Cash Your Super Before You Die

Cash Before You Die

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Cash your super before you die. Make sure your super is gone by the time you go, unless you have a tax dependant.

Cash Your Super Before You Die

You probably wonder why. Having super is good. Being frugal is good. Leaving super for your children is good. It sounds like a nice thing to do. And it is… but if you don’t cash out in time, your adult children will receive less than you think.

If you wait too long, your super will leave a nasty tax-bill behind. And your children will remember what – your super or the tax bill that came with it? 

But you probably shake your head and remember the terrible time when your spouse died. You had both just turned 65. And back then you received his or her entire super without any tax to pay. So why can’t you do the same for your children? 

Death Benefit Dependant

The answer is just one phrase – tax dependant – also referred to as a death benefit dependant.

Death benefit dependant is the term the ITAA97 uses. Tax dependant is the colloquial term most people, including the ATO, use. Two different words. Same thing.

As a spouse you qualified as a tax dependant. A spouse, a child under 18 as well as anybody in an interdependency relationship with or financially dependent on the deceased is considered a tax dependant. And tax dependants receive the lump sum death benefit tax-free. 

But your children are neither under 18 nor live in an interdepencey relationship with or are financially dependant on you. So they don’t qualify as tax dependants. And so they will pay tax on any taxable component that comes their way.

Sole Purpose

This concept of a tax dependant links back to the sole purpose of superannuation. Its sole purpose is to provide for your retirement and/or your tax dependants when you no longer can. For that purpose your super received massive tax concessions over the years.

But anything that is left over when you die without tax dependants clearly wasn’t needed for your retirement or tax dependants. So the legislator wants those concessions back.

Those concessions were never intended for your financially independent children. And so they charge your adult children a so-called ‘super death tax’. So this is why you need to cash your super before leaving it to a non-tax dependant.

Cashing Super

Cashing your super just means moving it out of the super environment. You do this by paying a member benefit to yourself – be it as a pension or a lump sum. 

A lump sum payment can be in cash. But a lump sum can also be in specie. So you don’t sell the asset, but transfer the title from the corporate trustee to yourself.

When To Cash In

But picking the right time to cash your super is not easy. Here are six factors to consider, some predictable, some impossible to predict.

# 1   Family Situation

While your children are little and your spouse alive, you have plenty of tax dependants. So you don’t need to worry about super death tax. You need to worry about life insurance.

But when your spouse has passed away and all your children are financially independent, then super death tax is an issue, since you no longer have any tax dependants.

# 2   Taxable Components

Your super consists of a tax-free and taxable component but either might be nil. 

If your entire super is in the tax-free component, you don’t need to worry about super death tax. None of your beneficiaries will pay any tax on your super. 

But if most or all of your super is in the taxable component, then a 30% tax rate for any untaxed and 15% for any taxed element looms large over your non-tax dependants.

# 3    Marginal Tax Rate

The higher your marginal tax rate, the more you save by leaving your super in your fund. If your marginal tax rate is 45% tax + 2% Medicare, then leave your super where it is as long as you can.

If you have no other income and your super earnings are under the tax-exempt threshold, then you pay no tax anyway – be it within super or outside of super. So then you might as well take it out.

# 4   Timing

It is difficult to get the timing right. If you cash your super too early, you might pay more tax outside of super than your beneficiaries pay in death tax.

But if you don’t cash your super before you die, you might waste part of your family’s legacy on super death tax. 

# 5   Capital Gains Tax

When you die, your SMSF must either sell the assets and then pay cash or transfer the title to pay in specie. Either way – sale or transfer – you are looking at a CGT event and hence a potential realised capital gain.

While you are alive and in pension phase, a realised capital gain isn’t an issue since your super is exempt from tax anyway. But once you are gone, a realised capital gain might result in a large tax bill for your children to deal with.

# 6    Fate

Call it fate, destiny, divine intervention or something else.  Accidents happen. Nobody knows how much time they have left.

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So these are six factors to consider to work out whether and when you should cash your super. If you get stuck, please email or call us. There might be a simple answer to your query.

 

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My Super When I Die

SMSF To Do List

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation

Minimum Pension Payments

Minimum Pension Payments

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When you start a pension, you need to make minimum pension payments. If you don’t, your SMSF loses its tax exempt status. So getting this right is important.

Minimum Pension Payments

Once you have started a pension, you need to withdraw a minimum amount each year. You calculate this minimum amount by applying a percentage to your pension account balance as of 1 July.

Percentage

This percentage is usually:

4% if you are under 65

5% if you are under 75

6% if you are under 80

7% if you are under 85

9% if you are under 90

11% if you are under 95

14% if you are 95 or older

But until 30 June 2022 these percentages have been cut in half to help you cope with the COVID-19 crisis. So at the moment you only need to withdraw:

2% if you are under 65

2.5% if you are under 75

3% if you are under 80

3.5% if you are under 85

4.5% if you are under 90

5.5% if you are under 95

7% if you are 95 or older

So these lower percentages to 2020/21 (1 July 2020 to 30 June 2021) as well as 2021/22 (1 July 2021 to 30 June 2022).

Purpose

Why a minimum pension payment? Why not just leave this up to you? The answer lies in the sole purpose in s62 SIS Act.

Superannuation is to provide for your retirement. It is not meant to be a tax effective vehicle of wealth transfer from one generation to the next. And so the legislator wants your super gone by the time you go. Hence the minimum pension payments.

Age

You take the age as of 1 July. How old were you on 1 July? This will determine the relevant percentage.

Member Account Balance

You apply the percentage to your member account balances in pension phase. Your account based pension balance (ABP). Not your total superannuation balance, which also includes accounts in accumulation phase.

And also not your transfer balance account (TBA). The TBA is about what you move into pension phase. Not about what happens after that. So investment earnings (or losses) and pension payments don’t affect your TBA. But they affect your ABP and hence your minimum pension withdrawals.

Date

If you started your pension before the 1 July, you use the balance as of 1 July. If it commenced during the year, you use the pension balance as of that date – the commencement date. So you need to determine your balance including investment earnings and losses as of that day. So most pensions start on 1 July. Saves you extra work.

Pro Rata

If the pension commences after 1 July, the minimum payment amount is calculated proportionately to the number of days remaining in the financial year, starting from the commencement day. Another reason why starting your pension on 1 July is less work.

Rounding

The minimum amount is rounded down to the nearest 10 whole dollars.

1 June

You don’t need to worry about minimum pension payments in a year if the pension commences in June of that year.

Below Minimum

What happens if you didn’t pay enough out during the year? You thought you had taken out plenty but as it turns out it wasn’t enough. What now? There is bad news and there is good news.

No Longer ECPI

The bad news is that you lose the pension status for that account. The super income stream for that account is taken to have ceased at the start of that income year for income tax purposes. So that pension account loses its ECPI status. ECPI stands for Exempt Current Pension Income.

Commute Back To Accumulation as of 1 July

So you need to commute that account based pension back to accumulation as of 1 July and hence pay tax on any income or capital gains during that income year. Any payments you made during the year from that account are super lump sum payments. And you need to report the commutation in any TBAR you lodge for that fund.

Commissioner’s Discretion

The good news is that there is a way out of all this. You might be able to apply the Commissioner’s discretion if you made an honest mistake or matters outside of your control prevented you from making the minimum pension payment.

But the honest mistake only counts as such if the shortfall is less than 1/12 of the minimum payment. 1/12 as in one payment of 12 monthly payments per year. And you need to make the catch-up payment as soon as you become aware of the shortfall. If you do that, your pension can keep its ECPI status and no need to commute.

Percentage

Going back to the list of percentages, can you see how the percentage accelerates? It starts with an increase of 1%, then 2% and then a jump by 3%.

And can you see how the intervals gets shorter? It first is 10 years and then increases to increments of 5 years. So your percentage will increase significantly as you age.  But at the same time your opening balance will decrease as you make payments, unless your investment returns exceed your pension payments. So whether your  pension payments increase or decrease from year to year depends on how this plays out.

Does all this make sense? Just call me if you have a question. My mobile number is 0407 909 779 – Heide. There might be a simple answer to your query.

 

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An edited version of this article is also published on the Tax Talks website for tax agents.

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation

what happens to my super when i die

My Super When I Die

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What happens to my super when I die? Did you ever ask yourself this question?

My Super When I Die

Your super is for your retirement. But what happens to the super you leave behind?

Compulsory Cashing

While you are alive, there is no requirement to cash your super.  When you meet a condition of release, you are free to cash it, but you don’t have to. You could just leave it all in accumulation and not touch a cent. Or move it to pension and only withdraw the minimum pension payments.

All this changes when you die. Your death is a compulsory cashing event – the only one in super. It means that the remaining balance in your member account needs to go somewhere – be it as a pension or a lump sum. Your super accounts can’t continue as if nothing happened.

Reg 6.21 SIS Reg: (1)  …a member’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies.

Benefit Payment

Other types of trusts distribute capital and income, but superannuation doesn’t make this distinction. Super funds – even though they are a type of trust fund – only pay benefits – be they member benefit or death benefit payments. 

While you are alive, your super is yours. Any super payments go to you. And so this is called a member benefit.

Once you have passed away, paying you is no longer an option. And so your super is paid to others. This is called a death benefit payment.

So there is a simple answer to your question, “What happens to my super when I die?” It will all be paid out as a death benefit.

But the tricky bit is who, how and when? The devil is in the details. There are 4 questions you need to ask to get an answer.

Question # 1    Who?

Who gets your super depends on six factors. Some outside of your control. Some within. 

1 –  SIS Act

The SIS Act sets the framework. Your super can only go to your SIS dependants or your estate. 

Your SIS dependants per s10 SIS Act are your spouse or de-facto spouse (but not a former spouse) and all of your children. No matter what age. As well as anybody in an interdependency relationship with you. An interdependency relationship means that you lived together and one depended on the other for practical support and care at the time of your death. 

And then there is one other group that qualifies as your SIS dependant, although not specifically mentioned in s10 – anybody financially dependent on you at the time of your death.

Your super goes to your SIS dependants and / or your estate. But to what extent – who gets how much  – the SIS Act doesn’t say. So you look further.

2 – Trust Deed

Every super fund has a deed. And this deed sets out what trustees can or can’t do with the super in their care.  A deed might allow or prohibit a reversionary pension, a binding or non-binding death benefit nomination or something else. Or it might be silent on any of these points.

A trust deed just says what COULD happen to your super. It doesn’t say this WILL happen. So you look further.

3 – Trustee’s Discretion

And then you might leave it at that. You might do nothing or make a non-binding death benefit nomination. Either way, you let the surviving trustees decide after your death – within the SIS Act and trust deed – who gets how much of your super.

4 – Specific Instructions

Or you take control.  You make your pension reversionary or sign a binding death benefit nomination – provided SIS Act and trust deed allow you to do so.

Making your pension reversionary means that your pension doesn’t stop upon your death but reverts to the reversionary beneficiary when you die.

A binding death benefit nomination will force the trustee to distribute your super as stipulated in the binding nomination,

5 – Testamentary Will

To the extent that your super ends up in your estate, it will only be distributed according to your wishes if you have a will that covers your super. If you don’t, then your legal personal representative (LPR) will decide who gets your super.

6 – Choice of Trustee

You can have the best legal set up in the world, possession is still 1/10th of the law.  If you don’t want somebody to get your super, don’t bring them into your SMSF.

Question # 2    How and When?

When you die, your super needs to go somewhere else. It usually gets cashed out as a lump sum, leaving the low-tax zone that super is – the legislator’s preferred option.

But under certain conditions your super can stay within the super environment and just move as a pension to another super account. The legislator doesn’t like this option one bit, so they put four measures in place that make it much harder to keep your super in the super zone.

1 – Selected Few

Only a selected few of your SIS dependants can receive their death benefit as a pension per reg 6.21 (2A) SISR and hence stay within the low-tax zone. Your spouse can. Anybody in an interdependency relationship with you can. Any of your minor or disabled children can. And any adult child under 25 and financially dependent on you can as well until they turn 25.

But your financially independent adult children can’t. They can only receive a death benefit lump sum from your super. And that means the assets leave the low-tax zone.

2 – Cap on Pensions

Pension accounts enjoy a 0% tax rate, but are capped at $1.6m – the transfer balance cap (TBC). So just because a SIS dependant qualifies to receive a death benefit pension from you doesn’t mean they can. 

Let’s say you started a reversionary pension on 1 July 2020 worth $1.6m and died that day. Your spouse  – with a transfer balance account (TBA) of $1m so far – receives your reversionary pension. To comply with the TBC, they can only credit $0.6m to their TBA and need to cash the remaining $1m.

3 –  No Accumulation

Whenever your super can’t move into a beneficiary’s pension account, it needs to be paid out. It can’t move into a beneficiary’s accumulation account. If it could, your super could stay there forever – passing from generation to generation – forever enjoying a low 15% tax rate in accumulation.

So in the example above, your spouse can’t move the excess $1m into accumulation, but needs to cash it out as a lump sum.

4 – No Mixing

To track compulsory cashing, you need to keep a death benefit pension separate from other pensions, so that means separate pension accounts.

Question # 3    How Much Tax?

There is no inheritance tax in Australia. But your non-tax dependants pay ‘super death tax’ on the taxable component of your super. How much depends on the following:

1 – Tax Dependants

Your spouse – including any former spouse – your children under 18 as well as anybody financially dependent or in an interdependency relationship with you are your tax dependants. Anybody else – including your financially independent adult children – are not.

2 – Taxable Components

Any super benefit consists of a tax-free and a taxable component. Tax-free components pass to beneficiaries tax-free. Taxable components trigger super death tax if paid to non-tax dependants, usually at 15%.

A taxable component consists of a taxed and an untaxed element. For most Australians the untaxed element is nil, but if it isn’t, it is taxed at 30%.  The rest – any taxed element – is taxed at 15%.

3 – Look Through Approach

Tax law applies a look-through approach.  Whether a beneficiary receives the death benefit directly (from your fund) or indirectly (via your estate) doesn’t change how the benefit is taxed. But it might affect whether the Medicare levy applies or not.

Question # 4   And Your SMSF?

If there is at least one other member, your SMSF will continue life as usual after you die. But if there isn’t, what then?

If your SMSF has no corporate trustee, then your SMSF will cease to exist once all assets are paid out.

If your SMSF does have a corporate trustee, then the loss of a director – even if you are the sole director – does not end a company and hence does not end your SMSF’s corporate trustee as such. But with no fund assets or beneficiaries left, the fiduciary relationship ends and your corporate trustee becomes an empty shell.

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So this is what happens to your super when you die. It is all in your hands if you want it to be.

If there are two things you take away from this article, please let it be this:

1 – If you want your super to go to your adult children, take it out of super before you die. If you don’t, your children will pay super death tax.

2 – Only do an SMSF with somebody you want your super to go to. It will save your intended beneficiaries a lot of headaches.

And one last thing in parting. You might hear the term ‘death benefit dependant’. This is the official term in s302-195 ITAA97 for a tax dependant. 

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SMSF Legal Framework

SMSF To Do List

 

Disclaimer: numba does not provide personal financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation

SMSF To Do List

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Here is a handy SMSF to do list so you can manage your SMSF from start to finish. A short bucket list for your SMSF.

SMSF To Do List

Your SMSF will go through different stages that will mirror your life cycle. Every stage has different hurdles to take. So here is a step by step SMSF to do list.

Step 1 – Set Up Your SMSF

Your SMSF is not a separate legal entity, but a fiduciary relationship – governed by a deed – between trustee and members about fund assets. So to establish your SMSF you need a deed, a trustee, members and fund assets.

# 1   Get a Deed

Your SMSF is only a fiduciary relationship, which your SMSF deed will govern.

# 2    Appoint Trustees

Your SMSF needs at least one trustee. You could choose individual trustees, but don’t. Go for a corporate trustee, ie a company. Every member must be a director of this company. And every director must be a member. 

# 3    Select Members 

Your SMSF needs at least one member but can have up to four (soon to be six). An SMSF member must not be the employee or employer of another member, unless they are related. 

Only choose fellow members you want your super to go to. So if you want your fund assets to go to your children of a previous marriage, don’t share an SMSF with your current spouse. 

# 4    Set Assets Aside

You get assets into your SMSF by making a contribution and / or transferring your super from another super fund to your SMSF. 

# 5    Write a Strategy

Every year, all members of your SMSF need to review and sign an investment strategy that takes each member’s risk profile into account. In this document you list your SMSF’s investment objectives, review the fund’s diversification, liquidity and solvency and decide whether to hold insurance within the fund. 

# 6    Get an ABN and TFN

Once your SMSF has been willed into existence, you need to get a TFN and ABN for your SMSF. Your corporate trustee will have received an ACN upon registration.

# 7   Sign Trustee Declarations

As a new trustee or trustee director, you need to sign your SMSF trustee declaration within 21 days of joining. In this form you confirm that you understand your duties and responsibilities as trustee. 

# 8    Stay in Australia

To receive concessional tax treatment as a complying super fund, your fund must  to be an Australian super fund (among other conditions). To be an Australian super fund, your SMSF must have its central management and control in Australia. And central management and control includes all trustees or trustee directors.

———–

Step 2 – Contribute to Your Fund

So now that your fund is established, it is time to accumulate funds. 

# 9    Mind the Cap

The annual caps for concessional and non-concessional contributions are $25,000 and $100,000 respectively – both subject to age and work test, and the later also subject to your total superannuation balance (TSB).

# 10    Use Current Cap Space Later

If your TSB is less than $500,000, you can carry unused concessional cap space into the next 5 years. 

# 11    Use Future Cap Space Now

If your TSB is less than $1.6m and you are under 65, you can contribute 3-years’ worth of non-concessional contributions in one year. So you can use this year’s cap plus the cap of the next two years all in one hit.

# 12    Track Your TSB

Simply speaking your total superannuation balance – TSB – is the total of your accumulation and pension accounts. It plays a central role – various concessions use it as a cut-off point. So track your TSB.

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Step 3 – Invest Fund Assets

Now is the time to invest your super. And there are strict rules about what you can and can’t do.

# 13    Avoid Mates Rates

Your SMSF is not allowed to make an investment per s109 (1) (a) SIS Act where the parties to the transaction are not dealing with each other at arm’s length.

# 14    Avoid Related Party Deals

Your SMSF is not allowed to acquire any assets from a related party – not even at arm’s length – unless the asset is either a listed security or business real property or the total of your in-house assets would not exceed 5% of the fund’s total assets.

# 15    Avoid Personal Use

You can invest in collectables and personal use assets – so-called ‘s62A items’ – such as artwork, jewellery, artefacts, coins, antiques, wine, cars, books and recreational boats. But you can’t allow a related party to use, lease or store them at their private residence per s62A SIS Act and s13.18AA SIS Regs. 

# 16    Avoid Loans to Members

Your SMSF is not allowed to lend money or provide other financial assistance to members or their relatives per s65 SIS Act .

# 17    Avoid Loans to SMSF

Per s67 SIS Act your SMSF is not allowed to borrow money for more than 90 days and even under 90 days only under very limited circumstances. But there is one way around. An LRBA.

# 18    Use an LRBA Instead

A limited recourse borrowing arrangements – LRBA – means that the geared asset is put into a bare trust. This way the lender only has recourse to that particular asset.

# 19    Have Sole Purpose

And above all else, maintain your SMSF solely for the purpose of providing retirement benefits to you or death benefits to your beneficiaries if you die. 

————

Step 4 – Access Your Super

Super is about saving for your retirement. And this means that you usually can’t access it until you do.

# 20    Meet a Condition of Release

While alive, you can only access your super upon meeting a condition of release. There are four general conditions of release linked to your age and your employment status. And then there are various special conditions of release, for example permanent disability, terminal illness or the first home buyer super scheme. 

# 21    Start a Pension

Starting a pension involves a bit of paper work. You need to request the pension as a member and then approve it as a trustee.

# 22    Track Your TBA

Your transfer balance account (TBA) tracks the amounts you move in and out of pension mode. Even if you are a member in various super funds, you only ever have one TBA. Your TBA can’t exceed $1.6m, the current TBC. 

# 23    Report Events

The ATO wants to track your TBA. For that purpose, you need to report any events that will result in a debit or credit to your TBA. Reportable events are the start of a new pension including a reversionary pension, LRBA payments, personal injury settlement payments as well as commutations.

# 24    Make Minimum Pension Payments

Once you start a pension, your SMSF must pay you a minimum pension amount each year. The amount is a percentage determined by your age and applied to the opening balance of your pension account. 

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Step 5 – Say Good Bye

One day you have to call it a day and say good-bye. You either cash out your super and close your SMSF. Or you let it ride to the end and then let your super assets pass to your dependents or otherwise your estate.

# 25    Identify SIS Dependents

Only your SIS dependants can receive your super directly from your super fund. Everybody else can receive your super, but only through your estate.

# 26    Determine Type of Death Benefit

Your super is usually paid out as a lump sum. But some SIS dependants can choose whether they want a lump sum or a death benefit pension. 

# 27    Identify Tax Dependants

Tax dependants receive all death benefits tax-free. Everybody else will pay tax on the taxable component. 

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Step 6 – Keep House

And then just some housekeeping rules that apply to your SMSF at all times, no matter at what stage in the SMSF life cycle you are at.

# 28     Lodge an Annual Return

Your SMSF needs to prepare and lodge its annual return by the due date. 

# 29    Get Audited

Your SMSF needs to get audited each year by an approved SMSF auditor, who is registered with ASIC. 

# 30    Tell the ATO

As an SMSF trustee you need to notify the ATO of any changes to trustees or trustee directors, members or contact details within 28 days.

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So this is your SMSF to do list. We didn’t think it would be this long. It is amazing how much there is. If you have a question, please reach out. We love to help.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation

SMSF legal framework

SMSF Legal Framework

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The SMSF legal framework doesn’t just include the SIS Act plus Regulations. There is a lot more to it. 

SMSF Legal Framework

SMSFs don’t live in a vacuum. If there was just one set of rules, being an SMSF trustee wouldn’t be so hard. But there is a lot more to it.

SIS Act and Regulations

It starts with the SIS Act and SIS Regulations. Or in full the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994. They do the heavy lifting for SMSFs.

They tell you when and how you meet a condition of release. How to calculate your minimum pension payments. How to run your SMSF.

Trust Law

But an SMSF is also a trust. And so is subject to trust law like any other trust.

Just like a ‘normal’ trust your SMSF is not a separate legal entity, but only a fiduciary relationship – governed by a deed and law – between the trustee and at least one named beneficiary (member) in relation to clearly defined trust property. 

Like any other trust, your SMSF can have one or more individual or corporate trustees.

And like any other trustee you are subject to trustee duties. So you must take reasonable care, adhere to the trust deed and give account. And you have a duty not to fetter your discretion, not to delegate and not to profit.

Different to a ‘Normal’ Trust

But an SMSF is also quite different to a ‘normal’ trust.

A SMSF pays income tax. A ‘normal’ trust doesn’t. Its beneficiaries and / or trustees do.

A SMSF can’t distribute before it meets a condition of release. In a ‘normal’ trust the trustee must distribute all income or otherwise be assessed at the top marginal rate.

Once in pension mode, a SMSF has to distribute a certain amount, so-called minimum pension payments, which might be more or less than its actual income. In a ‘normal’ trust, distributions are linked to income, nothing else.

In a SMSF must adhere to certain investment rules and can’t invest in whatever and however you like. In a ‘normal’ trust you can.

In a SMSF you need a written down strategy. In a ‘normal’ trust you don’t.

A SMSF has (concessional and non-concessional) contribution caps. A ‘normal’ trust doesn’t.

And so on. Do you get the gist?

Taxation Law

Your SMSF has to pay tax on its assessable income but to what extent is governed by the Income Tax Assessment Acts in conjunction with the SIS Act.

Corporation Law

If your SMSF has a corporate trustee, this corporate trustee will need to follow its constitution (or replaceable rules), comply with the Corporations Act 2001 and deal with ASIC – Australian Securities and Investments Commission.

Property Law

If your SMSF owns property, then you also need to comply with Australian property law. Most of this is state and territory based. So each state and territory has its own land title register as well as legislation regarding property and land title. 

Tenancy Law

If your SMSF rents out property, then there is the Competition and Consumer Act 2010 but the rest is state-based again, from your state or territory’s Residential Tenancy Acts to your state or territory’s Fair Trading Acts.

Family Law

And if you go through a marriage or relationship breakdown, then family law will have its fair share to say as well. Your SMSF will probably go into the joint asset pool and be split in one way or another. 

So this is why being an SMSF trustee is not an easy undertaking. There are a lot of moving parts.

Does this make sense so far? If you have a question, please email or call us. There might be a simple answer to your question.

 

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Units for SMSF Trustees

ATO Actions Against SMSF Trustees

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation

Penalty Units for SMSF Trustees

Penalty Units

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Penalty units for SMSF trustees can cost you dearly – up to $12,600 per trustee. 

Penalty Units for SMSF Trustees

As an SMSF trustee you need to follow certain rules. You need to comply with the SIS Act and SIS Regulations and everything that follows.

If you break these rules, the ATO as the SMSF regulator has 7 different actions at their disposal to force you into compliance. One measure is to hit you with administrative penalties. And these are all about penalty units.

Penalty Units

Penalty units – abbreviated as PU – are a concept that is neither new nor unique to superannuation. You can find penalty units across all statutory laws in Australia. 

The Commonwealth of Australia and the Australian states and territories each have their own PU system with a different value allocated to that unit and a different manner and frequency of adjusting this value.

Fines are calculated by multiplying the number of penalty units prescribed for the offence with the value of a penalty unit.

The advantage of using units rather than actual dollar values is that the law doesn’t need to be amended each time penalties are adjusted to inflation or for other reasons.

Instead the law just says x number of units. And the value of these penalty units is set outside of the actual law.

Federal Penalty Units

Federal penalty units only apply to federal offences. The SIS Act is a federal law and so any breaches of the SIS Act are subject to federal penalty units.

Since 1 July 2017, the value of a federal penalty unit has been $210. But this value will increase on 1 July 2020 and then every 3 years on 1 July after that to account for inflation. The increase will be indexed to the All Groups Consumer Price Index.

Not long ago a federal PU was still $170 (2014/15) and then $180 a year later (2015/16 and 2016/17). 

SIS Act

For any breaches of the SIS Act, ss166 SIS Act allocates penalties that range from 5 to 60 penalty units. The ATO refers to these as administrative penalties.

At currently $210 per unit, administrative penalties range from $1,050 (5 units) to $12,600 (60 units) per member. So if you have an SMSF with four individual trustees, you might look at a total penalty of 4 x $12,600 = $50,400.

Penalties

There are four mortal sins that will attract the highest penalty of 60 units. These are breaching the rules about lending in ss 65 (1), borrowing in ss 67 (1) and in-house assets in ss 84 (1) as well as failing to notify the ATO about significant adverse events in ss 106 (1). 

Anything else will be treated less harshly. Breaching operating standards in ss34 (1) SIS Act attracts 20 units. Failing to keep proper minutes and records or to inform the ATO about a change of trustees or directors will get you 10 units. And failing to comply with an education direction, failing to appoint an investment manager in writing or failing to provide required information to the ATO as the regulator of SMSFs will get you 5 units.

No Discretion

There is no discretion when it comes to applying these penalty units. Administrative penalties are automatically imposed as per s166 SIS Act.

If you breach a certain subsection of the SIS Act, you automatically receive the stipulated number of units set out in s166 for that subsection.

As an example, breaching the lending rules in ss65 (1) SIS Act by lending to members and relatives attracts a penalty of 60 PU. The ATO can’t say, “We give Peter 60, Paul 50 and Mary 10 PU.” The ATO has no such discretion. If Peter, Paul and Mary breach the lending rules in ss 65 (1), they receive 60 units each. Not more and not less. End of story.

Remission

Where the ATO has discretion is in the remission of these penalties. This is where they can look at individual circumstances and exercise discretion.

A good compliance history and immediate action to remedy the breach will increase your chances that the ATO remits your penalties. Even more if you have a reasonable explanation how the problem occurred.

But don’t count on a remission in serious or frequent cases of non-compliance.

Combination of Measures

The ATO often combines administrative penalties with other measures like education or rectification directions or the issue of a non-compliance notice. So they fine you and then get you to clean up the mess. 

Each Trustee

Each trustee might be subject to a fine. Be it the corporate trustee or individual trustees. 

And this is one of the many arguments for a corporate trustee. Because if your SMSF has individual trustees, then each trustee cops the full fine.

Let’s say your SMSF with four individual trustees breached the borrowing rules in ss 67 (1). So each of you gets a $12,600 fine, meaning a total penalty of 4 x $12,600 = $50,400.

If you a have a corporate trustee, one penalty of $12,600 is levied on the company. Each director is jointly and severally liable to pay that penalty but it is only one penalty, not four.

Not from SMSF Assets

You can’t pay the administrative penalties from SMSF assets since the penalties are imposed on the SMSF trustee directly.

As an individual trustee you need to pay the penalties from your personal savings. For a corporate trustee each director is jointly and severally liable.

ATO

The ATO’s compliance philosophy is to prevent rather than correct. They want to support you as SMSF trustees to establish and maintain good compliance from the start. Getting you to do the right thing from the start is much easier for all involved than to wield the heavy stick later on.

Units v Points

You might have heard of penalty points instead of units. Same thing. Statutory law uses the term ‘units’ but the SMSF community often talks of ‘points’.

Adverse Tax Consequences

Sometimes penalty units are just the side show. The real issue is often the tax treatment you face as a result of a breach. 

Take a non-arm’t length acquisition of assets as an example. If you acquire an asset at non-arm’s length, then all income from this asset, including the subsequent capital gain is treated as non-arm’s length income and taxed at the top marginal tax rate (45%). This might cost you millions of dollars, but definitely a lot more than the 60 penalty unit you might get.

So don’t just look at penalty units or points. Always consider the resulting tax treatment as well.

Does all this make sense? If you have a question, please call or email us. There might be a simple answer to your question.

 

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Preservation Age

ATO Actions Against SMSF Trustees

Commonwealth Seniors Health Card

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation.

ato actions against SMSF trustees

ATO Actions Against SMSF Trustees

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ATO actions against SMSF trustees won’t affect you as an SMSF trustee until you run into trouble. Either intentionally or by mistake.

ATO Actions Against SMSF Trustees

At the start having your own SMSF sounds wonderful. It will be your own. You will be the one running the show. 

But an SMSF also comes with a ton of responsibilities… and tough ATO actions when you don’t meet these.  As an SMSF trustee you can be subject to 7 different ATO actions. 

1 – Administrative Penalties
2 – Rectification Directions
3 – Education Directions
4 – Civil Penalties
5 – Criminal Penalties
6 – Disqualification of SMSF Trustees
7 – Notice of Non-Compliance

The worst one is probably a notice of non-compliance (# 7) since your SMSF looses all tax concessions. But let’s look at these one by one.

1 – Administrative Penalties

Administrative penalties are measured in penalty units. Per s166 SIS Act penalties can range from 5 up to 60 penalty units. A penalty unit is currently $210. So the maximum penalty of 60 penalty units would add up to $12,600 per trustee.

If your SMSF has four individual trustees, this would mean a maximum penalty of $50,400 – one of many arguments against individual trustees. 

When you have a corporate trustee, the ATO can only issue one penalty notice. So the maximum penalty would be $12,600 – another argument for a corporate trustee.

Be it individual or corporate trustee – you can’t pay these penalties from SMSF assets. Instead you must pay these out of your own pocket. 

While the ATO has no discretion in administering these penalties – they are what they are – the ATO can remit these penalties, either partially or in full. You can fight the ATO on this though and take them to court.

2  –  Rectification Directions

The ATO can order you to fix the problem. They can require you to undertake specified action to rectify the contravention and show evidence that you have actually done that within a specified time frame.

And they can ask you to outline the arrangements you have put in place to ensure all this won’t happen again.

If you don’t think the ATO’s direction makes any sense, you can ask for a variation of a rectification direction in writing before the specified date. You must date and sign the request and most importantly you must outline why you request this variation. If the ATO refuses to vary their direction, you can object. 

A good way to avoid a rectification order is to give the ATO an enforceable undertaking. So rather than you waiting for the ATO to tell you to fix the problem. You are proactive and tell the ATO how you will fix it. The ATO usually welcomes such initiative.

3 – Education Directions

If the ATO suspects that you might lack knowledge and understanding of your responsibilites as a trustee, they can ask you to attend a course to help you better understand your obligations as an SMSF trustee. They call this an ‘education direction’.

Such an education direction will ask you to undertake an ‘approved course’ within a specified time frame. And show evidence that you actually completed the course.

Some of these courses are free, but if you do a fee-paying course, you will need to pay for this out of your own pocket and not from SMSF funds.

And you will be required to re-sign your SMSF trustee declaration to confirm that you understand your obligations and duties as a trustee.

An education direction seldom comes alone. The ATO will usually combine an education direction with a rectification direction and / or an administrative penalty.

Under the law, all trustees are treated as if they were aware of the SIS Act and Regulations. No matter whether this is actually the case or not. So you can’t use lack of knowledge as a defence. “Sorry I didn’t know” is not a valid defence, unfortunately.

4  – Civil Penalties

If you thought, administrative penalties were harsh. Wait for civil and criminal penalties. These are even tougher.

If you contravene a civil penalty provision, a court can make a civil penalty order gainst you under s196 SIS Act. The maximum civil penalty is currently 2,000 penalty units, which translates to $420,000 (at $210 per penalty unit), as defined in section 4AA of the Crimes Act 1914.

5  – Criminal Penalties

The ATO can impose criminal sanctions – and not just on SMSF trustees but also on others. For example on promoters of illegal early access super schemes. 

6 –  Disqualification of SMSF Trustee

The ATO can disqualify you as an SMSF trustee if they no longer see you as a fit and proper person. If they are concerned with your actions or your suitability as a trustee.

Declaring you not to be a fit and proper person is a big thing though. And so disqualification will only ever happen after weighing up the seriousness and frequency of your contraventions and the likelihood of you re-offending

7 – Notice of Non-Compliance

In the case of a serious breach of the SIS Act, the ATO can issue a notice of non-compliance. Your SMSF will then remain non-compliant until you receive a notice of compliance.

Your now non-complying superannuation fund will lose its concessional tax treatment and that can result in a large tax bill.

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So given all this it really pays to seek help early. Please write or give us a call if you get stuck.

“A sum can be put right: but only by going back till you find the error and working it afresh from that point, never by simply going on.”
C.S. Lewis

 

MORE

Seniors Card

Retirement Age

Penalty Units for SMSF Trustees

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation.

senior card

Seniors Card

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As you reach your sixties you might qualify for one of the best deals around – your state government’s Seniors Card.

Seniors Card

With a senior card you will qualify for concessional fares on public transport as well as other discounts from participating businesses.

Concessions

The most important feature of a Seniors Card is that it gives you access to concessional fares on public transport.

There might be other state government concessions like discounted entries to National Parks, museums and so on. But the nature of these concessions vary from state to state and territory.

And then there are the discounts that private businesses might offer you when you present a Seniors Card. They don’t have to. But many do, especially in relation to travel, hospitality, insurance and commodities. Check the online directory in your state or territory listing local deals and discounts.  

Eligibility

How to qualify for the card varies from state to state and territory. 

To be eligible you need to be 65 years in Queensland, 62 to 65 in Western Australia depending on your date of birth and at least 60 years in all other states and territories. 

You must be a resident with an official address in that state or territory.

You can still work in paid employment while holding a seniors card, so you don’t have to retire to qualify. But all states and territories set a limit on the number of hours you can undertake paid work and still qualify.

This number is set per week and averaged over 12 months, but varies widely across Australia. In NSW, ACT, Tasmania and South Australia it is 20 hours per week. Western Australia draws the line at 25 hours. In Victoria and QLD you can work for up to 35 hours.

The Seniors Card is not means-tested. And this is important. You might live in a mansion with water views and have money coming out of your ears, and still qualify for discounts.

Application

You usually apply online with your green Medicare Card or over the phone. 

Victoria, Western Australia and Queensland also offer a paper form application.

In Queensland and ACT you can apply in person at government service centres. In Western Australia and South Australia you apply at an Australia Post outlet and in Tasmania a Service Tasmania shop will help you.

What to provide with your application differs slightly from state to state but you usually need to provide proof of identity, age and address. 

Travelling

Many places in Australia will give interstate seniors with an interstate Seniors Card the same concessions as local seniors with the a local Seniors Card.

The same applies to many places overseas. So always take your Seniors Card with you when you travel.

Validity

The cards don’t have an expiry date. Once you receive a Seniors Card, it is valid for a lifetime. So there is no need to renew the card.

The card lists your name, is not transferable and can be replaced if damaged, lost or stolen. 

More Information

Each state and territory provides online information about their Seniors Card program. Their websites will give you up-to-date information about eligibility, application and concessions. We have listed the links here:

New South Wales – Victoria – Queensland – Western Australia – South Australia – Tasmania – ACT – Northern Territory

Senior Business Discount Card

All states and territories offer a Seniors Card, but only Victoria and Queensland offer a Senior Business Discount Card. 

A Senior Business Discount Card is not as good as a Senior Card. It offers less. And so you would only apply for a Senior Business Discount Card if you don’t qualify for a Seniors Card.

But it still is pretty good given that thousands of business outlets in Victoria and Queensland will offer you free deals or discounts on the Discount Card.

If you have any questions, please reach out to us. There might be a simple answer to your query.

 

MORE

Preservation Age

Retirement Age

Commonwealth Seniors Health Card

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation.