamanis or Bernie O’Sullivan if you would like assistance in reviewing, discussion and/or amending your clients’ death benefit nominations and reversionary pensions in light of the superannuation reform.

By |March 8th, 2017|Uncategorised|0 Comments