DEBUNKING THE ESTATE PLANNING MYTH

DEBUNKING THE ESTATE PLANNING MYTH
While the financial planning industry is undergoing significant structural change, negative sentiment, increased compliance costs and falling practice valuations, a new breed of progressive advisers have identified and embraced new income streams from collaborative services to their practices, one of them being ‘estate planning facilitation’.

This is a blog post by Chris Hill, Director of Hill Legal – October 28, 2019 and published here:

For the most part, estate planning has been an untapped market for financial advisers, because it is traditionally seen within the domain of the legal profession.

As a result, most financial planners merely footnote estate planning discussions with their clients, usually with a recommendation in a statement of advice that the client discusses their testamentary wishes with their lawyer.

However, the reality is that most lawyers are not qualified nor experienced to deal with a holistic range of estate planning issues that planners often see within their clients’ affairs. For example, most lawyers are not capable of navigating superannuation death benefits post the 2017 reforms, particularly with SMSFs with pension and accumulation balances, nor Centrelink, aged care or taxation issues arising on death.

It is no wonder that there is a massive disconnect between the growing need for estate planning services, driven by an ageing population, progressive increases in dementia rates and blended families, and access by clients to cost effective holistic estate planning advice, particularly in regional areas.

Most planners perceive that estate planning services constitute “legal advice” and therefore off-limits as a service opportunity. However in practice, nothing could be further from the truth and more creative financial planners are exploring the benefits of delivering estate planning facilitation services within their practices, not only to provide a supplementary income but as a means of strengthening their client relationships, building a bridge to the client’s family beneficiaries and cross-selling existing financial planning and allied services.

Under the legal profession uniform law in each state, the definition of “engaging in legal practice” and the provision of “legal advice” includes the practice of law and providing legal services. This has typically meant the creation of a legal document ( e.g. will) and the provision of advice about the legal consequences of a client’s affairs. However, such “advice”, in the context of estate planning, is the conclusion of a detailed fact-finding process that in itself is not a legal activity.

A lawyer who undertakes estate planning activities spends most of their time with clients, engaged in this fact-finding process with the result that the bulk of their fees are charged for activities that do not constitute “legal advice”. For example, the following discussions between lawyers and their clients do not constitute legal advice:

• the appointment and selection of an executor, substitute executor or alternative executor;
• executor’s remuneration;
• choice and selection of guardians and trust appointors,
• identification of beneficiaries and their special needs or circumstances;
• successor beneficiaries;
• the distribution and control of assets to beneficiaries;
• vesting ages;
• the identification of the client’s assets, ownership structures and the entities that control those assets;
• superannuation interests;
• family relationship conflicts;
• potential relationship breakdowns, financial solvency and asset protection issues; and
• possible incapacity, etc.

Financial planners, in particular, are typically in the best position to navigate these issues because much of this information is usually within their files as part of their “know your client” duty. Because estate planning conversations are about events at a future point in time, the estate planning process is very much within the paradigm of the financial planning process. That is, it is directed towards developing a documented strategy of achieving the client’s long-term future goals relating to the happening of an inevitable future event – disability and death!

The most common misconceptions and barriers raised by planners entering this market are that an estate planning service is either a legal activity that affords limited participation, that they are not skilled at having estate planning conversations with their clients or that there are no revenue opportunities available. As a result, the traditional relationship between the planner, lawyer and client is at best a collaborative arrangement with limited revenue opportunity or at worst a mere referral to a lawyer with no financial benefit or reward to the planner.

In contrast, estate planning facilitation is a carefully prepared and orchestrated process of the adviser project managing and co-ordinating the entire estate planning process directly with their clients and in their offices for which they charge either a separate fee for that service or which is incorporated into a composite annual service fee, charged to their clients. The primary object of this process is not to give advice, but to search out and identify estate planning issues and to motivate clients to embark upon the journey of solving those issues with collaborative legal advice and documentation.

There are a number of online estate planning service models currently in the market. However, they primarily focused on allowing advisers to create and purchase online wills and powers of attorney with the limited opportunity to connect with a lawyer for advice. In reality, these models draw the adviser and their client into the control and domain of the lawyer. Few online systems allow the adviser to navigate and control estate planning conversations in a truly holistic manner from concept to completion and with the ability to uncover unmet estate planning needs within their clients’ affairs.

Those advisers who have moved into the arena of estate planning facilitation have reported charging upfront estate planning fees of between $2,000 and $8,000 per client together with an annual review fee of around $500 per client per annum. In addition, they have reported greater client engagement with the added benefit of picking up new work from family members and business associates who are often brought into the succession and estate planning facilitation process.

Many advisers have also reported better work satisfaction because estate planning facilitation carries no administration or compliance burden, nominal upfront costs to introduce within their practice and no legal responsibility if managed correctly with a competent estate planning lawyer.

In the current, post-Hayne royal commission environment there is growing drive to press clients away from financial planners and into the arms of institutional investment houses, particularly for non-strategic investment advice. Estate planning facilitation provides the opportunity for advisers to combat this drive and to re-position themselves as truly independent, professional and focused on meeting the best interests of all of their clients’ affairs as part of their wealth management.

Chris Hill, director, Hill Legal

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The battle for Australian Roads… Why Road Rage Is a Cyclist’s Worst Fear

POSTED ON JUNE 25, 2019 BY ASG THE STORE AU

Ask any cyclist, what is your greatest fear? You may expect a plethora of colourful answers including a mismatch of socks, itchy lycra, a flat tire, or even riding 50km in the wrong direction before noticing. The reality however, is that there is nothing that puts an uncomfortable heaviness within our bibs like the erratic behaviour of some Australian motorists. We may be opening a whole can of worms here, but I am only one more P-plater side whoosh away from chucking out my last Scicon X-Over bib – and those things are not cheap! Yeah, it’s definitely cars. Everyone is uniformly afraid of drivers on the road.

Most drivers mean well – or so we’d like to think… surely they wouldn’t want to hit us ON PURPOSE?? The reality is that the majority of motorists have probably never been so exposed and vulnerable as us cyclists. Simply put – they’ve never been in our weight-weenie, carbon-soled, boa-dialed shoes before. If they had, they’d find them uncomfortable, and they would show us way more courtesy while behind the wheel.

Until drivers squeeze into some tight lycra kit and try riding in the gutter to avoid being smashed by someone’s side-view mirror, they’ll simply never understand the difficulties cyclists go through to stay safe.

Of course, this perspective might also be a bit too generous. Maybe a lot of drivers out there actually do harbor ill-will toward us. Perhaps we look too free out there, sun on our skin, getting great exercise in, and so they take their after work frustration out on us by giving a scare. After all, who can blame a car-bound driver for feeling a bit of jealousy when our legs, chiseled with tanned muscles and reflecting sweat, look so good?

No, not us.

Not All Fun and Games

However, it’s not all fun and games. Cyclists do get hurt in a very real and sometimes irreparable way. You probably know at least one person who’s been tagged by a vehicle – it’s very doubtful they enjoyed it. You might be sitting there nodding your head yes as you read this because it was you who was hit.

One day, I was riding down a narrow and twisting mountain road when a small SUV came around a blind turn on my side of the road before slamming on its brakes. Luckily, my cat-like reflexes spared me from going over the car’s hood – I smashed into the driver’s side mirror and door instead, leaving a cartoonish outline of my body imprinted in the metal.

While some may chalk that incident up to irresponsible driving and not aggression, the kicker happened when the driver approached me as I laid on the ground in shock and pain and started gesturing in anger at their damaged car door.

Where Does the Road Rage Come From?

How many times have you been honked while precipitously riding at the edge of the road with nowhere else to go? Surely you’ve experienced the chilling effect of being unexpectedly yelled at by some teenagers, swearing as they go by in their parent’s car. Such events often lead to long periods of soul-searching while putting in kilometers on the bike. What did I do wrong?

The fact of the matter is you probably did nothing wrong, but a lack of compassion and understanding from the driver’s side is a major contributing factor to the situation. Many drivers fail to understand that we belong on the road too – cyclists have every right to take up space on the blacktop. We aren’t just any type of traffic, however. We’re largely unprotected and over-exposed to the whims of those around us.

A car weighs anywhere from 1,300 to 2,000 kilograms. Even at low speeds, the sheer inertia of an object that size moving forward in space is enough to severely impact and decimate a puny cyclist weighing a mere 60kg. The great thing about cycling is we can eat anything we want and still lose weight – but the downside is all that weight loss makes us pretty fragile. That’s all without getting into the fact that our bikes are made out of papery carbon fiber.

Suffice to say, when faced with a gargantuan SUV, we’re as good as paper mache in a hurricane. Road rage, when armed with a steering wheel-driven guided missile, can be a very dangerous thing indeed.

Where does road rage come from? Driving is, in and of itself, a stressful experience. It’s loaded with danger, and people often step into their cars with pre-existing problems. They’ve just had a fight, or are late for an interview, or simply can’t focus on what they’re doing as their mind takes flight elsewhere. None of these issues are ones that cyclists can guess at or should even bother trying to figure out, and yet we’re affected by them nonetheless.

What Can Cyclists Do to Make Roads Safer?
I am a firm believer that most drivers simply do not understand how fast many road cyclists are actually travelling, whether solo or in a group. Drivers do not expect riders to be actually doing the speed limit, 40 or 50 KPH in built up areas. Motorists pull out from side streets or into roundabouts and then we are there – no where for either to go.
As to the teenagers, tradies etc, some of the things I have witnessed over time simply defy description. Suffice to say, there are stories on EVERY ride of fellow cyclist being cut off, verbally abused, knocked off their bikes or had a vehicle whiz past them so close that the draft almost sucked them into the car.

I ride in Perth WA. I also ride for the most part in a reasonable size peloton. Perth has very few dedicated bike paths, most are shared, cannot accommodate bike groups, or any rider wishing to ride at any speed. Riders are required to ride on the road for their own safety as well as the safety of other users of bike paths.

How can we help? First, if a driver says something, don’t answer back. There’s nothing to be gained.
Always signal your intentions so drivers behind have some idea of what you plan to do.
Always have your lights on, no matter what time you ride. Be seen.
And the easiest, when drivers give way, or slow down or do anything to assist in any way, acknowledge with a smile and a wave. You’re never too pro to wave.

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SMSF Investment Strategies

Taken from then article in Financial Review titled Dual SMSF investment strategy that ticks all boxes by Tim Mackay Sep 23, 2019

The approach to diversification by SMSF Trustees needs to be flexible whilst still acting as a benchmark for your auditor to ensure your fund is meeting its investment requirements.

In September 2019, the ATO sent a letter to many SMSF trustees asking: “Is your SMSF investment strategy meeting its diversification requirements?”

This sent an element of panic amongst SMSF trustees who are predominantly invested in a single asset such as an investment property. If you didn’t receive this letter then the ATO is probably satisfied that you have:

a) an investment strategy;
b) that you know what the diversification requirements are; and
c) that you meet those diversification requirements.

Every SMSF must have a documented investment strategy. As a Trustee you will have signed the trustee declaration confirming you have one. It’s also important to keep this strategy up to date.

An investment strategy should document considerations relating to:
a) investment risks;
b) likely returns you seek;
c) liquidity (how easily you can sell investments);
d) the need for insurance; and,
e) the fund’s approach to diversification.

“Diversification” is a risk management strategy that mixes a wide variety of investments within a portfolio. If a portfolio is constructed of different kinds of assets it will, on average, yield higher long-term returns whilst also lowering the risk of any individual holding or security within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others.

Dual strategy

A SMSF investment strategy needs to meet two different objectives.

1) Your auditor needs to verify that your SMSF has met the conditions of your investment strategy every year, and

2) you want a documented SMSF investment strategy that gives you direction with flexibility and that meets the rules.

The ‘easy way’ is to document the asset classes your SMSF can invest in (for example, cash and cash equivalents, fixed income, property, Australian equities, international equities and alternatives), and specify an allowable range of 0 to 100 per cent for every asset class!

However, such a wide range gives no practical investing direction and would likely fail the scrutiny of the regulator, the ATO.

So what if instead you develop a practical, useful investment strategy?

Let’s assume your SMSF has a balanced growth profile with a 70:30 split between growth and defensive assets.

You could use typical ‘benchmark ratios’ where a specific range is set, for exampple:

i) cash and cash equivalents 3 per cent;
ii) fixed income and term deposits 27 per cent;
iii) property 14 per cent;
iv) Australian equities 28 per cent and
v) international equities 28 per cent.

Then you could give yourself about 10 per cent leeway for each asset class.

Whilst these are well-defined targets that enable good investment decision making and would indeed allow you to objectively compare your asset allocation over time, independent of emotions and market volatility, they may cause a legal issue for your SMSF and auditor.

Here is why:
If market conditions or your own circumstances change, forcing you to switching entirely to cash to protect your fund, or if you are a business owner wanting to buy a property using 95% of the SMSF capital you may be acting beyond the range of the documented investment strategy.

Your auditor would not be able to verify then that you have met the fund rules at all times.

A conflict may exist between wanting to create flexibility and still maintain sound investment direction.

This could be resolved by having two strategies.

a) A formal document that gives you maximum flexibility to act decisively in the members’ best interests and, within it,
b) a more detailed asset allocation exercise that you undertake twice a year where you do the detailed comparison.

While it may be a bit more work, it solves the conflict that trustees face.

And on the subject of investment property in the SMSF…

The vast majority of recipients of the ATO’s, letter hold a concentrated exposure to a single leveraged property and not much else; it’s not people holding 100 per cent cash. So the problem is less diversification and more the type and risk of the asset.

As a trustee, you must identify the risks created by asset concentration and have a documented Plan B if things go wrong. In giving this warning, the ATO has essentially covered itself should things go systemically wrong in this area. Trustees should therefore do the same with their own documented SMSF investment strategy.

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“Must Know” Credit repair secrets

It’s important to understand credit repair so you know what to do if it ever happens to you or someone you care about.
Credit repair is as a concept is actually simple: once you learn the mass of relevant industry regulations, you learn how to manage the situation and the associated stress.
That doesn’t mean discarding the intricacies of credit repair – so here are five credit repair secrets that might just offer some guidance should your credit history be frustrating your progress.

Damaging listings on your credit file are there because they were correctly placed or incorrectly placed. Only incorrect listings can be removed.
Unfortunately, credit providers won’t remove accurate information from a credit file. But they will remove inaccurate information, provided you know how to work with them.

Removing incorrect listings is a process that takes weeks, not days. So while a good credit repair agency will move fast, they have to liaise with credit providers – and those providers can be big, bureaucratic organisations that operate at a slower pace.

Creditors may be willing to negotiate. Hence, they might be willing to offer you friendlier payment terms, or even cancel some of their debt. You need to ask.
This sort of informal negotiation spares the credit providers the hassle of chasing someone for money.

Part 9 Debt Agreements involve a formal renegotiation. Again, they usually involve credit providers accepting less money under a new repayment schedule.
This time, though, your name (or your loved one) will be entered on the National Personal Insolvency Index and the agreement will be recorded on their credit file, severely damaging your borrowing prospects for at least five years.

You can solve problems yourself.
You might not realise it, but you can do your own credit repair without engaging an agency. Whilst you might find it complicated, stressful and time-consuming, this route won’t cost you a cent.

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Tax return checklist

Tax return checklist

Here we’ve compiled a tax return checklist of some pre-return information you might need to get together when preparing your return:

Basics

  • Tax File Number (TFN)
  • Bank details: BSB, account number, account holder name, bank name
  • For medical expenses you will also need your medicare number
  • Details of children
  • Last year’s Income Tax Assessment

Earnings

  • Payment summaries (PAYG) from any places where you have received an income
  • Information on any lump-sum payments you may have received, potentially through termination payments, Centrelink. Personal injury payouts do not need to be reported if they occurred outside and unrelated to your workplace
  • Details on foreign earnings
  • Any interest received from banks or building societies
  • Statements of dividends received or invested
  • Statements on earnings from managed funds
  • Any other income gained, i.e. from properties or investments
  • If you have a spouse you will need details on their earnings and expenses

Deductions

  • Receipts for gifts and donations
  • Receipts for work-related expenses including transport (mileage), uniforms, technology necessary for your work
  • If self-employed, contributions to superannuation
  • Details about your income protection insurance
  • Costs for managing tax calculations, i.e. tax agents
  • Medical receipts, totalling >$2,120

While your tax returns can be a thankless task, being prepared through  out the year can make the job easier especially if you have meticulously filed away your receipts throughout the year. If you can provide these together with the above-mentioned documents in our tax return checklist you will find the whole process less intimidating and less stressful.

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Can your enduring power of attorney (EPOA) sign your super fund death benefits away?

A recent decision by the Queensland Supreme Court has raised some interesting issues regarding the powers of an enduring attorney to make, vary or revoke a binding death benefit nomination (BDBN) on behalf of a superannuation member.

In the case (Re Narumon Pty Ltd [2018] QSC 185), the enduring attorneys of a member who no longer had mental capacity purported to extend his lapsed BDBN by signing an “extension of death benefit binding nomination form”, which the court upheld as valid.

Reasons for the decision included that the trust deed expressly allowed a validly-appointed enduring attorney to exercise any power given to a member in the deed if the member were under a legal disability, the deed permitted a member to make a BDBN, the enduring power of attorney (EPOA) did not place limits on the attorney’s authority and, importantly, the purpose of the extension was simply to confirm the member’s clear wishes.

So what does the decision mean for you as a member of an SMSF?

First, consider whether granting your attorney these significant powers is something you are comfortable with. Some people like the flexibility this arrangement provides (if changes in their personal circumstances after loss of capacity warrant a change to their BDBN, the attorney is able to step in) while others are concerned with the potential risk of abuse by the attorney.

If you think it is a good idea, your next step is to have a look at your EPOA (or sign one).

Boxes to tick

The scope must be wide enough to include the signing of a BDBN – at the very least it needs to empower your attorney to deal with your financial affairs – and must not include an express limit on the attorney’s power in respect of BDBNs. Depending on your circumstances and the jurisdiction of the EPOA, the document may need to expressly allow an attorney to enter into conflict transactions (especially if the attorney is to be a beneficiary of the death benefit under the nomination). Even if  this is not a statutory requirement, it may be prudent to include such a statement.

Next, check your trust deed. Does it allow you to implement the strategy? If not, have it amended. Ideally it should confer an express power on the attorney to make, vary or revoke a BDBN on behalf of a member. Short of the deed saying this, it should permit members to delegate to their attorney. While you are  looking at your trust deed, see if it includes a timeframe after which your BDBN lapses (generally three years) as once a nomination has lapsed, it no longer binds the trustee and your death benefit would be allocated as per the trustee’s discretion (including to themselves if eligible). This may be another reason to update your deed.

Your EPOA and your trust deed must work together to achieve the intended result, so focus on both. Given superannuation may one day make up the bulk of your wealth, think very carefully about who it is you choose as your attorney/s and entrust with those broad powers. Making the wrong choice may cause your intended beneficiaries to miss out.

Consider making your wishes known – via death benefit nominations (including binding and non-binding ones) or other methods. This may, however, be a double-edged sword, as while this could help a court uphold a BDBN made by your attorney to carry out your wishes as valid, it may also serve as ammunition for a disgruntled party trying to invalidate the latest BDBN where the terms differ (justifiably or not) from your previously stated wishes. Whether a BDBN made by an attorney is valid will be determined on a case-by-case basis.

If you want to limit your attorney’s authority, then you need to sign a new EPOA containing the necessary limitations and/or vary your trust deed accordingly.

This article was written by Julie Hartley who is an associate with Townsend Business & Corporate Lawyers.

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What would happen if negative gearing was abolished?

The Labor party, in particular Bill Shorten has been calling for the tax concessions on properties that are negatively geared to be abolished. Negative gearing is essentially when a property investor is making a loss from his investment property as rental income received is not covering the expenses incurred by owning the property in question. This could be because:

i) the investor has paid too much for the property,
ii) the investor hasn’t enough funds available to pay a large enough deposit so that the property would be positively geared, or
iii) the investor is possibly not charging enough in Rent to cover expenses.Is this approach by the opposition leader and those supporting this move logical or misguided?The argument is that house prices are continuing to rise faster than incomes and therefore housing affordability has been stretched for many Australians. It is suggested that the demand for ownership of investment properties has pushed prices beyond where prices would be if everyone was satisfied with only owning the property that they lived in. This is certainly a valid point but it also misses some vital benefits that renters derive by renting rather than owning in the short to medium term (less than three years).

An economy needs to be able to provide rental properties as not every one needing accommodation is looking for permanent accommodation and hence many not want to incur the costs of owning a home at a particular time. For example, it often makes sense for a young couple to rent their first home. Firstly, it’s a lot cheaper to do so than to incur the costs of owning a home particularly if they do not intend to stay in that home for more than three  years as can be seen in  table 1  below.

TABLE:1

After the first year of buying a property (in Western Australia) the owner would be $27,723 worse off than the renter. This is mainly due to the $24,575 in acquisition costs and a possible $17,094 in disposal costs at the start of the second year. Further, the mortgage is likely to have been higher than what could have been received in rent by $6,900. On the plus side, in a perfectly linear world the property would have appreciated, by say 4%, giving a (taxable) capital gain of $20,000 in the first year to negate some of the losses.

TABLE 2:

So, provided that there are linear property escalations of 4% per year, it could take at least three years of ownership to break even with the outlay in a rental scenario. If property growth was halved, it extends from three years to five, and if there was no growth the period for break even extends beyond ten years. The key to shortening the break-even point is that there must be capital appreciation on the property.

But let us take a look at what the likely outcome would be should negative gearing get booted from our landscape.

In the short term, House Price growth will slow down

The shameful scenario here proposed by Labor is that the ‘mum and dad’ investors who are essentially the base of support for Labor would be largely excluded from being able to invest in an investment property. It would simply be more draining on their cash flow and their financial resources. The wealthier individual with financial resources would be able to make a higher deposit and neutrally gear their investment. Here, the income and cost offset each other. These investors will remain in the market, but prices will likely fall as the mums and dad’s are no longer competing for available stock. If prices do fall, for some renters who might want to own their own homes, the cost of a mortgage will be a lot closer to what they are paying to rent. Investors who may be unable to soften their payments through the previous tax deductions they derived, may be forced to increase rentals where possible. Where this isn’t possible they may off-load their properties which could also cause prices to potential drop if the market becomes over supplied, but as priced drop the difference between renting and owning becomes more of an incentive to own and this will offer support to property prices.

It is worth bearing in mind that there are other countries, such as the UK, where there have been no tax incentives yet they continue to experience higher prices than we have seen happen in Melbourne and Sydney.”

 Australia has gone down this pathway before with Labor back in 1985. Losses on property were quarantined so that losses had to be offset against current or future profits on property rather than being offset against any income. It took two years for the decision to be reversed in part because of the tight rental market in both Perth and Sydney.

The impact on rental prices in most cities was negligible, but the impact in Sydney and Perth was significant. Rental prices increased causing severe stress on renters, but investor felt the financial pressure too and began selling off investments which in turn caused house prices to come under downward pressure. Today, most of Australia’s capital cities have much tighter rental markets which suggests that history may well repeat itself.

The original intent of negative gearing was to encourage the development of new properties, and since the suggested changes to negative gearing would mostly affect established properties, investors would wisely refocus their attention on new and off-the-plan properties to maximize their returns from this asset class.

However, it is interesting to note that Sydney has experience significant hike in property prices between the period March 2011 and March 2017. Property prices rose by more than 70%. In Perth, over the same time period prices only rose by 2.5%. A key reason for this has to do with State based GDP or GSP.  House prices usually track well with year on year changes in GDP. Part of GDP is made up of consumer spending, investment by firms and borrowing and expenditure by government. Government expenditure is raised through GST, Stamp Duty and Royalties among other things. Hence, when a state is experiencing a slow down in the property market, stamp duty, which can easily make up 25% of the state revenue received drops significantly further exerting downward pressure on house prices. When the property market is experiencing higher demand, receipts from stamp duties increase which in turn increased funds for government to spend in that state which in turn further buoys the property prices.

 

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Early release of Super funds due to Financial Hardship or Compassionate Grounds.

If life has dealt you a financial blow and you have no-where else to turn, you might be able to access funds from super earlier than usual.

Here is the procedure.

You must apply to your super fund to claim early access to your super benefits on the basis of severe financial hardship.

You must satisfy certain conditions for early access to super benefits based on ‘severe financial hardship’, which are outlined in a special regulation of the super laws (Sub-regulation 6.01 (5) and (5A) of the Superannuation Industry (Supervision) Regulations 1994).

You can claim your super early based on severe financial hardship, if you satisfy one of the following two scenarios:

  1. Received Commonwealth income support for 26 weeks, and cannot meet reasonable and immediate family expenses. Schedule 1 of the SIS Regulations 1994, stipulates that you can access up to $10,000 of your super benefit in each 12-month period, and a minimum of $1,000. The 12-month period starts from the first payment.
  2. Reached preservation age (age 55 for those born before July 1960, and at least age 56 for those born on or after 1 July 1960) and received Commonwealth income support payments for 39 weeks (cumulative) after the person reached preservation age. Can access full super benefit if required.

For more detail of the requirements for the two scenarios above, please continue reading.

1. Received Commonwealth income support for 26 weeks

You are considered to be in ‘severe financial hardship’ under the super laws if the trustee of your superannuation fund is satisfied of the following two facts:

  • You have received Commonwealth income support payments for a CONTINUOUS period of 26 weeks. You can confirm this with written evidence provided by Centrelink or another Commonwealth department or agency (if relevant) responsible for the income support payments, and you must be in receipt of the income support when the written evidence is prepared. Income support includes NewStart allowance, Disability Support, parenting payment, carer’s payment, and widow allowance, but in this instance, does not include Ausstudy payments, or Youth Allowance paid to students in full-time study, AND.
  • You are unable to meet reasonable and immediate family living expenses.

If your super fund’s trustee considers that you satisfy the above requirements, you can access up to $10,000 in each 12-month period, and a minimum of $1,000 (unless your super benefit is less than $1,000 and then you must withdraw the entire amount).

 

Note: The letter or form from Centrelink (or other government department or agency) confirming your income support history must be dated no earlier than 21 days before you submit your application for early release to super fund. In other words, be sure to make your application as soon as possible after receiving written confirmation from Centrelink about your income support. According to Centrelink, rather than submitting a letter, you can arrange for your super fund to check your eligibility for income support by using Centrelink’s Customer Confirmation eService (if you have given your super fund permission to do so, and assuming your super fund has registered for the eService).

 

 

2. Reached preservation age and received Commonwealth income support for 39 weeks

Alternatively, you are considered to be in ‘severe financial hardship’ under the super laws if you satisfy the following conditions:

  • you have reached your preservation age (age 55 for those born before July 1960, and at least 56 years for those born on or after 1 July 1960).
  • you have been in receipt of Commonwealth income support for a CUMULATIVE period of 39 weeks after you reached your preservation age, and this is confirmed by written evidence provided by at least one Commonwealth department or agency responsible for the income support payments.
  • if you are working, you are working fewer than 10 hours a week. More specifically, at the date of the early access application, you were NOT gainfully employed on a full-time or part-time basis. Part-time work is defined to mean at least 10 hours a week, and less than 30 hours each week.

If your super fund permits early access on the basis of severe financial hardship, and you satisfy the above age, work and income support requirements, then you can access your ENTIRE superannuation benefit.

 

Note: The letter or form from Centrelink (or other government department or agency) confirming your income support history must be dated no earlier than 21 days before you submit your application for early release to super fund. In other words, be sure to make your application as soon as possible after receiving written confirmation from Centrelink about your income support. According to Centrelink, rather than submitting a letter, you can arrange for your super fund to check your eligibility for income support by using Centrelink’s Customer Confirmation eService (if you have given your super fund permission to do so, and assuming your super fund has registered for the eService).

 

Accessing super early on compassionate grounds

If you are unable to meet the conditions required for ‘severe financial hardship’, you may be able to access your super early under ‘compassionate grounds’. If you’re eligible, you will have to apply to the Department of Human Services for early release of your super benefits.

Warning: You may not be aware that if you are permitted to access your super benefits, then benefits tax is likely to be deducted from the super benefit before it reaches your hands.

What is ‘compassionate grounds’?

The general rule is that you can only access your superannuation benefits when you reach your preservation age (now at least 56 years and up to 60 years for those born on or after1 July 1960) AND you retire. Retirement, on or after preservation age, is considered a condition of release.

Another condition of release is ‘compassionate grounds’ and such circumstances include requiring help with expenses that cover specifically:

  • mortgage assistance (see later in article)
  • medical treatment (see later in article)
  • medical transport (see later in article)
  • modifications to home and/or vehicle where a fund member or fund member’s dependant suffers a severe disability
  • funeral or burial or other expenses related to the death of a dependant, that is, the deceased person was financially, domestically or personally reliant on you
  • palliative care for a terminal condition (that is, in the case of impending death) suffered by you or one of your dependants

Tip: The Department of Human services is also authorised to allow early access to super benefits where the circumstances are consistent with, or directly relate to, one of the specified grounds listed above (subject to a determination by DHS).

See later in the article for more information on accessing super early on compassionate grounds for:

  • mortgage assistance
  • medical treatment
  • medical transport

How do you apply on the basis of ‘compassionate grounds’?

You must apply to the Department of Human Services (DHS) (rather than your super fund) for early release on compassionate grounds. In the first instance, Centrelink prefers you register online using a MyGov account (see this link DHS register online), but also accepts paper applications. You can submit paper application by hand-delivering your application at the closest Centrelink service centre, or by post.

The contact details for DHS are set out below:

Telephone: 1300 131 060                                          Fax: 1800 228 455

Web: http://www.humanservices.gov.au/customer/services/centrelink/early-release-of-superannuation

By post:

Department of Human Services
Early Release of Superannuation Benefits
PO Box 7832
CANBERRA BC ACT 2610

Important: Before making an application to DHS, check that your super fund does permit early access to super benefits. Some super funds have special rules that stop you from withdrawing your super benefit early, even when you satisfy the ‘compassionate grounds’ condition of release.

Compassionate grounds: Mortgage assistance

You can apply for early release of your super benefits on compassionate grounds, if your home is going to be forcibly sold by the bank or financial organisation that lent you the money for your home mortgage, or the bank is going to foreclose on your mortgage, and you need your super benefits to prevent this from happening.

In addition to completing a special form, you must give DHS a written statement from your bank or financial organisation that states the following

  • payment of an amount is overdue and if the person fails to pay this amount, the mortgagee (lender) will foreclose the mortgage on the person’s principal place of residence; or exercise its express, or statutory, power of sale over the person’s principal place of residence.
  • the amount that equates to 3 months of repayments under the mortgage; and
  • the amount that is 12 months of interest on the outstanding balance of the loan at the time the statement is made.

Maximum amount that can be released for mortgage assistance each year: According to Schedule 1 of the SIS regulations, the amount accessed from the person’s super benefit for mortgage assistance must be a single lump sum, being an amount determined in writing by the Regulator (DHS), not exceeding, in each 12-month period, an amount equal to: the sum of 3 months’ repayment, AND 12 months’ interest on the outstanding balance of the loan.

Note: The ground of ‘mortgage assistance’ does not include circumstances where an applicant expects to have difficulty in making mortgage payments in the future, or for mortgage payments in arrears where the lender has not yet decided to sell, or for other people’s mortgage payment arrears (such as family members), or for a second property or investment property.

Compassionate grounds: Medical treatment

You can apply for early release of your super benefits on compassionate grounds, if you have medical costs for you or your dependant, and two medical practitioners (including one a specialist in the area of your illness) certify that the treatment is necessary to

  • treat a life-threatening illness or injury; and/or
  • alleviate acute or chronic physical pain; and/or
  • alleviate an acute or chronic mental condition

Note: The treatment must not be readily available through the public health system, and must not be covered by private health insurance or by workers’ compensation.

Compassionate grounds: Medical transport

You can apply for early release of your super benefits on compassionate grounds, if you have costs related to transporting you or your dependant to or from medical treatment, and two medical practitioners (including one a specialist in the area of illness) certify that the treatment is necessary to

  • treat a life-threatening illness or injury; and/or
  • alleviate acute or chronic physical pain; and/or
  • alleviate an acute or chronic mental condition

According to the SIS regulations (Regulation 6.19A) , ‘medical transport’ means transport, for medical attention, by land, water or air.

Note: The applicant must not have the financial capacity to pay for the medical transport, and the treatment related to the medical transport must not be readily available through the public health system.

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Commuting a Transition to Retirement Pension under the 2017 Rules

When should a TRIS be commuted: 30 June or 1 July?

We suspect that many will want to commute their transition to retirement income streams. However, when should these TRISs be commuted: 30 June or 1 July?

The short answer is 30 June. The reasoning is as follows.

Background

There are rules regarding the ability to commute pensions (including TRISs). One rule that applies to most SMSF pensions these days is that before commuting a pro-rated pension minimum must be paid, calculated as:

[minimum annual amount] x [days in payment period] ÷ [Days in financial year]

But what happens if the pension is commuted on 1 July? Is a minimum for that one day required? To be even more extreme, what if the pension is commuted at 12:00:01 AM on 1 July? Surely a prorated minimum is not required for having a pension for literally one second?

In practice, many take the answer to be no and don’t pay a minimum. However, is this correct?

ATO’s view

The Commissioner has answered this question, albeit in a non-binding forum and some years ago, namely, in the June 2009 meeting of the National Tax Liaison Group, Superannuation Technical Sub-group. The minutes reveal the following question was put to the Commissioner: ‘Is the day of the commutation included in the ‘days in payment period …’

The Commissioner answered this in the affirmative stating:

… where the commutation occurs on 1 July … the Tax Office considers that there is one day in the payment period and a minimum pension or annuity payment representing a one day period must be paid.

This approach means 1 July would also be counted in working out the minimum payment for any new pension immediately commenced from a roll-over of the commutation lump sum.

Accordingly, the Commissioner believes that, even though if commuting a pension at 12:00:01 AM on 1 July of a financial year, a prorated amount must first be paid.

Other considerations

In light of the above, if commuting a TRIS on 1 July, a prorated minimum should first be paid. Accordingly, I suspect that those rolling back a TRIS might wish to do so on 30 June in order to avoid the practical difficulty of having to pay a prorated minimum first.

Other considerations before deciding to commute include:

  • Under current law, if the TRIS assets were segregated current pension assets as at 9 November 2016, such a commutation needs to occur anyway before 1 July 2017 if the assets are to be eligible for CGT relief under s 294‑110 of the Income Tax (Transitional Provisions) Act 1997(Cth). (However, there is a proposal to relax this provision so that no commutation is necessary in order to be eligible for segregated CGT relief.)
  • Will the lump sum resulting from commutation be internally rolled back to accumulation and mix with other benefits? If so, are you comfortable with the implications of taxable component being irrevocably mixed with tax free component?
  • Naturally, it is important to properly document any commutation and to comply with any specific provisions of the fund’s governing rules.
  • Part IVA, the promoter penalty and the AFSL regime must all be considered too,

*           *           *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

– See more at: http://www.dbalawyers.com.au/pensions/tris-commuted-30-june-1-july/#sthash.jVOI3YUl.dpuf

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SMSF and Property

Before purchasing a property in an SMSF, make sure you do all the necessary checks, particularly where borrowing is involved.

1. Is it the right investment for the superannuation fund?

The investment strategy of the SMSF needs to be considered in regards to the range of investments available to the trustee. If it is noted that the purchase of a property will cause the range of investments permitted under the investment strategy to be out of alignment, the trustee should consider amending the investment strategy.

2. Does the fund have the resources to purchase the property outright?

Initial questions the trustee needs to answer are:

  • Will the SMSF purchase the property using available resources of the SMSF;
  • Is it prepared to commit a significant portion of the SMSF assets towards the purchase of a ‘lumpy’
    asset at the expense of diversification; and
  • Will it be more prudent to purchase a property of a value greater than the available resources, using borrowed funds to complete the purchase.

3. Should the property be purchased in the SMSF or in another entity?

Once the decision has been made regarding the property to be purchased, the next consideration is the proper structure in which the property will be owned. Will the trustee of the SMSF own the property or will, for example, the SMSF own units in a unit trust that will, in turn, own the property?

Unit trusts can provide a number of advantages in comparison to holding the property in the SMSF. They include:

  • Providing protection for other assets of the SMSF in the event of accidental injury at the property; or
  • Enabling activities that would not be permitted if the property was being purchased by the SMSF/bare trustee under am SMSF borrowing arrangement, e.g. significant improvements or development of the property.

4. Will the trustee borrow to acquire the property?

Having decided on the purchase and the structure, it is likely that the decision as to whether the fund will enter into an SMSF limited recourse borrowing arrangement (LRBA) will also have been made. The next decision could be whether the borrowing will be from a bank or other financial institution, or from a related party. Further to that, the amount that would be available for purchase under the borrowing would need to be ascertained.

5. How will the property be managed following the death of a member?

Once the SMSF has purchased an asset, such as property, which forms a significant (‘lumpy’) portion of the assets of the SMSF, consideration needs to be given to what would happen in the event of the death of a member. For example, it may be necessary for the property to be sold or transferred to beneficiaries, if the entitlements of those beneficiaries were required to be paid out of the SMSF. That would most likely occur when adult children or more remote dependents are the beneficiaries.

If the surviving spouse is to be the recipient of the death benefits, then the funds, including the ‘lumpy’ assets, could remain in the SMSF and provide a pension to the surviving spouse. That is predicated on the assumption that sufficient income will be generated from the property and other assets to meet the minimum pension requirements, or the higher cost of living requirements, of the spouse.

When the SMSF has borrowing obligations to meet, the situation is compounded.

More considerations

Some subordinate considerations, if entering into an SMSF borrowing arrangement, include:

  • Will the fund have sufficient liquidity to meet ongoing loan payments?
  • Does the property to be purchased comprise multiple titles?
  • Is there a plan to develop or significantly improve the property?
  • Does the contract to purchase include the purchase of ancillary items, e.g. furniture in an apartment or machinery in a factory?
  • Will the appropriate documentation be available prior to signing the contract?
  • Who will sign the contract as purchaser?
  • Who is the vendor?
  • Who will occupy the property after settlement?

Liquidity

In the event of the disability of a member, particularly when the expected contributions in respect of that member are committed to meeting loan repayments, the fund can incur significant financial difficulties. Planning for that should take place at the time of purchase.

Multiple titles

Generally, purchases under the SMSF borrowing arrangements must be under a single title to meet the single acquirable asset provisions. Exceptions to that rule include apartments and car parks that cannot be separated, and farms and factories that have major buildings across multiple titles.

Development or improvement

If the proposal is to develop or significantly improve the property, a standard SMSF LRBA is unlikely to suit. Purchase through a unit trust, most likely using related-party lending, may overcome the restriction.

Ancillary items

The single acquirable asset provisions would be breached if the borrowing is used to purchase ancillary assets, such as furniture in an apartment, machinery in a factory or equipment on a farm. Those items should be purchased using SMSF funds, rather than borrowed funds.

Documentation and signing the contract

The trustee of the SMSF should not sign the contract. Preferably, the bare trust documentation should be available prior to entering into the contract, so as to avoid any subsequent repercussions. Rules as to the timing of signing both the bare trust documents and the contract of sale vary across each state or territory.

In NSW, Victoria, Tasmania, the ACT, South Australia and Queensland, the purchaser should be the name of the holding trustee only. There should not be any references to “as trustee for the bare trust” or “as trustee for the SMSF”. If you get this wrong, it may result in adverse stamp duty implications. 

A corporate holding trustee is the smartest way to go, and this is usually the first step in any LRBA irrespective of where the property is located. Set up a company that can act as the holding trustee. Why is a company better? Companies don’t die, they don’t lose capacity and they don’t get divorced, so it is easier to change the directors rather than the names of individuals on a property title. Also, many lenders won’t lend unless the holding trustee is a company.  

Some members want to use their own name as the purchaser and note ‘and/or nominee’, that is, “Jack and Jill Mogul and/or nominee”. In some states, such as NSW, this could result in ad valorem duty being charged when Jack and Jill nominate the holding trustee as the alternative purchaser, as this can be seen as a ‘sub-sale’. Currently Victoria is the only state where ‘and/or nominee’ can be used, but you should check the rules with a local conveyancer. 

The name of the purchaser on the contract for NT property is very specific. It needs to be “Holding Trustee Pty Ltd ACN as trustee for Name of Holding Trust as bare trustee for Fund Trustee Pty Ltd ACN as trustee for Name of Fund ABN”. 

In WA, the word ‘for’ must be used between the holding trustee and SMSF trustee names. It should be “Holding Trustee Pty Ltd ACN for Super Fund Trustee Pty Ltd ACN”.

Vendor

If the vendor is a related party to the members of the SMSF, there are limitations on the assets that may be acquired. In particular, residential property could not be acquired from a related party in most instances.

Tenant

Similarly, if the proposed tenant is a related party to members of the SMSF, the SIS legislation permits such an arrangement so long as the property is business real property and the lease is legally enforceable. If the property is residential property, it must not be leased to a related party.

Full Credit for this article to: Michael Harkin, national manager of training and advice, Topdocs

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