Register for anti detriment webinar

I am pleased to announce the next SMSF Academy InPractice webinar on “Using an anti-detriment strategy effectively within a SMSF”.

This one (1) hour webinar will work through:

  • How the anti-detriment tax saving amount is calculated, including discussing the ATO’s recent view’s on this matter;
  • Why it’s now very important to consider claiming an anti-detriment payment where a member dies;
  • How the anti-detriment amount can be ‘funded’ within a SMSF;
  • How a further tax deduction for the Future Liability to pay benefits can also be used and applied
  • Case studies to demonstrate the power of these strategies; and
  • Work through the strategy using the SMSF Academy best-practice tools (to document & implement the strategy).
Further details about this web-training event and registration can be found on The SMSF Academy website.

Anti detriment is back as a popular strategy for SMSFs

The use of anti-detriment within SMSFs as a strategy has been stymied over the past couple of years since the Australian Taxation Office (ATO) indicated that any allocation from a reserve for the purposes of paying this tax saving amount was to be counted as a concessional contribution.  Subject to the amount of the allocation, and other levels of contributions, it appeared likely that this amount was going to incur excess contributions tax (ECT).  As a result, the benefit of the strategy would be eroded by the potential excess contributions tax.

There has been some uncertainty within the industry about the amount to be included for the calculation of the anti-detriment tax deduction since the introduction of section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997).  The old section 279D within the ITAA 1936 required the whole balance to be paid out as lump sum to qualify for the deduction.  However, this didn’t necessarily appear to be the case when interpreting the new laws.

A question was raised at the March 2011 NTLG Superannuation Technical Committee meeting as to how much of a member’s account balance must be paid as a superannuation lump sum in order for a super fund to qualify for a tax deduction under section 295-485 of the ITAA 1997?

The good news from the ATO’s interpretation is that the tax deduction for the tax saving amount can be claimed on the amount paid out as a lump sum; it does not require the entire benefit to be paid out (as a lump sum).  In other words, a member could receive a combination of income stream and lump sum and claim the deduction for the tax saving amount on the proportion paid as lump sum only.

To demonstrate this, let’s use the following example:


Frank (58) recently died and was survived by his wife, Maria. He had a balance of $550,000 in his SMSF, in which Maria wishes to take a lump sum of $150,000, with the balance to be taken in the form of an account based pension.

Use the SMSF Academy Anti-detriment calculator

From the above calculation, the tax saving amount is calculated as $72,056 on the entire benefit.  As $150,000 has been taken as a lump sum, the proportionate tax saving amount is $19,652 (15/55 x $72,056).  This would mean that an amount of $169,652 would be paid to Maria by way of lump sum. The SMSF would be entitled to a tax deduction of $131,013 ($19,652/0.15).

The ATO’s views expressed from the NTLG March 2011 meeting in my view brings anti-detriment right back into play as a key estate planning strategy for SMSFs.  Whilst still having to consider the issue of allocations from reserves as concessional contributions, there appears now to be a greater scope for planning around the level of deduction that may be required within fund, rather than simply determining it based on the deceased member’s entire benefit.  This deduction may be used to mitigate CGT or simply to benefit future generations of fund members.

Furthermore, there is greater scope to consider how the anti-detriment amount may be ‘funded’ within the SMSF without necessarily having to use reserves.

This positive news means all advisers dealing in the area of SMSFs should again turn their attention to how this strategy may benefit their client’s overall estate plan.

Register your interest to attend the SMSF Academy InPractice August Webinar on Anti-detriment and Future Liability to pay benefits.  Free for SMSF Academy members, $77 for non-members.  Details of this session to be announced shortly.

Top 10 SMSF strategies for 2011

A Happy New Year to all my readers…

The 2010 year left behind an indelible mark for the self-managed super fund industry; much of it due to the key recommendations of the Super System Review (Cooper Review).

The year ahead will see the beginnings of a new framework in which trustees and SMSF service providers will begin to operate.

However, as has (and will) always be the case, the application of strategic advice plays the most important role for members of SMSFs.  Strategy has been recognised by government as the most integral piece to the SMSF jigsaw, with recommendations to increase the competency requirements for those wishing to advise on SMSFs.

The 2011 year has seen some changes to last year’s (2010) inaugural top 10 list on thedunnthing blog.  Last year’s strategies focused on the themes of borrowing and the global recovery.  Borrowing inside super has certainly taken off, but most of us are still waiting the markets to recover!!  I think these two themes will continue in 2011, along with an emerging theme of SMSF investment succession, as many members start to think about intergenerational issues and longevity risk for their funds.

So, I have outlined below for you my Top 10 list of self-managed super fund strategies for 2011:

  1. Contribution Splitting is back in vogue!! – The last Federal Budget saw the government announce changes to allow for individuals over 50 with less than $500,000 in super to continue to be able to make concessional contributions at $50,000 p.a.  Whilst this is not yet law, it is important to start thinking about the impact of splitting contributions with non-working spouses to allow for the primary breadwinner to continue to make maximum contributions into super each year.  See my previous blog, “has the budget may contribution splitting a powerful strategy again?”
  2. Borrowing to develop property – this strategy appeared to gain momentum over the course of 2010, in particular post 7 July when the rules for limited recourse borrowing changed.  Click here to read my previous blog for details about this strategy.  This strategy currently has its limitations with banks unlikely to offer borrowings, as they can only take a charge over the units of the ungeared unit trust.  Therefore, related party lending (BYO lending) appears the most likely way to facilitate this.  Some financial institutions may be prepared to look at it, however don’t bank on it!!
  3. Member lending beyond contribution caps – whilst the contribution caps might have stymied the inflow of contributions into super, limited recourse borrowing actually allows for significant monies to still enter the superannuation environment.  With limited recourse borrowing arrangements for property acquisition being the ‘flavour of the month’, I think we will also see people look to lend ‘surplus’ money to their SMSF on an ‘arm-length’ basis to simply invest (where they have already reached their contribution caps). Why? simple, two key reasons… (i) no CGT on assets if sold in pension phase; and (ii) the rate of interest can arguably be quite nominal.  ATO ID 2010/162 last year stated the views of the ATO – that is, the terms of the loan can be more favourable to the SMSF (i.e. interest rate can be lower than commercially available).  On the basis that the fund’s rate of return can exceed the cost of borrowing, this strategy definitely stacks up!!  I expect this strategy to gain momentum in 2011.
  4. The year for building reserves – reserves are still very much an unknown beast within SMSFs.  They can however provide significant advantages to members today and for the future.  You can read my previous article on “10 things your need to know about fund reserves”.  Contributions reserves (as discussed above), pension reserves, reserving for anti-detriment and self-insurance are just some of the key benefits available within a SMSF.
  5. Understanding the tax benefits of anti-detriment and the future liability deductions – Whilst we would all like to think we would live forever, this is simply not the case…  There are however two very important strategies to be aware of relating to the payment of death benefits (as a lump sum) from a SMSF.  Anti-detriment payments or the ‘tax saving amount’ provides an additional payment for dependent beneficiary(ies), and creates a sizeable tax deduction within the fund which can benefit future members or simply minimise (or eliminate) CGT.  You can refer to item 6 in “10 things your need to know about fund reserves” for more information on anti-detriment payments.  The future liability deduction can also provide a sizeable tax benefit within the fund in the event of death or terminal illness where the deceased member was working (see section 295-470 of ITAA1997).  I’ll be providing more information on these topics early in 2011…
  6. Closing the door on in-specie share transfers – one of the recommendations by the Cooper Review Panel to Government was to remove the exception of being able to in-specie transfer (off-market) listed shares.  The government supported this recommendation, which is likely to take effect from 1 July 2012. There are some great strategies around off market share transfers into SMSFs, in particular focusing on the management of the capital gains tax impost, such as making deductible super contributions using the 10% rule.  Click here to read further information on this Cooper Review recommendation and government support for the change (refer to recommendation 8.13).  Click here to read more about transferring assets into an SMSF.
  7. “Double dip” on contributions in June 2011 – this strategy again makes the list as it provides a fantastic opportunity for a person to get double the tax deduction in the year of the contribution, but to amortise the contributions over two financial years.  Click here to refer to further details on this strategy in last year’s Top 10 strategies. (NB. with excess contribution tax assessments expected to increase substantially for the 2010 financial year, this strategy is very effective to use to house June contributions to allocate in July.  It might not solve the whole problem, but it’s certainly better than paying 46.5% or 93% tax!!)
  8. Meeting minimum pension limits by lump sums (including in-specie payments).  The impost of tax can play an important part of a member’s retirement planning.  The ability to take benefits from a SMSF under age 60 as a pension but be taxed as a lump sum, can provide significant tax savings when it is available to be used. With the first $160,000 of taxable component taxed at 0%, this strategy can literally save thousands of dollars where structure appropriately.  Does it still have application post-60?  you bet!! Whilst pension payments must be taken in cash, this strategy can allow you to transfer assets as a lump sum from super and meet the minimum pension requirements.  Click here to read my previous blog on this issue.
  9. Locking in tax-free proportion income streams – this to me is the most powerful piece of legislation introduced with the Simpler Super reforms.  The large majority of pension recipients from SMSFs should be running multi-pensions to either provide tax efficiency under age 60 or for estate planning post 60.  Income streams with 100% tax-free component, such as after a re-contribution or large non-concessional contribution can save tens of thousands of dollars at an estate planning level.
  10. Segregating to capitalise on a market recovery – whilst we wait for market’s to recover, I think it is important to keep this strategy in the back of your mind.  Where there is a pension and accumulation member or account within the fund, the trustees have the ability to segregate assets into the pension account or pension pool (for the benefit of all pension members).  Why?  By simply applying segregation, the assets with significant capital gains can be exempted from tax, rather than a proportion of the amount being exempt in accordance with an actuary tax certificate.  The important thing to do here is to appropriately document the decisions of the trustees to segregate assets to a particular member or pool of members.  It also doesn’t have to be all members, it can simply be one asset to the pension member and the rest of the income shared across all members.  The strategy allows absolute creativity!!  Click here to read my previous blog on segregation.

What do you think about my Top 10 strategies list? Let me know if there are any strategies that you think should be included?

I am currently in the process of preparing an e-book detailing the benefits of these top 10 strategies.  I hope to have ready later this month, along with a webinar going through these key strategies for the year ahead.  Keep your eye out for this must see event!! Register your interest on The SMSF Academy website to be sent a copy of this e-book.

Here’s to an exciting year ahead of us for SMSFs…

A family super fund or a family feud?

The concept of the family super fund (FSF) has started to enter the vocabulary amongst SMSF trustees and advisers over the past year as a way to bring together family members to invest and manage their total wealth.

The focus of the family super fund concept is to provide for not only the members today, but to also provide for the effective transfer of wealth for future generations.

The effective transfer of wealth is an important issue moving forward, because as we live longer, it will not be uncommon that the next generation of beneficiaries will be close to retirement themselves.

Statistics as at 30 June 2010 shows the average fund having only 1.90 members, well below the minimum of four members allowed.  The recent Super System Review (Cooper Review) which covered SMSFs, considered the issue of the number of fund members, but the Panel recommended no change to this arbitrary figure as the average didn’t support any need to.

So, with a limitation of up to four fund members, what are the real benefits as to why you would consider setting up a “family super fund”? or by doing so, are you simply setting yourself up for a family feud?

Let’s take a look at the pro’s and con’s of the family super fund:

Pro’s of the Family Super Fund

  • You have the ability to ‘control’ the family wealth through a single tax structure that provides significant tax concessions to benefit all members, both through accumulation and pension phase;
  • The FSF could look to acquire property using a limited recourse borrowing arrangement.  The older members could pay the deposit, with future contributions being made by the younger members to repayment the loan.
  • Wealth of the younger members could be ‘housed’ within mum or dad’s account to be taxed at concessional rates (maybe no tax) and redrawn as and when needed through a pension or lump sum (assuming mum or dad have retired and met a cashing condition).  This concept is in reverse to what we understand with family trusts, as the focus is on distribution of wealth through members over 60, rather than spreading income across multiple beneficiaries.
  • You have the ability to run reserves within the FSF to:
    • transfer wealth from older members into the next generation.  This can be done via allocated surplus amounts from reserve accounts
    • self-insure all members – in particular be able to provide an income stream for a child within the fund in the event of disablement;
    • To generate a large tax deduction through the payment of an anti-detriment amount (the tax-saving amount), when a lump sum is paid to a SIS dependant in the event of the death of a member; and
    • hold specific assets (such as the family business premises) within the Reserves separate investment strategy to retain within the fund over many generations.
  • The ability for the younger members of the fund to over time take a more active role in the fund as the parents get older and have less ability to manage the overall affairs of the fund.  This can be achieved through granting an enduring power of attorney.

Con’s of the family super fund

  • SMSFs are naturally limited to no more than 4 members.  How do you decide who to include or exclude when it comes to families of more than four?
  • The marriage of children adds in-laws and a new life together for husband and wife and their own family.  The supposed benefits of  a family super fund can become lost on future generations as they start a new family of their own.
  • In this day and age with people travelling and working all around the world, careful consideration needs to taken to ensure that the fund retains its complying status as an Australian Super Fund (meets the residency requirements to receive tax concessions).  This could cause concerns should members decide to move overseas for a significant period of time.
  • Operating a family super fund will add significant cost to the ongoing operation of the SMSF.  Whilst many of the strategies can add significant benefit to the members, expect significant cost to manage these highly-technical strategies.  It may simply be too cost prohibitive to consider running.  Subject to the size of the family, this concept may need to be run through two SMSFs, with unit trusts, which as you can imagine, starts to add significant layers of costs.

A further issue to consider in deciding whether to proceed to build a family super fund includes how should you structure the voting rights of the fund – should each member have one vote or are votes based on account balance?

When deciding to build a family super fund, it is important  to look at tailoring specific provisions of the fund’s trust deed or introducing other agreements to deal with key family matters of holding this wealth inside a SMSF.  For example, appropriate consideration needs to be given to issues around what happens to the business premises inside the super fund that runs the family business in the event of the death of a fund member? Can it be sold?  Who can make this decision?  Who has first rights to acquire?

The case of Katz vs. Grossman is an excellent example of how the concept of a family super fund can go wrong.  Whilst not a family super fund in its own right, this case demonstrated the issues of adding in children (and subsequently in-laws) into the fund without understanding the impact of doing so – in this case at the exclusion of Ervin Katz’s son.  Without appropriately documenting the wishes of how a member’s benefits are to be dealt with, the benefits of strategies introduced for the “family” can be quickly eroded in solicitors fees fighting over an estate.

Personally, I’m an advocate of the family super fund in certain circumstances, but it is not for everyone.  I believe the size of the fund has a big role to play, including the amount of wealth held outside of super.  The age of the beneficiaries and their own financial circumstances will also influence the result. Where a beneficiary is closer to retirement, their focus will be towards building super, assuming they have significantly reduced debt or even paid off their family home.  Younger family members will still be struggling with mortgages and kid’s school fees, so super simply isn’t attractive at this stage of their lives.

I heard recently of a person who stated in their Will (after their death benefit nomination stated that their super benefits are to be paid to their Legal Personal Representative), that in the event of their death, $450,000 of their estate was to be paid to each child on one (1) condition…  that they made a $450,000 contribution into superannuation to build for their own retirement.  If they didn’t do this, then these benefits were to be paid to the father’s nominated charity, The Red Cross.  If you are one of the beneficiaries, it makes for a pretty easy solution I would have thought!! however, it would arguably be more prudent for this member to start thinking about building a family super fund to benefit his next generation.

(C) The SMSF Academy 2012
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