Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 454

Meg on SMSFs – More on future-proofing your fund

Last month I shared some ideas for getting a self-managed super fund prepared for the eventual incapacity or even death of a member.

Several comments flagged the challenges for single-member funds where the eventual beneficiaries (or support team in the event of mental decline) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

It does get trickier but there is still plenty to do.

An enduring power of attorney is still very useful

It’s not common for adult children to have an ‘active’ enduring power of attorney for their parent until the parent gets quite old. But it’s something worth considering early for people who have SMSFs.

Don’t forget the attorney’s powers can be constrained. For example, I could have an enduring power of attorney that lets my children be trustees of my SMSF in my place now (regardless of my capacity) but doesn’t let them sell my house. I might reserve the “selling all my belongings and putting me in a nursing home” kind of muscle for an enduring power of attorney that’s only activated when I’m unable to make my own decisions.

The SMSF rules accommodate a number of different member/trustee configurations – some that rely on having this document in place and some that don’t. Consider all these examples for a single parent (Tim) with two adult children:

  • Tim and his children could be both members and directors of the trustee company (remember SMSFs can now have up to six members). The fact that both of Tim’s children belong to his SMSF doesn’t mean they have to put all their super in it – they could just have a nominal balance, or
  • One or both children (holding an enduring power of attorney for Tim) could be directors of the trustee in place of Tim without being members, or even
  • One of the children could be a director with Tim without being a member – in fact, the enduring power of attorney wouldn’t be necessary for this option.

What about overseas residents?

Children living overseas can complicate things, but they don’t necessarily make life impossible (except when it comes to planning Christmas during a global pandemic). For example, an overseas resident can be a trustee of an SMSF. In this modern era of digital communication and even digital signing of many documents, it’s not that impractical.

The thing to watch is that the “central management and control” of the fund is ordinarily in Australia. That means the important decisions are made by people who are normally physically here. But in Tim’s case, if one of his children lives in Australia, it would be fine to have both (under an enduring power of attorney) as directors in place of Tim. For this rule, 50/50 control in Australia is enough.

Alternatively, just the Australian-based child could be a director in place of Tim. Even if the enduring power of attorney normally requires the two children to act together when they are doing things as their father’s attorney, they don’t have to both be directors of the SMSF trustee. It’s the existence of the document that makes it OK for one or both children to be SMSF trustees for Tim - the document itself doesn’t determine how they do it or impose any restrictions on the way in which they make decisions. Once they become the trustee of their father’s SMSF, they are just like any other trustee – they are not “acting for” Tim.

The big issue to think about very carefully is the amount of control that gives just one of Tim’s children. They will hold the keys to the SMSF. Does Tim want that? And will the ‘right’ balance of power change over time? For example, the family might feel it’s fine to have a lot of control resting with the child who lives in Australia while Tim is still alive. After all, Tim still has all the same rights and powers as a member (as opposed to a trustee). If those powers are exercised under the enduring power of attorney, the children will have to act together if the document requires that. But what about after Tim dies and the trustee is making very big decisions like who gets his super balance? At that point, it might be more appropriate to have both the children involved.

One other point I usually suggest to SMSF members with family overseas is that even if the children become members, they get more specific advice before having any contributions or rollovers directed to the fund. That’s because doing either of these things makes them an “active member” and having too much of the fund owned by an active member who lives overseas is a problem.

Getting it wrong on either the “central management and control” or “active member” rules can mean the fund loses its status as an Australian superannuation fund. That is an unmitigated (very expensive) disaster and the ATO has no flexibility to forgive mistakes.

Get the money out

Several readers of my previous article commented that they would want to get the money out of the SMSF if they were in Tim’s position. There are good reasons for that. The tax on superannuation death benefits to financially independent adult children can be very high. (In contrast, the treatment of beneficiaries such as spouses or dependent children is much more generous.)

When it comes to tax, the death benefit is divided into two parts. One part (called the tax-free component) is the bit that can be traced back to amounts like personal contributions from the member for which they haven’t claimed a tax deduction. This part can come out to the children tax-free. But the rest of the death benefit (the taxable component) is generally taxed at 15%. An even higher rate (30%) can apply to some of it if the member died before they turned 65 and had insurance.

If the benefit goes directly to the children (rather than via the estate), the Medicare Levy is also added.

While a tax rate of 15% doesn’t immediately sound like a lot, remember we’re talking about a tax on capital rather than income here. A $1 million death benefit could cost more than $150,000 in tax. Even the Medicare Levy would be $20,000! (One pro-tip for death benefits is to pass benefits to adult children via the estate where possible.)

It gets more complicated if the child is an overseas tax resident – then things like tax treaties become relevant. The benefit might be assessable in the foreign country rather than Australia and taxed entirely differently.

Unsurprisingly, no one likes to die with lots of money in super when the beneficiaries aren’t classified as ‘dependents’ under the tax laws.

But that doesn’t make it obvious to me that Tim should close his SMSF and get out of super entirely. I think it really depends on factors like Tim’s age and the make-up of his super.

For example, if Tim is a healthy 60-year-old, he’s likely to have many years of fantastic superannuation tax concessions ahead of him. Does he really want to take all his money out of super now just on the off chance that he might die prematurely and that would cost his children money? But if he is in his late 80s with declining health, the answer to that question might be entirely different.

And what if Tim’s super was mostly a ‘tax-free’ component? In that case, he might decide to leave it in super if possible – there’s no real downside to his children.

Like so many things with superannuation, it’s a classic case of picking the right strategy at the right time.

 

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances.

To view Heffron's latest SMSF Trustee webinar, 'Super contributions unpacked', click here (requires name and email address to view).

For more articles and paper from Heffron, please click here.

 

22 Comments
Jeff Broderick
April 23, 2022

I personally don't see a problem here. All of us over 60 are paying no tax, on our earnings that are in pension phase. We have accumulated this money in a concessionally taxed environment as well, and are now trying to avoid it being taxed a bit when passed onto our adult children.
Really. My adult children will get quite enough after the 15% is taken out of my taxable component. I have no issue with that.

James
April 23, 2022

"All of us over 60 are paying no tax, on our earnings that are in pension phase."

I wouldn't count on that lasting much longer! Huge government debt, continued cost blowouts in aged care and the NDIS and increasing chatter from socialist sectors harking on about the inequity of retirees not paying their fair share! The end is nigh!

SMSF Trustee
April 23, 2022

James, keep in mind that the tax free situation is only in relation to super balances below that limit of $1.6 mn brought in a few years ago. That was in response to the budget issue you mention and means that the earnings that are tax free are not excessive.

But Jeff, the more of us who see the tax free super as being there to pass on to our kids, the more likely is it to become an issue like James has flagged. Super is not intended for inheritance planning, but for retirement income. Spend it mate.

Meg Heffron
April 24, 2022

I can see your point Jeff (people like me probably get too focussed on saving tax for our clients sometimes). The only point I'd make is that it's unusual for tax to be levied on capital as opposed to income - so the deceptively low figure of 15% can really add up. I guess you could say that this is a delayed extra tax on income (past taxable contributions and investment earnings) but it still feels like a lot at the time.

Barbara Ryan
April 18, 2022

Except for $1000 all my husbands super money was withdrawn from super and recontributed without claiming a tax deduction.We have a SMSF WITH 3 ACCOUNTS
1 in my husbands name from his re-contributed super now in pension mode
2nd in my name from inherited money
3rd in my husbands name from inherited money
On the death of the 2nd and therefore last person in the fund is there tax on the increase in value of the fund?

Jon Kalkman
April 21, 2022

Barbara. The tax on the death benefit is always determined by the proportion (not the amount) of the fund that comes from non-concessional contributions. Those proportions are frozen at the start of a pension account, (because it cannot accept new contributions) so the tax on any growth of the fund stays in the same proportion. Closing a pension fund to add new contributions and restarting a pension will then also change these proportions and therefore the tax implications at death.
An accumulation fund can accept new contributions and as it continues to grow all the growth is added to the taxable side of the fund. The longer an accumulation fund continues the higher the taxable portion.
Surprisingly few people know the taxable portion of their super fund and yet it could materially affect the tax payable at death. Your fund or your SMSF administrator should be able to tell you.

Barbara Ryan
May 15, 2022

thanks Jon, best to wind up the fund if the last person is likely to die in order to avoid the 15% tax
Barbara

Jack
April 17, 2022

Meg has highlighted an enormous inequity with the tax on death benefits. Because withdrawals from super are tax free after 60, if I have a terminal illness with time to organise my affairs, I can remove all my money from super tax-free before death and dispose of it at my discretion. But if I die suddenly with money remaining in the super fund, my beneficiaries are hit with this 15% tax on the remaining taxable capital. That seems grossly unfair.

Richard
April 17, 2022

It is not an inequity if you regard the non taxabilty as a concession to the living.

As I recall it because of various grandfathering provisions there were different ways of taxing payments in the recepient's hands and this simplified matters

Jon Kalkman
April 17, 2022

Meg has raised a point. The tax on death benefits only applies to the concessional portion of the fund. A useful strategy is make a withdrawal from the super fund and then recontribute it to the fund. In so doing, the tax status of that money is changed to non-concessional. This re-contribution strategy, done within the rules, will change the proportion of the death benefit subject to tax. Best to get advice.
Of course the normal contribution rules apply, but recently the work test has been removed for people up to the age of 75. That means non-concessional contributions can be accepted whether you are working or not. It also allows two members of a couple to even up their super balances if desired.

Meg Heffron
April 24, 2022

Exactly right Jon - one of the issues I've been pondering recently is that this recontribution strategy used to operate in quite a narrow window. An individual had to be able to both withdraw money AND contribute it which meant it was really only available between retirement and 65 (or more recently 67) for most people. Now that the work test has been removed for non-concessional contributions from 1 July 2022 onwards, it will be a strategy people can pursue for at least 10 years! We may see a lot of people able to completely "turnover" their balances in this way. The challenge for some will be that even under the new rules, your total super balance can still limit your ability to make large personal contributions - for example, if your total super balance at 30 June 2022 is $1.7m or more, your cap on these contributions is $nil in 2022/23.

Carol Flynn
April 14, 2022

Thanks for this explanation.
The easiest way to proceed, in my view, is to leave the money in super by rolling over to a large super fund.
We did that recently and have got better returns in an industry fund than we were getting for ourselves.
It was an extremely easy process with the help of our accountant and the industry fund.

john
April 18, 2022

Can you explain more re. the process in the help of your accountant and the industry fund ?? I was hoping to find an industry super fund that is prepared to assist in rolling over from our SMSF. That is; to assist with the accounting process to close the SMSF and roll over the funds. One would think there would be an industry super fund prepared to do that, so as to gain a substantial new member.

David Owen
April 14, 2022

Excellent article opening the window on a complex subject. I am not a lawyer, however, it is my understanding that a Power of Attorney granted by an individual does not extend to grantor's role as a director of a company. It is my understanding that the company has to grant the power of attorney for a person(s) to act as a director(s).

Meg Heffron
April 15, 2022

You're right about that David. The trick when it comes to enduring powers of attorney and SMSFs is that you're not actually "acting" under the power of attorney - which is where your points would be spot on. Rather, the SMSF rules say a variation of : "if you're a member of an SMSF you also have to be a director of the trustee company. But we'll give you a free pass on that rule if someone else is a director instead of you and we deem that person to be particularly special, like... they hold an enduring power of attorney for you or have been appointed by a court to be your legal personal representative". So the attorney is not taking on another director's role, they are actually appointed as a director in their own right. Thanks for your question - I think this nuance is really confusing and very often misunderstood so I've banked it as an idea for a future article.

David Owen
April 17, 2022

Hi Meg, Many thanks for your response, however, it is still confusing. I look forward to your article on the subject so that everyone can develop a very clear understanding of what is right and what to do - sooner rather than later whennthe member is no longer able to act for themselves.

Rob
April 14, 2022

The key takeout Meg is to have a plan and make sure that plan is documented and understood by all those who have to act including the professionals they need to turn to. Often time can be very short and usually very stressful so pre planning and early discussion is critical. In my case it is all documented, what to do and who to talk to, down to the brutal instruction to put me on life support if they need to buy time!!

At the end of the day it is a simple discussion with adult kids - choice is act and boost your inheritance, or stuff around and boost the coffers in Canberra. Which would you prefer?

Jill
April 14, 2022

Same here Rob - all documented, which gives me peace of mind.,

Meg Heffron
April 15, 2022

Totally right Rob + Jill - a plan is the key. That's probably true of many things but particularly on point when it comes to SMSFs and getting older. I find that the "who to turn to" is often the key for the next generation.

David C
April 17, 2022

Keeping a brain-dead body on life support in a precious bed for a few days for the financial benefit of the children is unlikely to be how an intensive care unit wishes to use its resources - nor should it be expected to.

Trevor
April 14, 2022

Thanks Meg !
"Several readers of my previous article commented that they would want to get the money out of the SMSF if they were in Tim’s position.".............I STILL like that option.........................but .............."if Tim’s super was mostly a ‘tax-free’ component?
In that case, he might decide to leave it in super if possible – there’s no real downside to his children."........is EVEN BETTER !

David C
April 17, 2022

However practically speaking the taxable component is usually significant.

 

Leave a Comment:

     

RELATED ARTICLES

SMSFs and the control over estate planning

Why SMSFs should have a corporate trustee

Meg on SMSFs: Future proofing your own fund

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.