SMSFs: keeping it in the family

Self managed super funds (SMSFs) can offer their members many benefits, but one that’s often overlooked is their potential as a multigenerational wealth creation and transfer vehicle.

Family SMSFs are relatively rare. According to the most recent ATO statistics (2022-23), the majority of SMSFs (93.2 per cent) have only one or two members.i Just 6.6 per cent have three or four members and only 0.3 per cent have five or six members (the maximum allowed).

Advantages of a family SMSF

An SMSF is sometimes established when two or more generations of a family share ownership or work in a family business. The fund can then form part of a personal and business succession plan, potentially making it easier to pass on ownership and management of assets to the next generation.

With more members, SMSFs also gain additional scale, allowing them to invest in larger assets (such as property). You can add business premises to the SMSF and lease it back without violating the related parties rule and 5 per cent limit on in-house assets.ii

Reduced tax and administration costs are also a benefit of multigenerational funds.

Running a family SMSF means the costs of establishing and administering the fund are spread across more members. This can be particularly helpful for adult children just beginning to save for their retirement.

In addition, more fund members means more people to share the administrative burdens of running an SMSF, which may be helpful as you get older.

A family SMSF does not need to be automatically wound up if you die or lose mental capacity and they can simplify the process of paying out a member death benefit as well as potentially allowing it to be paid tax-effectively. Note that death benefits paid to non‑tax dependent beneficiaries incur a tax rate of up to 30 per cent plus the Medicare levy.iii

More fund members also make setting up a limited recourse borrowing arrangement (LRBA) easier because their contributions reduce the fund’s risk of being unable to pay the borrowing costs. (An LRBA allows an SMSF to borrow money to buy assets)

Funding pension payments

Another advantage of an SMSF with up to six members may be when the fund begins making pension payments to older members.

If younger members are still making regular contributions, fund assets don’t need to be sold to make pension payments, which avoids the realisation of capital gains on assets.

Family SMSFs can also provide non-financial benefits, helping to transfer financial knowledge and expertise between the generations. And, while your children gain a solid financial education from participating in the running the SMSF, they can also provide valuable investment insights from a different perspective.

Risks and responsibilities

It is important to note that a multigenerational SMSF may not be right for everyone.

SMSFs of any size come with some risks and responsibilities. You are personally liable for the fund’s decisions, even if you act on advice from a professional, and your investments may not provide the returns you were hoping for.

Before you start adding your children and their spouses to your fund, it’s essential to spend time thinking about the challenges in running a family SMSF. Developing an asset allocation strategy catering to different life stages can be complex. Older members may prefer a strategy designed to deliver a consistent income stream, while younger members are usually more focused on capital growth.

Risk profiles are also likely to vary. Typically, younger fund members have a higher appetite for investment risk than members closer to retirement.

Family conflict can also be an issue when relationships are under pressure from divorce, blended families, and personality clashes.

The death of a parent can also create disputes over the distribution of fund assets or forced asset sales. Decisions about the payment of death benefits by the remaining trustees can derail carefully made estate plans and result in expensive legal battles.

Larger families with multiple adult children and partners may also find the six member limit an obstacle, forcing them to look at other options such as running a number of family SMSFs in parallel.

If you would look more information about establishing a family SMSF, call our office today.

i SMSF quarterly statistical report June 2024 | data.gov.au

ii Related parties and relatives | Australian Taxation Office

iii Paying superannuation death benefits | Australian Taxation Office

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Super vs property: what works for retirement income?

There is no debate that Australians love investing in property. The value of Australian residential real estate at the end of August 2024 was an estimated $10.95 trillion.i

Some love it so much that they believe property is a better option for providing a retirement income. They see a bricks and mortar investment as a more tangible and solid approach than say, superannuation, preferring to take their super as a lump sum on retirement to buy property. They may also choose to invest a windfall, such as an inheritance, or the proceeds from downsizing the family home, in property instead of their super.  

So, given that a retired couple above age 65 needs an estimated yearly income $73,337 to lead a comfortable lifestyle, could a property investment do the job?ii

While it’s true that a sizeable property portfolio could deliver rental income to equal a super pension, it might mean missing out on some useful benefits.

After all, super is a retirement savings structure with significant tax advantages. It also has the flexibility to provide investments in a range of different asset classes, including property.

Meanwhile, super fund performance has, generally speaking, outstripped house price movements over the past decade. Super funds (invested in an all-growth category) returned an annual average of 9.1 per cent during that time while average house prices in Australian capital cities grew 6.5 per cent per year over the same period.iii, iv

Not that past performance can give you any guarantees about what will happen in the future. Indeed, the average numbers smooth out the years of high returns and the years of negative returns. More important considerations in making an informed decision are your financial goals, your investment timeframe and how much risk you’re comfortable with.

Liquidity

One of the most significant differences between super and property investments is liquidity, or how quickly you can convert your investment to cash.

With super, assuming you’re eligible, funds can be accessed relatively easily and quickly. On the other hand, if your wealth is tied up in property it may take some time to sell or it may sell at a lower price.

Nonetheless, market cycles affect both property and super investments. They can be affected by volatile conditions and deliver negative returns just at the time you need access to a lump sum.

Long-term investing

Superannuation is designed for long-term growth, often spanning decades as you accumulate wealth over your working life. The magic of compounding interest can lead to substantial growth over time, depending on your investment options and the state of the market.

Property investments, on the other hand, can be invested for short, medium, and long-term growth depending on the suburb, the street, and the type of house you invest in. Of course, there are additional costs in buying a property (such as stamp duty) plus costs in selling (including capital gains tax). If there’s a mortgage over the property, you’ll need to factor in the additional costs of repayments and interest (bearing in mind that interest on investment properties is tax deductible).

Risk appetite

Investors’ attitudes towards risk also play a role in choosing between super and property.

Superannuation funds can be diversified across various asset classes, which helps to reduce risk. But property investments expose investors to a single market meaning that while there might be a big benefit from an upswing, any downturn may be a blow to a portfolio.

Making an informed choice

Ultimately, any decision between superannuation and property should align with individual financial goals, risk tolerance, and investment strategies. And, of course, it doesn’t need to be one or the other – many choose to rely on their super while also holding investment property so it’s best to understand how super and property can complement each other in a well-rounded retirement plan.

We’d be happy to help you analyse your retirement income strategy to develop a plan that works for you.

i Monthly Housing Chart Pack – September 2024 | CoreLogic Australia

ii ASFA Retirement Standard – June quarter 2024 | The Association of Superannuation Funds of Australia Limited (ASFA)

iii Super funds deliver strong result in FY24 | Chant West

iv SQM Research Weekly Asking Property Prices , 1 October 2024 | SQM Research

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Market movements and review video – November 2024

Stay up to date with what’s happened in the Australian economy and markets over the past month.

Welcome news on the inflation front in October pointed to the Reserve Bank of Australia (RBA) holding steady on rates this month.

The latest quarterly inflation figures show inflation has slowed to its lowest level since the height of the pandemic and now sits within the RBA’s target range at 2.8%.

Global share markets softened in the final two weeks of October, reflecting economic and geopolitical uncertainly.

The S&P/ASX 200 closed slightly down over the month of October, after again reaching record highs mid-month.

With the US election on the horizon there is much speculation about what that will mean for markets and the economy, both in the US and Australia.

Click the video below to view our update.

Please get in touch if you’d like assistance with your personal financial situation.

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The Age Pension and your retirement plans

Most people intend to retire between ages 65 and 66, according to the latest data and, surprisingly, despite growing superannuation balances, the Age Pension is the main source of income for many retirees.i

The intended retirement age has increased significantly in the last two decades, from just over 62 years on average in 2004.

Australian Bureau of Statistics (ABS) figures show that, in 2022-23, a government pension or allowance was still the main source of personal retirement income. This was followed by super, an annuity or private pension.

More than 60 per cent of those aged over 65 years were receiving the Pension in 2021ii

Am I eligible?

It is important to remember that, while you may not meet the eligibility requirements today, you may qualify later in life.

In 2021, only 44 per cent of people aged 65-69 received either full or part Age Pensions but this increased to 81 per cent for those aged 80 to 84 years.iii

Veterans who have served in the Australian Defence Force may be eligible for pensions or benefits from the Department of Veterans Affairs.iv

You are generally eligible for the Age Pension if you:

  • are over 67 years (depending on when you were born)
  • are an Australian resident and have lived in Australia for at least 10 years
  • can meet an income and assets test

What are the income and assets tests?

The Age Pension means tests considers your income and the value of any assets you own. If the value of your income and assets exceed certain limits, your payment will be reduced.

Income includes money from a job (including salary packaging), other pensions or annuities, earnings from investments and any earnings outside of Australia.v

Assets are items of value you or your partner own or have an interest in such as investment properties and artworks; caravans, cars, and boats; shares; and business assets. While your family home isn’t included in the assets test, your pension may be affected if you sell it.vi

Can I still work?

Singles can earn up to $212 per fortnight without their pension being affected. For every dollar over that amount, their pension will be reduced by 50 cents. Couples can earn up to $372 per fortnight and for every dollar over that amount, 25 cents in the dollar will be deducted from their pension payment.vii

If your income in a fortnight goes over a certain amount, you will not receive a pension payment. This cut-off amount is $2500.80 for a single person and a combined $3,833.40 for a couple. There are other higher cut-off allowances for those affected by ill-health.

The Work Bonus may help you earn more from working without reducing your pension. You don’t need to apply for it, the Bonus will be automatically applied to your eligible income – you just need to declare your income.viii

What does the Age Pension pay?

There are different rates of pension for singles and couples.

The current maximum basic rate for a single person is $1047.10 per fortnight. A couple would receive 1,578.60 per fortnight. With extra supplements, those on a full Pension could receive a fortnightly total of $1,144.40 for singles and $1,725.20 for couples.ix

Get in touch if you’d some help to work out your eligibility for the Age Pension and other government entitlements.

i Retirement and Retirement Intentions, Australia, 2022-23 financial year | Australian Bureau of Statistics (abs.gov.au)

ii, iii Age Pension guide | SuperGuide

iv Eligibility for benefits and payments | Department of Veterans’ Affairs (dva.gov.au)

v Income – Age Pension | Services Australia

vi Asset types – Age Pension | Services Australia

vii Income test for Age Pension – Age Pension | Services Australia

viii Who can get the Work Bonus – Work Bonus | Services Australia

ix How much Age Pension you can get – Age Pension | Services Australia

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Tax update September 2024

New deductions and employer obligations

Employers need to check that payroll systems reflect recent legislative changes, and the ATO is highlighting deduction opportunities available to some small businesses. Here’s your roundup of the latest tax news.

Updated employer obligations

The ATO is reminding employers to stay on top of legislative changes affecting payroll systems.

The Super Guarantee rate increased on 1 July 2024 to 11.5 per cent of ordinary times earnings, so all payments (starting with those for the July to September quarter) to super accounts for eligible workers must reflect the new rate.i

Individual income tax rate thresholds and tax tables changed also changed on 1 July 2024 so you may need to check calculations for your Pay As You Go Withholding obligations.

Claims for energy expenses

Many small business are eligible for a bonus 20 per cent tax deduction for new assets (or improvements to existing assets), that support more efficient energy usage.

The Small Business Energy Incentive applies to eligible assets first used or installed ready for use between 1 July 2023 and 30 June 2024.ii

Eligible expenditure for external training courses for employees incurred between 29 March 2022 and 30 June 2024 could also qualify for a 20 per cent bonus tax deduction from the Small Business Skills and Training Boost.iii

Pay less capital gains tax (CGT)

While a business can reduce capital gains made during a tax year by offsetting them with capital losses from the same or previous income years, not all capital losses are eligible.iv

Capital losses carried forward from previous years need to be used first, with losses from collectables (such as artwork and antiques) only permitted to be offset against capital gains from collectables.

Losses from personal use assets (such as boats or furniture), CGT exempt assets (such as cars and motorcycles), paying personal services income to yourself through an entity you set up, and leases producing income (such as commercial rental property), are ineligible as offsets.

Fuel tax credit rates change

Before claiming fuel tax credits in your next Business Activity Statement (BAS), check you are using the latest rates as they have changed twice in the new financial year.v

On 1 July 2024, the rate for heavy vehicles travelling on public roads changed due to an increase in the road user charge, with the rate altering again on 5 August 2024 due to a change in fuel excise indexation.

Different rates apply based on when you acquired fuel for your business’ use, so ensure you use the correct rate. If you are unsure, try the ATO’s online Fuel Tax Credit Calculator to work out the amount to report in your BAS.

Records essential for rental expense claims

Rental property investors without correct documentation to substantiate their expense deductions may find their claims declared invalid.vi

The ATO is warning investors they need all receipts, invoices and bank statements plus details of how deductions were calculated and apportioned for a valid claim.

Lodging a ‘nil’ BAS

While taxpayers registered for GST automatically receive a Business Activity Statement and are required to lodge and pay in full by the due date, businesses with nothing to report are still required to lodge.

If you have paused your business, you are required to lodge a ‘nil’ BAS by the due date either online or via the ATO’s automated phone service.vii

i How much super to pay | Australian Taxation Office (ato.gov.au)

ii Small business energy incentive | Australian Taxation Office (ato.gov.au)

iii Small business skills and training boost | Australian Taxation Office (ato.gov.au)

iv Pay less capital gains tax (CGT) | Australian Taxation Office (ato.gov.au)

v From 1 July 2024 to 30 June 2025 | Australian Taxation Office (ato.gov.au)

vi ATO warning to rental property owners: don’t let your tax return be a ‘fixer-upper’ | Australian Taxation Office

vii Cancelling your GST registration | Australian Taxation Office (ato.gov.au)

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Preparing your SMSF for the future

What happens to a self managed super fund (SMSF) when a trustee dies or becomes mentally impaired? While these are circumstances that many of us would rather not think about, some time spent planning now could make a big difference to you and your family later.

Australia’s 620,000 SMSFs hold an estimated $933 billion in assets, so there is a lot at stake.i

But it’s not just about money – control of the SMSF may also be crucial.

The best way to ensure that your wishes are carried out is with a properly documented succession plan and an up-to-date trust deed.

An SMSF succession plan sets out what will happen if you or another trustee dies or loses mental capacity. It makes sure that there’s a smooth transition and is quite separate to your Will.

It’s important to be aware that instructions in a Will are not binding on SMSF trustees, so it’s essential to have a valid (preferably non-lapsing) binding death benefit nomination in place so the new trustees are required to pay your death benefit to your nominated beneficiary.

Your Will cannot determine who takes control of your SMSF or who receives your super death benefit as the fund’s trust deed and super law take precedence.ii

Succession plans also reduce the potential for the fund to become non-compliant due to overlooked reporting or compliance obligations. They can even provide opportunities for death benefits to be paid tax effectively.iii

Selecting successor trustees

Super law requires SMSFs with an individual trustee structure to have a minimum of two trustees, so it’s important to consider what will happen after the death or mental incapacity of one of the trustees.

An alternative to appointing a successor trustee can be introducing a sole purpose corporate trustee structure for your SMSF, as death or incapacity is then not an issue. This structure makes it easy to keep the SMSF functioning and fully compliant when a trustee transition is required.iv

Appoint a power of attorney

Good SMSF succession planning also means ensuring your Will is updated to reflect your current family or personal circumstances.

It requires having a valid Enduring Power of Attorney (EPOA) in place to help keep the SMSF operating smoothly if you lose mental capacity. Your EPOA can step in as fund trustee and take over administration of the fund or make necessary decisions about the fund’s investment assets.

Checking compliance

When developing a succession plan, ensure your wishes comply with all the requirements of the SIS Act and will not inadvertently compromise your SMSF’s compliance status.

Your planning process should include a regular review of both the fund’s trust deed and any changes in both the SMSF’s circumstances and membership, and the super legislation and regulations.

Tax is an important consideration when it comes to estate and succession planning as the super and tax laws use different definitions for who is and isn’t considered a dependant.

Your SMSF is able to pay super death benefits to both your dependants and non-‑dependants, but the subsequent tax bills vary based on the beneficiary’s dependency status under tax law.

The problems that can occur, due to the differences between super and tax law dependency definitions, were highlighted in recent private advice (1052187560814) provided by the ATO. It found that even if a beneficiary was receiving “a reasonable degree of financial support” from a deceased person just before they died, they would not necessarily be considered a death benefit dependant under tax law.

There is also the potential for capital gains tax to be payable if fund assets need to be sold because your super pension ceases when you die. Nominating a reversionary beneficiary for your pension ensures payments continue automatically without requiring any asset sales.v

If you would like to discuss or require assistance with drawing up your SMSF succession plan, give our office a call today.

i https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/smsf-newsroom/highlights-smsf-quarterly-statistical-report-march-2024
ii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-benefits/death-of-a-member
iii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/administering-and-reporting/how-we-help-and-regulate-smsfs/how-we-deal-with-non-compliance
iv https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/setting-up-an-smsf/choose-individual-trustees-or-a-corporate-trustee
v https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/in-detail/smsf-resources/smsf-technical-funds/funds-starting-and-stopping-a-pension

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Market movements and review video – August 2024

Stay up to date with what’s happened in markets and the Australian economy over the past month.

While the anxiously awaited release of the latest inflation data at the end of July, showed an increase, it was in line with economists’ predictions.

Given the RBA wants inflation back within a 2-3% target range by the end of 2025, there were concerns about the inflation figures and the implications for the cash rate.

The ASX finished the month strongly with an increase of around 4%, riding out a mid-month plunge and surging to a record high for the ninth time this year.

Click the video below to view our update.

Please get in touch if you’d like assistance with your personal financial situation.

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How to end the financial year on a high note

As the financial year draws to a close, it’s the perfect time to review your financial affairs and set the stage for a successful new financial year. By taking care of essential tasks and implementing strategic planning, you can position yourself for a smooth transition and a strong start for the year to come.

Topping up super

One important item for the To Do list is to top up your super with either concessional (pre-tax) or non-concessional (post-tax) contributions. For example, you could make a voluntary concessional contribution up to the limit allowed and then claim a tax deduction on your personal assessable income for it.

Consider making additional contributions to your own super account or your spouse’s account, to take advantage of tax concessions.

If you have unused concessional cap amounts from the previous five years and a super balance less than $500,000 on June 30 the previous year, you may be eligible to make a catch-up (or carry-forward) contribution greater than the annual limit.

Maximising contributions not only helps you build your retirement savings but can also provide valuable tax benefits. But it’s critical to be mindful of your caps and to ensure that you make any super contributions before the end of the financial year to meet the deadline.

Reviewing investments

Reviewing your investment portfolio is a valuable task at any time but particularly now.

For example, you could take a look for any capital gains or losses that could be used strategically to manage your tax liability.

Also, it is worth considering how your portfolio performed over the past 12 months against your goal of capital growth, income, or balance.

You may decide to readjust your goals or your investments to help steer performance in the right direction for the next 12 months.

Of course, if you’re planning any changes, it’s important to check in with us to ensure you’re making informed decisions about your investments.

Paying expenses early

Another useful strategy at tax time can be to bring forward any deductible expenses or interest payments before 30 June to reduce your taxable income.

That could include incurring expenses on an investment property, prepaying interest on investment loans, making charitable donations, or claiming eligible work-related expenses.

Make sure you keep detailed records and receipts to support your deductions.

The ATO’s myDeductions app is a great place to start for free record keeping and to assist you to be ready for tax time.

Setting up salary sacrifice

As you look ahead to the new financial year, consider whether a salary sacrifice arrangement might be right for you.

Salary sacrifice allows you to divert a portion of your pre-tax salary directly into your superannuation, which effectively reduces your taxable income and boosts your retirement savings.

You will need to think carefully about your living expenses to work out the amount you can afford to contribute to your super, ensuring you do not exceed your concessional (before-tax) contributions cap of $27,500 (which will increase to $30,000 from July 1 2024) to avoid paying any extra tax.

Your employer or payroll department can help you set up a salary sacrifice arrangement.

Checking your budget

This is a good time to revisit your financial goals and how you’re tracking, and then put together a strong budget for the new financial year that will help get you further along the track.

Take the time to review your income and expenses and identify any areas where you can cut back spending or improve your income.

This exercise not only helps you understand your financial habits but also allows you to reallocate funds towards your goals, such as paying down debt, building an emergency fund, or increasing your investment contributions.

Consult with professionals

Don’t forget to check in with your trusted advisers – financial advisers, accountants, or tax professionals – to make sure you are making the most of any opportunities for financial growth and maximising tax savings.

Taking advantage of our expert advice to review your current financial situation and goals, and check that you are making the best decisions for you can make a difference. It provides peace of mind, ensures that you are complying with any obligations and, importantly, puts you in the best position to achieve your financial goals.

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Understanding the new $3m super tax

The much-debated tax on superannuation balances over $3 million is inching closer and those who may be affected should ensure they have considered the implications.

Although it is not yet law, the Division 296 tax should be taken into account when it comes to investment strategy and planning, particularly in relation to any end-of-financial-year contributions into super.

Tax for higher account balances

The new tax follows a Federal Government announcement it intended to reduce the tax concessions provided to super fund members with account balances exceeding $3 million.

Once the legislation passes through Parliament and receives Royal Assent, Division 296 will take effect from 1 July 2025. Division 296 legislation imposes an additional 15 per cent tax (on top of the existing 15 per cent) on investment earnings of a super account where your total super balance exceeds $3 million at the end of the financial year.i

The extra 15 per cent is only applied to the amount that exceeds $3 million.

Given the complexity of the new rules, it is important to seek professional advice so you can make informed decisions.

How the new rules work

A crucial part of the new legislation is the Adjusted Total Super Balance (ATSB), which determines whether you sit above or below the $3 million threshold.

When assessing your ATSB, the ATO will consider the market value of assets regardless of whether or not this value has been realised, creating a significant impact if your super fund holds property or speculative assets. The legislation also introduces a new formula for calculating your ATSB for Division 296 purposes.

The legislation outlines how deemed earnings will be apportioned and taxed, based on the amount of your account balance over the $3 million threshold.

Negative earnings in a year where your balance is greater than $3 million may be carried forward to a future financial year to reduce Division 296 liabilities. If you are liable for Division 296 tax, you can choose to pay the liability personally or request payment from your super fund.

Strategic rethink may be needed

For many fund members, superannuation remains an attractive investment strategy due to its favourable tax treatment.ii

But those with higher account balances need to understand the potential effect of the Division 296 tax. For example, given the new rules, you may need to consider whether high-growth assets should automatically be held inside super.

Holding long-term investments that may be more difficult to liquidate, such as property, within super may be less attractive in some cases, because the new rules create the potential to be taxed on a gain that is never realised. This could occur where the value of an asset increases during a financial year but drops in value by the time it is actually sold.

For some, holding commercial property assets (such as your business premises) within your SMSF may be less attractive.

It will also be important to balance asset protection against tax effectiveness. For some people, the asset protection provided by the super system may outweigh the tax benefits of other investment vehicles, such as a family trust.

Division 296 will require more frequent and detailed asset valuations, so you will need to balance this administrative burden with the tax benefits of super.

Estate planning implications

Your estate planning will also need to be revisited once Division 296 is law.

The tax rules for super death benefits are complex and should be carefully reviewed to ensure you don’t leave an unnecessary tax bill for your beneficiaries.

If you still have many years to go before retirement and hold high-growth assets in your fund, you will need to closely monitor your super balance.

If you want to learn more about how Division 296 tax could affect your super savings, contact our office today.

i https://treasury.gov.au/sites/default/files/2023-09/c2023-443986-em.pdf
ii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/understanding-concessional-and-non-concessional-contributions

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The importance of SMSF succession planning

Preparing for loss of capacity or death is vital for SMSF members. It’s important to ensure your trust deed is watertight.

There are more than 600,000 self-managed superannuation funds (SMSFs) in Australia, managing close to $900 billion of assets on behalf of over a million Australians.

Each SMSF’s trust deed is legally required to set out the rules for establishing and operating the SMSF including its objectives, who can be a member of the SMSF, and whether benefits can be paid as a lump sum or as an income stream.

But what happens when a member becomes incapacitated, or dies?

Has the SMSF’s trust deed been worded in a way that will make it possible to give effect to the wishes of an incapacitated or deceased member, to the extent those wishes are consistent with superannuation laws?

If you’re a member of an SMSF, it’s important to ensure that you have ticked all the right boxes when it comes to succession planning.

And, to do this, it’s worthwhile considering obtaining tailored professional advice from an SMSF specialist.

Preparing binding death benefit nominations

SMSF members generally have a degree of ability to choose who will get their residual super benefits when they die, by making and giving the SMSF’s trustee a binding death benefit nomination.

This directs the fund’s trustee to pay the benefit to either a legal personal representative or one or more eligible dependants of the member.

However, depending on the wording of your SMSF trust deed and the nomination itself, it is possible that a binding death benefit nomination given by a member will expire after just three years (or any shorter period specified in the trust deed) under Regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth). In that scenario, assuming the member is still alive, their death benefit nomination would then need to be renewed and there would be no death benefit nomination in place unless and until they do so.

But the High Court ruled last year that it is possible for a validly made binding death benefit nomination to last indefinitely if a trust deed’s wording is structured in such a way that effectively avoids the three-year automatic expiry.

This is a prime example of why it may be worthwhile getting professional advice around the wording in your trust deed covering death benefit nominations as well as your nomination form, including whether they are aligned with your preference as to how often (if at all) death benefit nominations need to be updated in order to be legally effective.

Preparing for loss of capacity or death

Another key aspect for SMSF trustees to consider and plan for is who would take control upon a member’s loss of capacity or death.

For example, problems can arise where someone wanted their super money to go to a child from a previous relationship, but where a second spouse controlling the fund was able to frustrate the wishes of the deceased.

It’s certainly worth asking how your wishes will be honoured if you lose capacity or die. Who will or could be running the fund in this situation? As there are a range of legal factors and restrictions that shape who would be eligible to operate the SMSF or make decisions on your behalf, good quality expert legal and financial advice on these matters can go a long way to avoiding inconvenience, confusion and conflict in future.

Reversionary pension nominations

SMSF trust deeds can generally specify that a superannuation income stream that a member of the SMSF is receiving will automatically transfer to an eligible dependant beneficiary previously nominated by the member upon the member’s death. This nomination is typically referred to as a reversionary pension nomination.

For some SMSF members they can be very important, particularly for people who have a high tax-free component or who are expecting a life insurance payout upon their death.

Some SMSF trust deeds are worded in a way that gives priority to a reversionary pension nomination over a binding death benefit nomination, which can lead to unexpected or unintended outcomes after a member’s death.

Reversionary beneficiary nominations are not necessarily needed or suitable for everyone with an SMSF, but for those wanting to implement them it’s important to ensure they’re permitted under the terms of the trust deed and enforceable in the future.

Getting succession planning advice

SMSF trust deeds can be complex documents, and it’s vital to ensure that yours is structured to ensure it is best placed to conform to your wishes in the event you’re incapacitated or die.

Consider giving us a call or consulting a licensed financial adviser or other relevant qualified professional who specialises in SMSF.

Source: Vanguard

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor. We have not taken your objectives, financial situation or needs into account when preparing this article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any financial product we make available before making any investment decision. Before you make any financial decision regarding Vanguard products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD before making any investment decisions. You can access our IDPS Guide, PDSs, Prospectus and TMDs at vanguard.com.au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.

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