Posts

Super Death Tax

Super Death Tax

/0 Comments/in /by

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. 

 

MORE

Super Fund

How Super Rules Change with Age

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.

Super Fund

Super Fund

/0 Comments/in /by

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.

_____

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.

SIS Contribution Rules

/0 Comments/in /by

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.

______

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.

 

MORE

Superannuation

Super Contributions

My Super When I Die

 

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

/0 Comments/in /by

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.

 

MORE

Minimum Pension Payments

Collectables and Personal Use Assets

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.