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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

Konnie Lontos Joins the Team

We are very pleased to welcome lawyer Konnie Lontos to Bernie O’Sullivan Lawyers. Konnie works predominantly in commercial matters including negotiating and drafting agreements and documenting commercial transactions including sales of businesses and commercial leases. With a Bachelor of Laws, a Bachelor of Business (Banking and Finance) and a Graduate Diploma in Legal Practice, Konnie provides exceptional practical legal advice to our clients. Attention to detail, a solid work ethic and strong working relationships enables Konnie to achieve positive results that meet clients’ expectations.

By |September 26th, 2017|Uncategorised|0 Comments

Let’s Get Physical: Changes Affecting the Small Business Company Tax Rate

We are regularly told to be more active for our physical wellbeing.

Similar advice now applies to companies – they need to be less passive.

To qualify for the small business company tax rate of 27.5%, a company needs to be a “small business entity” – that is, the company needs to carry on a business and have an aggregated turnover of less than $10 million.

On 18 September 2017, the Federal Government released draft legislation to “clarify that passive investment companies cannot access the lower company tax rate for small businesses”.

Before the proposed change, there was some doubt as to whether a company that derived investment income (such as rent, dividends and interest), or that received distributions of income from discretionary trusts, was carrying on a business so that it qualified for this concessional rate.

The ATO website states:

    “It is not possible to definitively state whether a particular company is carrying on a business. This is always question of fact. Based on the overall impression of the activities of a company and the relevant indicia of whether a business is carried on.  However, where a company is established and maintained to make profit for its shareholders, and invests its assets in gainful activities that have a prospect of profit, then it is likely to be carrying on business. This is so even if the company’s activities are relatively passive, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.”

This statement by the ATO was not particularly clear.

The Government has now moved to resolve doubt by the release of the draft legislation.

Under the draft legislation, a company will only qualify for the small business company tax rate of 27.5% if:

  • the company carries on a business;
  • the company has an aggregated turnover of less than $10 million; and
  • the company’s “base rate entity passive income” is not more than 80% of its assessable income.

Base rate entity passive income includes dividends, interest, royalties, rent, gains on discounted securities and capital gains (whether derived by the company directly or through a trust or partnership).

If the draft amendments are enacted in their current form, they will have effect from 1 July 2016.

Keep in mind that the threshold of 80% of assessable income is quite high. Therefore, a company may be able to qualify for the small business company tax rate even if the company derives significant levels of passive income.

Income distributions from trusts are not necessarily passive income. Under the draft legislation, if a trust conducts an active business and distributes that income to a corporate beneficiary the income will not be base rate entity passive.

However, as a company will need to carry on a business to qualify for the small business company tax rate of 27.5%, many (if not most) “bucket companies” that receive income distributions from a discretionary trust will be subject to tax at a rate of 30%.

By |September 26th, 2017|Uncategorised|0 Comments