Super Death Tax

Super Death Tax

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There is no inheritance tax in Australia. But there is super death tax.

Super Death Tax

Super death tax can be a nasty surprise for your family when they are at their most vulnerable. So best to be avoided.

Who Gets Your Super

When you die, you leave your super behind. Your left-over super goes to your SIS dependants or your estate. That’s it. SIS dependants or estate. We cover all this in Who Gets My Super. 

Once this is clear, the next issue rears its head – tax.

How Much Tax

Your super might not arrive alone. It might arrive with a hefty tax bill in tow. The dreaded super death tax. To understand super death tax, you need to remember one thing. Your super had a good run. Tax deductions for contributions and a 15% or 0% tax rate. That is a pretty good deal.

The legislator did all this to help you fund your retirement. And to help those dependent on you. But now that you are no more, the legislator wants those tax concessions back for the super you left behind. Your non-tax dependants are not deemed worthy of these concessions. 

The argument is that outside of super you would have paid an average 30% tax, not 0% or 15%. And so your left over taxable components going to non-tax dependants get hit with a top up.  Top up back to 30% plus Medicare. This top up is the dreaded super death tax. How badly it hits depends on four factors.

1 – Tax Dependancy

When your super goes to tax dependants as a lump sum – no super death. Your tax dependants depended on you and now your super is all they got.  So the legislator goes easy on them. No tax. They will get every cent of your super.

But everybody else – any non-tax dependant – pays super death tax. But who is a tax dependant and who isn’t?  

Your spouse and your children under 18 are your tax dependants. Anybody financially dependant on you or living with you in an interdependency relationship qualifies as your tax dependant as well. And this can include your adult children per ATO ID 2014/22.

By the way, the official term is ‘death benefits dependant’ per s302-195 ITAA97, but that is too long and so everybody just says ‘tax dependant’.

2 – Super Components

Your super consists of a tax-free and a taxable component.  We cover all this in Super Components. 

Your tax-free component won’t trigger any tax – tax dependant or not – ever. You paid your non-concessional contributions out of after tax income. So there won’t be another tax charge.

But your taxable component does trigger super death tax when paid to non-tax dependants. 15% for any taxed element and 30% for any untaxed element, both plus 2% Medicare levy. 

3 – Type of Payment

Your super needs to go when you go. And so it either leaves the super environment straight away as a lump sum. Or it goes into somebody else’s super account as a pension. Different rules apply to either.

The tax treatment of a lump sum depends on whether a recipient is a tax dependant or not. Tax dependants pay no death tax. Everybody else only gets the tax-free component tax-free, but pays super death tax on the taxable component – 15% for a taxed and 30% for a tax-free element.

The tax treatment of a pension on the other hand doesn’t depend on tax dependancy. Anybody receiving a pension is a tax dependant anyway since the rules overlap. It also doesn’t matter whether it is a reversionary or death benefit pension. The tax treatment is the same. For a pension it is all about age – how old is the beneficiary now? How old was the deceased at the time of death?

Both 60 or over – no tax. One of them 60 or over – no tax. Both of them under 60 – super death tax on the taxable component, but only until the beneficiary turns 60. 

4 – Medicare Levy

Whether or not the 2% Medicare levy applies on top of a 15% or 30% tax rate depends on how the death benefit is paid.

If it comes directly from your super fund, the 2% Medicare levy applies. If it comes via your estate, the levy doesn’t apply. This little detail can easily cost your adult child $20,000 on a $1m lump sum death benefit.

So these are the 4 factors that determine how much super death tax your beneficiaries pay when they receive your super.

Does all this make sense? Just call me if it doesn’t. There might be a simple answer to your query. 

 

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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.

Super Fund

Super Fund

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Think of a super fund like a piggy bank. 

What is a Super Fund

The coins inside are your super. The piggy bank is your super fund. That is what it basically is. Except that a super fund is not limited to cash. And is a separate entity – a fund – rather than porcelain on your window sill, but the concept is the same.

Keep Safe

Putting your super into a separate entity – a fund – is to keep it safe – mainly from you. 

Imagine your rent is overdue, but you are broke. Would you use your super to pay the landlord if you could? Of course you would. At least most of us would. You take the money – not forever of course – you will pay it back next week. A week passes and you are still broke. A month. Three months – still broke. Your super is gone. 

To prevent this from happening, your super sits in a separate fund.

Fund Types

The fund holding your super could be an industry or retail fund. In these funds others manage and invest your super.

Officially, there are also government and corporate funds, but these tend to be a thing of the past. Too much of a headache for the companies and governments involved.

So industry and retail funds it is. These funds give you a few investment choices and then send you a statement every six months. The fee they charge for these services – a percentage of your super balance – will have already been taken from your super. 

But there is one more option you have. You could set up your own fund and manage your own super. This is called a self managed superannuation fund or SMSF for short. 

Trust

Whatever type of super fund you choose, a super fund is always a trust. This means five things. Just like a ‘normal’ trust your SMSF is

1 – Not a separate legal entity;
2 – Only a fiduciary relationship;
3 – Between trustee and at least one name beneficiary (‘member’);
4 – With respect to clearly defined trust property;
5 – Governed by a deed and law.

And like any other trust the SMSF trustee can be one or more individuals or companies. The later is referred to as corporate trustee.

Different to a Trust

But an SMSF is also quite different to a ‘normal’ trust in seven distinctive ways. An SMSF

1 – Pays income tax;
2 – Requires a condition of release to distribute;
3 – Distinguishes between accumulation and pension mode;
4 – For a pension must distribute a fraction of net assets, irrespective of income;
5 – Must follow investment rules;
6 – Requires an investment strategy;
7 – Has contribution caps.

A ‘normal’ trust doesn’t have or do any of these. And a ‘normal’ trust doesn’t refer to its beneficiaries as members.

Trustee

Like any ‘normal’ trust, a super fund has a trustee – at least one trustee, but it could be more than one. And like any other trust, this trustee can be an individual or company. If the trustee is a company – preferably a special purpose company – it is referred to as a corporate trustee.

The trustee is the entity who actually owns the asset – legally. So the trustee is the one whose name is on the bank statement, share certificate, land register and so on. 

The trustee is also the one who acts, manages and decides. The trustee receives your contributions and pays your pension. It is the trustee you write to when you want to start or commute a pension or cash it all out.

If you have a SMSF,  you are the trustee. In an SMSF each member must be a trustee – by law – either an individual trustee or the director of a corporate trustee.

A non-member can’t be a trustee  – with two exceptions. If you lose capacity, your LPR will step into your shoes as trustee. And if your SMSF only has you as individual trustee, then another individual has to join you as trustee.

Members

In a super fund beneficiaries are referred to as members. As a member you hold the beneficial ownership of the assets without being the legal owner. This means the assets have to benefit you as the member.

If you have an SMSF, you are a trustee as well as a member. This means that you will often write as a member to yourself as trustee. 

Legislation

A super fund has to follow many rules, but these three are crucial:

Superannuation Industry (Supervision) Act 1993 (‘SIS Act’)
Superannuation Industry (Supervision) Regulation 1994 (‘SIS Regs’)
Income Tax Assessment Act 1997  (‘ITAA97’).

The SIS act sets out the road map. The SIS regulations fill out the details. And the ITAA97 stipulates how all this is taxed. 

Regulator

All super funds have a regulator. The regulator is like an umpire making sure everybody plays by the rules. Handing out yellow and red cards when they don’t.

The regulator for SMSFs is the Australian Taxation Office (ATO). For all other funds it is the Australian Prudential Regulation Authority (APRA).

Regulated Superannuation Funds

Being a regulated super fund just means that the trustee has decided to play by the rules. The trustee has declared that the SIS Act and SIS Regulations are to apply to the fund. This is all it takes to become a regulated superannuation fund.

But being a regulated super fund doesn’t really mean anything. It just says that you want to comply.

Complying Superannuation Funds

What does mean something is being a complying superannuation fund. That will make a difference. Now you don’t just say that you want to comply. You actually do comply.

A complying super fund is a fund per ss42 and 42A SIS Act that complies with all relevant rules of the SIS Act and SIS Regulations. A fund is also a complying fund if the regulator has told them so in a compliance notice.

Once your super fund qualifies as a complying fund, two things happen. Your super fund:

1 – Can receive super guarantee (SG) contributions. Super guarantee is the 9.5% super your employer pays for you into a super fund of your choice.

2 – Qualifies for concessional tax treatment.

A non-complying fund on the other hand can’t receive SG contributions and doesn’t qualify for lower tax rates. 

Being a complying fund is not forever. If a fund breaks the rules, it can lose that status again. 

Financial Product

Your super – officially called ‘an interest in a superannuation fund’ in the Financial Services Reform Act 2001 – is a financial product. This means that only somebody with an AFS licence – Australian Financial Services Licence – is allowed to tell you what to do with it. 

Only somebody with an AFSL is allowed to tell you whether to make a contribution, split contributions with your spouse, take benefits as a lump sum or pension, make a binding death benefit nomination and so on. 

But there is a difference between telling you what to do and just giving you the facts. Telling you what to do requires an AFS licence. Just giving you the facts – explaining the rules of the game – doesn’t.

And by the way – since 1 July 2016 – accountants no longer have a so-called accountants exemption.

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So this is a short summary of what your super fund is about. If you get stuck, please email or call us. There might be s simple answer to your query.

 

MORE

How Super Rules Change with Age

SIS Contribution Rules

Super Contributions

 

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.

How Super Rules Change with Age

How Super Rules Change

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Some super rules change with age – some don’t.

How Super Rules Change with Age

The rules around superannuation are confusing. And one of the reasons for that is that some change as you age and some don’t. Here are 9 rules that change and 9 that don’t.

Super Rules Not Affected by Age

Not everything changes as you age. Some super rules stay the same from birth to death. They are not affected by age, neither yours nor anybody else’s.

1 – Tax Rates 

Your tax rates within super don’t change – no matter your age. You will always pay 15% tax on accumulation and 0% on pension within super.

2 – Tax Free

Your tax-free components will always be tax-free irrespective of age. Neither you nor any beneficiary will ever pay tax on tax free-components.

3 – Contributions

The rules around government co-contributions as well as spouse contributions apply irrespective of your age.

4 – Investment Rules

The rules around what your fund is allowed to invest your super in don’t change with age.

5 – Special Conditions of Release

Your age has no bearing on whether you meet a special condition of release like terminal illness, disability or financial hardship.

6 – Transfer Balance Cap

Your transfer balance cap and account is not affected by your age. Whether you can start a pension might depend on your age, but the amount doesn’t.

7  – SIS Dependants

SIS dependancy doesn’t depend on age. Whether you qualify as a SIS dependant or not has nothing to do with how old you are.

8  – Tax Dependants

Your tax dependancy doesn’t depend on your age as long as you are not a child of the deceased. 

9  – Administration

The rules around the administration of your fund – annual audit, annual return, TBAR reporting etc – are not affected by your age. 

Super Rules Affected By Age

What worries our lawmaker while you are young no longer worries them when you are old. And vice versa. And so many super rules change with age.

1  – Personal Contributions

Between 65 and 74 you must pass the work test to make personal contributions. Once you hit 75, the door is closed apart from SG and downsizer contributions.

2 –  Concessional Contributions

While a minor, your super can’t receive personal concessional contributions unless you run a business. Once you turn 18, the door is all open.

3 – Downsizer Contributions

You can only make downsizer contributions once you are aged 65 or more. 

4  – Superannuation Guarantee

Under 18 you have to work at least 30 hours per week and earn at least $450 per month to get the super guarantee. Once 18, only the $450 threshold applies.

5 – General Conditions of Release

General conditions of release depend on your age. Preservation age, turning 60 and 65 are important trigger points.

6 – Minimum Pension Payments

Your minimum pension payment percentage steadily increases with age. It starts at 4% under 65 and increase to 14% when 95 or older.

7 – Taxable Components of Benefit Payments

If you access your super before you turn 60, you pay tax on any taxable component. Once 60, any benefit payment to you is tax-free.

8 – Child Dependancy

While under 18, being somebody’s child automatically makes you a tax dependant and eligible for a death benefit pension. Past 18 it doesn’t. 

9 – Death Benefit Pension

A death benefit pension is tax-free when the deceased at the time of death and/or the beneficiary are 60 or older. It isn’t, while both are under 60.

So this is a short overview of how super rules change with age. If you get stuck, please email or call us. There might be a simple answer to your query.

 

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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.

SIS Contribution Rules

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If you want your SMSF to enjoy concessional tax treatment, make sure it complies with the SIS contribution rules. 

SIS Contribution Rules

The SIS contribution rules tell you what contributions your SMSF can or can’t accept. If you fall foul of these rules, the penalties are tough. Your entire fund will loose its concessional tax treatment. Not just a specific transaction but the entire fund. So it is important to get this right.

When it comes to contributions into super funds, there are two hurdles to take. Two sets of rules to comply with. The SIS contribution rules and then the tax contribution rules.

SIS Contribution Rules

The SIS contribution rules are about whether the fund is even allowed to accept a specific contribution. Reg 7.04 SIS Regulations will tell you that.

Any contributions that don’t meet the conditions of Reg 7.04 need to go back to where they came from. If they don’t, all hell will break lose. Your entire SMSF will loose its concessional tax treatment with all fund income taxed at the top marginal rate.

Only if a contribution has passed this first hurdle – the fund is allowed to accept it – do you even need to worry about the tax contribution rules.

Tax Contribution Rules

The tax contribution rules – the second set of rules – sit in ITAA97. These rules will tell you how to treat a contribution for tax purposes, once it has been accepted. Any contributions that exceed the caps, work tests and age limits in ITAA97 are likely to trigger additional tax.

But these rules are a lot more gentle. Penalties will only affect the specific contribution at your marginal tax rate. Not your entire fund at the top marginal tax rate. Big difference.

So in this article let’s focus on the tough ones – the SIS contributions rules Which contributions is your SMSF allowed to even accept? What are acceptable super contributions per reg 7.04 SIS Regulations?

Reg 7.04

Reg 7.04 lists what contributions a super fund can and can’t accept. It is very black and white. A contribution is either ok or it is not ok. If a contribution doesn’t meet the conditions set out in reg 7.04, the contribution needs to go back to where it came from.

Compliance with reg 7.04 means that your SMSF maintains its status as a complying super fund and concessional tax treatment. It means your SMSF doesn’t have to tax all income at the top marginal rate. So making sure you comply with reg 7.04 is worth the effort.

Mandated Employer Contributions

No matter your age, your super fund must accept any mandated employer contributions. For this you can thank Dr Ken Henry who led the Henry tax review published in 2010.

Mandated employer contributions are defined in reg 5.01 (1). Usually they just include the 9.5% superannuation guarantee (SG) payments your employer has to pay. But sometimes your employer also has to pay you super through an award or agreement. Your fund has to accept all of these as mandated employer contributions.

SuperStream is to better capture and track mandated employer contributions.

Voluntary Contributions

In addition to mandated employer contributions, your super fund might receive voluntary contributions. Your employer might voluntarily pay you additional super. Or you personally make member contributions as defined in reg 5.01 (1).

This is where it gets tricky. Whether your super fund has permission to receive these contributions depends on your age and employment status. Beside that make sure your fund has your tax file number (TFN), since it can only accept your member contributions per 7.04(2) SIS Regulations, if it does.

Under 65

As long as you are under 65 as of 1 July of the relevant financial year, all this is easy. Your super fund can accept any concessional contributions. It can also accept any non-concessional contributions within the 3-year-bring-forward rule.

Per SIS reg 7.04 (3) your fund can accept non-concessional contributions up to three times the non-concessional contributions cap per s292 -85(2) ITAA97 and reg 7.04 (7) SIS Regulations, but not more. This is the 3-year-bring-forward-rule. The current non-concessional contributions gap is $100,000, so the three-year-forward rule allows contributions of up to $300,000 over a period of three years.

65 to 75

Between 65 to 75 voluntary contributions get more tricky. Still possible, but trickier. And when we say 75, we mean 28 days past the month you turn 75.

Your fund can only accept additional contributions if you are gainfully employed on at least a part-time basis during the financial year in which the contributions are made. The three-year-bring-forward rule no longer applies, so non-concessional contributions are limited to $100,000 per year.

You are “gainfully employed on a part-time basis during a financial year” per reg 7.01(3) SIS Regulations if your are gainfully employed for at least 40 hours in a period of not more that 30 consecutive days in that financial year. This roughly equals to 10 hours per week.

75 and Older

Once you have passed the 28th day of the month that follows the month you turned 75, the door is closed. No more additional contributions. Any additional super paid into your fund needs to go back to where it came from.

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So this is what the SIS contribution rules are about. If you get stuck, please just email or call. There might be a simple solution to your problem.

 

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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.

Super Contributions

Super Contributions

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You can contribute to your super – but how much and when depends.  Super contributions come with a lot of strings attached.

Super Contributions

There are three ways to grow your super:

1 – Contributions;
2 – Investment income;
3 – Transfers from another super account.

Investment income and transfers are relatively straight forward. They are what they are. Just make sure the investment income is at-arm’s-length.

But contributions come with a lot of ifs and whens. There is a mandatory and a voluntary part. Contributions are either concessional or non-concessional. And there are caps, work-tests and age limits.

Mandatory Contributions

It is mandatory for your employer to make minimum superannuation contributions on your behalf whenever they pay you $450 or more (before tax) in a calendar month. This is the superannuation guarantee (SG).

And it applies to all adult employees – full-time, part-time or casual – no matter your age with two exceptions.  While under 18, you must work more than 30 hours per week in addition to the $450 before you qualify. The same applies if you work in a domestic setting, for example as a cleaner or nanny.

The current SG rate is 9.5% but set to increase by 0.5% increments until it hits 12% from 1 July 2025 onwards.

Your employer has to pay 9.5% of what you usually earn each month, so your salary for your usual hours of work plus anything extra you usually get – for example commission, bonus, shift loadings or allowances. The official term is ordinary times earnings (OTE). Your OTE doesn’t include overtime.

Your SG entitlement is capped at $5,250.65 per quarter for 2019/20, equivalent to an OTE of $55,270. This is the maximum super contribution base (MSCB). Even if you earn significantly more, your employer only has to pay super up to the MSCB.

If your employer doesn’t pay your SG on time, they have to pay the superannuation guarantee charge (SGC) which consists of your SG payments plus penalties and interest.

Your employer’s SG payments count as a concessional contribution and so trigger a 15% contribution tax upon arrival in your super fund.

Voluntary Contributions

In addition to your employer’s SG payments, you can make additional contributions into super. You don’t have to, but you can. Voluntary contributions are also referred to as personal contributions.

They can be in cash or in-specie. A cash contribution is just a bank transfer. An in-specie contribution is when you transfer ownership of an asset. In-specie contributions are usually limited to SMSFs. Government, industry and retail funds are unlikely to accept in-specie contributions. 

Once you hit 65, you can only make voluntary contributions, if you work at least 10 hours per week, averaged over 30 consecutive days. So over 30 consecutive days you must work at least 40 hours. This is the dreaded super work test.

Once you hit 75, you can’t make any more voluntary contributions – even if you pass the work test – apart from the down-sizer contributions. 

Voluntary contributions are either concessional or non-concessional contributions.

Concessional Contributions

You can contribute up to $25,000 each year before-tax. Before-tax means that somebody claims a tax deduction, either you or your employer. This is called a concessional contribution.

Your employer’s SG payments count towards this cap, but you can use up any remaining cap space with additional personal contributions and claim a tax deduction. If you don’t use up the cap space in one year, you can use it over the following five years as long as your TSB is below $500,000.

Any concessional contributions will trigger a 15% contribution tax upon arrival within your super fund. If your total income plus super contributions exceed $250,000, then your concessional contributions will trigger an additional 15% Div 293 tax.

Non-Concessional Contributions

You can contribute up to $100,000 each year after-tax. After-tax means that neither you nor your employer claim a tax deduction, so this is called a non-concessional contribution.

Spouse contributions you receive count as non-concessional since they trigger a tax offset but not a tax deduction as such.

If you want, you can contribute 3-years’ worth of contributions in one hit. So instead of contributing $100,000 each year, you could contribute more in one year and then contribute less in the following two years, so that all up you don’t contribute more than $300,000 over 3 years.

Once your total superannuation balance (TSB) – so everything you have in super – hits $1.6m, you can’t make any more non-concessional contributions.

Non-concessional contributions don’t trigger any tax upon arrival in your super funds. 

So this is a short overview of what you can contribution when and how. If you get stuck, please call or email us. There might be a simple answer to your query.

 

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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.

superannuation

Superannuation

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Superannuation is for your retirement. You pay less tax to save more for later.

Superannuation

When you are old and no longer work, you hopefully have enough savings, superannuation or the age pension to live comfortably. But will you?

Saving for your retirement is tough – low wage growth, high marginal tax rates, HELP/HECS debt, mortgage, young kids, you name it – and so you probably won’t get far with this one.

Qualifying for the age pension is also tough and likely to get worse, since our current system is not financially sustainable for generations to come.

And so that means your super is all you will have left – unless you want to rely on family and friends, charity and welfare or crime and begging.

That is a lot of heavy lifting for your super to do. And so there are tax concessions to help you.

Less Tax

Your super comes with three tax concessions. You pay 15% tax on any income within super while in accumulation, 0% tax within super while in pension and 0% tax when you cash your super past 60 or 65 years of age.

This is what super is about. If these tax concessions didn’t exist, very few would consider contributing more than they absolutely have to.

Super Rules

Super comes with nice tax concessions, but also with not-so-nice strings attached. Especially four areas have the legislator’s full attention. How much goes into your super. What happens inside. How much moves into pension mode. And how much comes out. 

How Much Goes In

What goes into your super is called a contribution. There is a mandatory and a voluntary part. The mandatory part affects your employer. The voluntary part just you. 

It is mandatory for your employer to pay a superannuation guarantee (SG) on your behalf whenever they pay you $450 or more (before tax) in a calendar month. The current SG rate of 9.5% is applied to your ordinary earnings capped at the maximum super contribution base, which is $55,270 per quarter in 2019/20. These payments count as concessional contributions.

In addition to your employer’s SG payments, you can voluntarily make additional contributions into super (before-tax or after-tax) as long as you are below 65. Between 65 and 75 you can make voluntary contributions if you work at least 10 hours per week. 

Before-tax means that somebody receives a tax deduction – this is called a concessional contribution. Your concessional contribution is capped at $25,000 per year and triggers 15% or 30% tax upon arrival in your super fund.

After-tax means no tax deduction – so this is a non-concessional contribution. Your non-concessional contribution is capped at $100,000 per year and only possible while your superannuation balance (TSB) – so everything you have in super – is below $1.6m. Non-concessional contributions don’t trigger any tax upon arrival in your super fund.

What Happens Inside

What happens inside is all about investment rules. Your super is yours but you can’t do with it whatever you want. There are six rules that are to protect your super – from you and your Part 8 associates. They are especially relevant for self-managed super funds (SMSF) since an SMSF gives you plenty of opportunity for chummy deals with your mates.

You must pass the sole purpose test and act at arm’s length. You must keep in-house assets below 5% of total assets.  And you must neither acquire assets from related parties, nor acquire or hold assets for personal use, nor borrow money unless it is through a limited recourse borrowing arrangement (LRBA).

How Much Moves Into Pension Mode

How much moves into pension mode is all about transfer balance accounts and caps. Since funds in pension mode enjoy 0% tax, there is a cap on how much you can move into pension mode. That cap is $1.6m at the moment, but will increase with time.

What Comes Out

And how much comes out is all about conditions of release and benefit payments. The big draw-back of super is that you can’t access it for a very long time, usually until you hit 60 or 65. There are ways to access it earlier but those will cost you a fair bit of tax.

Super Fund

Your super is for your retirement. To keep it safe over all those years, it needs to go into a separate entity – a superannuation fund, also called a super fund.

You can join a government, industry or retail fund. Or you can set up your own superannuation fund – called a self-managed superannuation fund (SMSF).

A super fund consists of trustees and members. Trustees mange the fund and are the legal owners of any super assets, but hold these on behalf of members. 

In an SMSF, you as the member are also a trustee – either an individual trustee or a director of the corporate trustee.

And so this is a very short overview of superannuation. Super is a complex topic and a highly regulated area. Please call or email us if you get stuck. There might be a simple answer to your question.

 

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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.

Who Gets My Super

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Who gets my super when I die? Did you ever ask yourself that question? 

Who Gets My Super

Our lawmakers want your super to be gone when you go. That’s why they gave you – in their eternal wisdom – minimum pension payments to contend with. That is why it gets harder and then impossible to make personal contributions past 74. And why there are caps on contributions full stop.

But let’s assume that despite all their efforts, at the end you still have some super left. Who gets it?

Your Choice

The simple answer is that you can leave your super to whoever you like. It is your super. You can make a binding death benefit nomination or leave it to the trustee’s discretion. Your choice.

But there are strict rules around how your super is actually paid out and how much tax it cops on the way out.

SIS Dependant

SIS dependant is a strange word. But it is an important one. You will shortly see why. Your SIS dependants are:

1 – Your spouse (married or de-facto but not your ex)
2 – All your children regardless of age
3 – Anybody living in an interdependency relationship with you
4 – Anybody financially dependant on you who is not your child

For an interdependency relationship think of your elderly mother who lives with you. You live together, have a close personal relationship and one of you provides financial and domestic support as well personal care to the other. 

Financially dependant means just that – somebody depends on you financially. Think of your orphaned nephew who you put through college.

Directly or Via Estate

Upon your death, your super can leave your fund in two ways.

Your super can go 1 – directly from your fund to your SIS dependants, or 2 – into your estate and then your legal personal representative (LPR) will distribute it – in accordance with your will if you left one. 

So anybody can receive your super through your estate but only your SIS dependants can receive it directly from your fund.

Lump Sum or Pension

Your super is usually paid out as a lump sum – either in cash or in specie. In specie means that the asset is transferred.

Lump sum is the default mode. It means your super leaves the low-tax super environment straight away and in one hit – the legislator’s preferred option.

But there is another way and that is a death benefit pension. With a death benefit pension your super stays within super and is only slowly paid out via pension payments.

The legislator doesn’t like this one for obvious reasons. And so they limited the circle of possible recipients to your spouse, your children under 18 as well as anybody living in an interdependency relationship with you or financially dependant on you who is not your child.

Your adult children, however, are out. They need to take their super as a lump sum.

But there two exceptions. A child between 18 and 24 and financially dependant on you can get a death benefit pension but needs to take the rest as a lump sum on their 25th birthday. And children with a disability can receive a death benefit pension regardless of age.

Now you know who can get your super and how. The next step is to look at how much tax your super cops on the way out. And for this you need to work out who your tax dependants are. 

Tax dependants

Your tax dependants receive all your super tax-free. Non-tax dependants receive your tax-free component tax-free, but pay tax on your taxable components (15% on any taxed element and 30% on any untaxed element).

So who are your tax dependants? There are 4 types.

1 – Your spouse (married, de-factor as well as former spouses)
2 – Your children under 18
3 – Anybody in an interdependency relationship with you 
4 – Anybody financially dependant on you

A child over 18 can still be your tax dependant if they live with you in an interdependency relationship or are financially dependant on you (just in case you ever want to look this up: ATO ID 2014/22).

In most cases your SIS dependants are also your tax dependants and vice versa –  but with two exceptions.

1 – Your financially independent adult children are your SIS dependants, but not your tax dependants. So they can get your super directly from your fund, but pay tax on it.  So leave your super to your spouse or dependant family members or cash it out before you go.

2 – A former spouse is your tax dependant but not your SIS dependant. So if your estate paid your super to your ex, then she or he wouldn’t pay tax on it.

For all your tax dependants you can stop here – no tax to pay.

But for your non-tax dependants here is how much tax they will pay. It all depends on how much of your super sits in your tax-free and taxable components.

Tax-free and Taxable Components

Your super consists of two components – tax-free and taxable.

In theory the taxable component consists of two elements – taxed and untaxed, but untaxed elements are rare, so most taxable components consists of just taxed elements. 

Untaxed elements usually only appear if there has been a pay-out from a life insurance policy held by the fund or the fund itself is untaxed, which only applies to certain government sector funds. 

Every recipient receives these components and elements in the same proportion as they exist in the relevant super account. So you can’t pick and choose who gets what component or element.

The good news is that your non-tax dependants pay zero tax on your tax-free component.

The bad news is that they pay tax on the taxable component. How much depends on whether your super is paid as a lump sum or as a death benefit pension.

Lump Sums

Non-tax dependants pay 15% tax on any taxed element and 30% on any untaxed element – both plus Medicare – if they receive your super as a lump sum. Age doesn’t affect the taxation of lump sums. But it does for death benefit pensions.

Death Benefit Pensions

Age only matters for the taxable components of death benefit pensions. Tax-free components are tax-free regardless of age.

If one of you is 60 or over at the time of your death, the taxable component of any pension payments is tax-free. 

However, if one of you is below 60 at the time of your death, then your beneficiary includes any taxable component in their assessable income with a 15% tax offset. But this stops the moment the beneficiary turns 60. From then on the beneficiary will receive the taxable component tax-free.

There is just one exception to all this – untaxed super funds. But these are rare and a dying specie within the government sector, so let’s not worry about those.

Death Benefit Nomination or Valid Will

So now it is time to put all this in place. You decide how you do this. You can

1 – Make a binding death benefit nomination that pays your super to your SIS-dependants and/or estate – renew every 3 years or make it non-lapsing;

2 – Make a non-binding death benefit nomination to your SIS dependants and/or estate but the trustee makes the final decision.

3 – Make no death benefit nomination and leave it up to the trustee to decide how much should go to your SIS dependants and/or estate;

And for any super within your estate:

4 – Make a will that stipulates who gets how much of your super; or

5 – Leave it up to your LPR (executor or administrator) to decide what happens to your super in your estate.

Review

Looking at all this, is this really what you want?

For example, are you sure you really want your super to go to your financially independant adult children, even when they have to pay 15% or 30% tax plus Medicare on any taxable component?

Or are you sure you really want to leave it up to others by not having a binding nomination and will?

If you aren’t, please give us a call. We will be able to help. It would be a pity to get this wrong and have your super go places or trigger tax that you didn’t want.

 

MORE

SMSFs Need an ABN

How Much Will Your SMSF Cost

Collectables and Personal Use Assets

 

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 Cost

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How much will your SMSF cost you? What fees will you incur?

How Much Does My SMSF Cost

It depends on how much you do yourself, how much you pay in penalties if you get it wrong and how much you get others to do.

Over the lifecycle of your SMSF there are at least 10 trigger points that might cost you money. Here is a quick overview.

1 – ASIC Fees to Set Up Corporate Trustee

Your SMSF must have at least one trustee – be it an individual (you) or a company. An individual trustee is free. A corporate trustee incurs an ASIC fee at registration.

2 – Trust Deed

Your SMSF is only a relationship – a relationship between trustees and members over trust property, governed by a deed. And this deed usually doesn’t come free.

3 – Bank Account

Most bank accounts are free – for example NAB, ING or Macquarie – but some charge.

4 – Professional Fees

Your accountant will probably charge you a fee to prepare your SMSF’s annual report. As will any financial adviser you engage for the actual investment of your super.

5 – Software

Any software your accountant uses – usually Class or BGL – is usually included in their fee. If you do it yourself, you can pay for a BGL subscription or try a free version of Excel, McLowd or Wave.

6 – Audit

Every SMSF requires an audit of its annual return by an independent auditor registered with ASIC. Your accountant might cover this in their fee.

7 – Actuarial Certificate

Whenever your SMSF is in hybrid mode – ie in accumulation and retirement mode – you need an actuarial certificate. And that costs money. Your accountant might cover this in their fee.

8 – Annual ASIC Fees

An individual trustee is free – although far from ideal – but a corporate trustee will incur an annual ASIC fee.

9 – SMSF Levy

The ATO will charge an SMSF levy to your tax refund or liability when you lodge your tax return. 

10 – ATO Penalties

Superannuation is a highly regulated environment where it is easy to make mistakes, which can cost you dearly.

If you have a question, please call or email. There might be a simple answer to your query.

 

MORE

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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

SMSFs need an ABN and TFN

ABN and TFN

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SMSFs need a TFN and ABN. SMSF’s corporate trustees need an ACN. And all members need a TFN.

SMSFs need an ABN and TFN

That was quick and confusing, so let’s go through this once more.

Your SMSF needs a TFN

Tax File Numbers (TFN) are issued by the Australian Tax Office (ATO) and identify a tax payer.

Your SMSF has to prepare an annual return and hence needs a tax file number. This number is like your SMSF’s id. Without it the ATO can’t process the information in their system.

Your SMSF needs an ABN

Australian Business Numbers (ABN) are issued by the Australian Business Register (ABR) and identify a business.

Your SMSF needs an ABN…….Not actually true. There is no legal obligation for an SMSF to get an ABN. Neither the SIS Act nor SIS Regulations stipulate an ABN. And so the ATO can’t force you. Your SMSF can be a complying super fund without an ABN. 

But life is a lot easier when your SMSF does have an ABN. The business community expects your SMSF to have an ABN so many forms will ask for it. And eSAT doesn’t work for SMSFs without an ABN.

eSAT is the electronic superannuation audit tool auditors can use for their annual compliance audit or to lodge an auditor contravention report.

Your Corporate Trustee needs an ACN

Australian Company Numbers (ACN) are issued by the Australia Securities & Investments Commission (ASIC) and identify a company.

A corporate trustee is a company so they need an ACN by definition. Every company – be it a special purpose company or not – automatically gets an ACN upon registration. You are not an Australian registered company if you don’t have an ACN.

Assuming your corporate trustee doesn’t run a business or derive any income directly, they neither need an ABN nor a TFN.

All Members Need a TFN

Every member has a beneficial interest in the SMSF’s assets and income. And so the ATO wants to know who these members are. And they do that through a TFN. So every member needs a TFN.

If you get stuck, please email or call us. There might be a simple answer to your query.

 

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Collectables and Personal Use Assets

 

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.

Collectables + Personal Use

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Super is all about gratification delay. Suffer now. Retire later. But collectables and personal use assets mean instant gratification. 

Collectables and Personal Use Assets

When your SMSF acquires collectables and personal use assets, you have fun right now. There is no gratification delay. The legislator doesn’t like that.

Before 2011

Life was good before 2011. Back then you could get your SMSF to buy Aboriginal art and hang it on your living room wall. Or buy a vintage car and drive it around on weekends. Or buy a Tiffany ring and wear it next to your wedding ring.

And then you just hoped for capital growth some time in the future. That was enough to pass the sole purpose test – sort of.

But the legislator didn’t like that one bit. They struggled to see the sole purpose in your expensive paintings and vintage cars. And so they addressed the issue in two steps.

s62A SIS Act

They added a definition in s62A of the SIS Act to clarify what the term ‘collectables and personal use assets’ actually includes.  

s62A lists collectables and personal use assets – ranging from artworks, artefacts and antiques over jewellery, coins and stamps to vehicles, motorbikes and recreational boats.

Paragraph 13.18AA SIS Reg

And then they added paragraph 13.18AA to the SIS Regulations to do the heavy lifting. Para 13.18AA lists clear rules about the usage, storage, insurance, lease and subsequent sale of collectables and personal use assets. 

Since the term ‘collectables and personal use assets’ is quite a mouth full, they are often referred to as ‘s62A items’.

s62A items must not be leased to or used by a related party, not be stored or displayed in the private residence of a related party and not be sold to a related party below market value and without an official valuation. The asset must be insured in the name of the fund. And any decision regarding the storage of the asset must be well documented and kept for 10 years. 

The purpose of all these rules is to prevent a member from receiving a benefit before a condition of release has been met.

Usage

You and related parties must not use collectables and private use assets in any way. Any use – however insignificant, incidental or arbitrary – counts as usage. 

So if your SMSF owned a vintage car, you or other related parties must not drive it. Not even to get the car to a work shop for maintenance or restoration work. If you want the car moved, ask a third party not related to your SMSF. 

Storage

You can store your SMSF’s s62A items in any way you like as long as it is not a related party’s private residence.

Private residences are a huge No No when it comes to collectables and personal use assets. The legislator doesn’t want these assets anywhere near a private residence where a related party’s private use or display would be impossible to track.

But other premises – for example an office, warehouse, factory, boat shed, trailer – are ok even if a related party owns or leases these premises. Any storage outside of private residences is ok as long as the storage does not amount to a display.

When you store a s62A item, you need to keep a record why you decided to store the items the way you did.

Display

You and related parties must not display your SMSF’s s62A items in any way.

So if you store your SMSF’s art works in your office building, they must be packed away. You can’t display them in your reception, meeting room, office or wherever else you might have an empty white wall.

There is only one way s62A items can see the light of day. And that is when they are leased to an unrelated party at arm’s length – for example to an art gallery.

Insurance

Your SMSF must insure any collectables or personal use assets within seven days of purchase. The policy must be in your SMSF’s name, but it doesn’t matter whether the items are insured under separate policies or collectively under one.

The need for insurance in the SMSF’s name is probably the greatest hurdle. Insuring s62A items is often prohibitively expensive, if you manage to find an insurer. Many insurance company don’t insure lifestyle assets, and when they do charge accordingly.

Leasing

If your SMSF holds collectables or personal use assets, it must not lease these to a related party. A lease is only permissible if at arm’s length to an unrelated party.

So your SMSF could lease art work to an art gallery at arm’s length as long as no related party has any connection with this art gallery.

Selling

The legislator doesn’t really want your collectables and personal use assets in your SMSF in the first place. So all doors are open for you to sell them again. 

You can sell your collectables and personal use assets to anybody you like. Even a related party.  You just have to make sure that the sale is at market value determined by a qualified and independent valuer. Qualified means they know what they are talking about. They have formal valuation qualifications or their professional community values their specific knowledge, experience and judgement in the matter. Independent means that they are not a related party.

Superannuation Investment Rules

The rule in para 13.18AA is one of six superannuation investment rules. But there are five more.

Any acquisition of collectables and personal use assets must pass the sole purpose test, be at arm’s length, not from a related party and keep in-house assets below 5% of total assets.  And the SMSF can’t borrow money to buy the collectable or personal use asset.

If you acquire collectables or personal use assets you need to pass all six investment rules.

If you get stuck, please email or call us. There might be a simple answer to your query.

 

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Superannuation Investment Rules

 

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.