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Do you need a binding death nomination?

Did you know that your superannuation benefits do not automatically form part of your estate and so cannot automatically be dealt with under your will?

Under superannuation laws, if you should die and you do not leave a valid binding death benefit nomination (BDBN), the trustee of your super fund decides which of your dependents will receive your super. The only way to ensure that your superannuation benefits pass to those you wish to benefit is to leave a BDBN, which instructs the trustee how to pay your death benefit. As long as the BDBN is valid, it is legally binding and the trustee must follow it. Wills or non-binding nominations are not legally binding on the Trustee.

An added complexity exists with SMSFs as the death of a member also means that a trustee vacancy can arise. Without a BDBN this situation can potentially be exploited by the remaining trustees to divert death benefits in a way that was not intended by the deceased.

There have been a number of well-publicised cases in which one beneficiary has benefited to the exclusion of another where a valid BDBN did not exist, such as Katz v Grossman. This case highlighted spectacularly the need for a BDBN, particularly where there are individual trustees of an SMSF.

In this case Mr and Mrs Katz were both trustees of their SMSF. Following the death of Mrs Katz, their daughter, Linda Grossman, was appointed as the second trustee. Mr Katz subsequently passed away and in his will he appointed his daughter and son as executors and left his estate to them both equally. However, the will does not have the power to distribute the super death benefit or appoint SMSF trustees. Linda appointed her husband as the second trustee and as Mr Katz had not left a BDBN, the trustees made the decision to distribute all the super benefits to Linda. Her brother took legal action to claim a share of the benefit. However, this action failed because the trustees were not in breach of the provisions of the law or the trust deed. Had Mr Katz left a valid BDBN directing the benefits equally to both children, the outcome would have been different.

To help protect your SMSF and your super benefits from this type of situation, you could consider using a corporate trustee structure as it handles succession issues much better than having individual trustees. Also consider whether a BDBN is prudent for your circumstances. BDBN's are effective but it is vital that the nomination is considered along with your estate plan as a whole. It is also very important that you seek appropriate advice to ensure that the BDBN is valid.

This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Danny Salmon is an associate advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory. 

Danny is a Chartered Accountant and a Fellow of the Institute of Chartered Accountants in Australia, a CA SMSF Specialist with the ICAA, and is an accredited Self Managed Superannuation Specialist with the SMSF Association. He has completed a Bachelor of Business (Accounting) and superannuation advisory studies with Kaplan Professional Education. Danny has been working in financial and business services since 1990. 

Setting the ground rules

When two or more people go into business together they are acknowledging that together they can achieve more than what they could have if they went into business on their own.  There is no doubt then when people first think of going into business together, there is usually lots of optimism and positive energy.  What people rarely think about at this time is what happens when it ends?

The ending of a business relationship is as an important time as starting it.  Endings can happen amicably (retirement, business sale) or not so amicably (disagreement, business failure).   Businesses can end for reasons beyond your control (death or incapacity).

 So what happens when a business comes to an end?  Well the short answer is – it depends!

One of the most important things that two or more people contemplating going into business together can do is invest some time and effort into a partnership/shareholder/unit holder agreement (from now on I will use the term "agreement" to reference all these types of agreements).

So what are in these agreements?  Well the agreements set out the ground rules.  The usually address the following key items:

Key Item  Purpose 
The type of business to be conducted A statement to help ensure the business stays on track 
How contributions are made and how profits are shared Define what capital contributions are required and how profits are shared. It might also consider profit distribution and retention policies.  
How the business is managed  This might address matters of voting rights, casting votes, management roles, etc. What decisions need to be unanimous or only by simple majority. 
That happens when someone wants out, when someone dies, becomes incapacitated, etc This is done to ensure there is certainty in the event of changed circumstances. These clauses will consider wind up or buy out options. It might address the need for cross partner insurances. 
How the business is valued Again to provide certainty for when someone is existing a business, or how a buy in or buy out price is determined. 
How new owners join Rules around admission of a new business owner and deals with business succession.  
How the business is wound up How are assets distributed, can one continue on, etc 

Of course other issues can and are dealt with in these agreements.

The true value of an agreement is that it provides certainty.  Agreements are best drawn up at the beginning of the business relationship when everyone is thinking the same way.  This means that potentially contentious issues like some of the items mentioned above are considered prior to the investment of time and assets into the venture.  This is when people have less to lose and there is less a chance for a vested interest to get in the way of the correct position.

So why doesn't every business with arms length parties have an agreement?  Often it is just overlooked, but just as often it is to avoid a cost at an early stage of the business life.  Usually this saving is a false saving.

I was in a meeting with a lawyer recently and he had seen his fair share of business bust ups.  We were discussing a potential new venture with our respective clients and discussing the need for a unit holder's agreement.  When queried about this, his comment about the value of the agreement was that, in his experience, the cost of any dispute in the absence of a written agreement is usually about 10 - 20 times the cost of drafting up the original agreement. 

Sage advice I thought.

Gary Essex is managing partner of Johnsons MME. Gary is a member of the Institute of Chartered Accountants of Australia and holds a Bachelor of Commerce from the University of Melbourne. Gary deals with a wide range of clients, including primary producers, transport operators, builders, motor vehicle dealers, irrigation operators, estate and stock & station agents, licensed premises as well as investor clients.

Gary has been involved in negotiations with Treasury and senior ATO Officers regarding various taxation issues including complex CGT matters for both small and large businesses alike. 


 

Proposed Changes to Super Outlined

Superannuation was a key focus in the 2016/17 Federal Budget and a number of changes were put forward. While the nation waits to see what will actually get through parliament, we outline what the proposed changes were below, in case you may have missed them.

  • A lifetime $500,000 non-concessional contributions cap will take effect from 3 May 2016. The cap applies to all non-concessional contributions made on or after 1 July 2007, and will be indexed in $50,000 increments in line with average weekly ordinary times earnings. Any individual who has exceeded the cap prior to the 3 May 2016 commencement date will not be required to withdraw their excess contributions.
  • The concessional contributions cap will be reduced from 1 July 2017 to $25,000. Until this time, the existing caps of $30,000 for individuals under 50 and $35,000 for those over 50, will apply.
  • The tax exemption on earnings of the assets supporting Transition to Retirement Income Streams (TRIS) will be removed from 1 July 2017. Earnings will be taxed at 15% and this is proposed to apply irrespective of when the TRIS commenced.
  • Currently under Div 293 individuals with combined income and super contributions of more than $300,000 are liable to pay additional tax of 15% on concessional contributions. From 1 July 2017 the threshold will be reduced to $250,000.
  • A new $1.6 million cap will apply to how much an individual can transfer into a pension phase account. Earnings on amounts within this account will continue to be tax free. Excess balances will need to be reverted to accumulation phase accounts where earnings will be taxed at a rate of 15%. Members already in pension phase with balances above the cap will be required to reduce their balances to $1.6 million by 1 July 2017. The cap will be indexed in $100,000 increments in line with CPI.
  • From 1 July 2017, a low income superannuation tax offset will reduce the tax paid by superannuation funds on super contributions for low income earners by up to $500. This applies to individuals with adjusted taxable income of less than $37,000 that have had a concessional contribution made on their behalf.

 For advice on your superannuation planning, contact our super specialists today.

This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Danny Salmon is an associate advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory. 

Danny is a Chartered Accountant and a Fellow of the Institute of Chartered Accountants in Australia, a CA SMSF Specialist with the ICAA, and is an accredited Self Managed Superannuation Specialist with the SMSF Association. He has completed a Bachelor of Business (Accounting) and superannuation advisory studies with Kaplan Professional Education. Danny has been working in financial and business services since 1990. 

 

Your Structures

Your structures. Not your homes, not your warehouses, not even the old hay shed that's near to falling over. They are the legal entities you use to operate your businesses and to accumulate your wealth. They are companies, partnerships, trusts of all sorts, self-managed superannuation funds or combinations and variations of all of these.

Successive governments have tended to 'fiddle around' with their treatment of business structures. Some of these fiddles have been positive (think small business CGT concessions or dividend imputation) and some have definitely made our life, well, more challenging (think Division 7A, changes to trusts and the like.)

One thing is almost certain when it comes to business structures. That is, any structure set up  today is most likely to be different to the optimal structure for you in say ten, twenty or thirty years' time. This is not only because of the inevitable government tinkering that will occur, but also because by then the structure will probably have served its useful life and will no longer meet the changed objectives of the owners. So when a government announces a 'positive fiddle' we are usually looking for opportunities for our clients to take advantage and maybe rid themselves of some burdensome entity that is being tolerated, much like that old hay shed.

During the 2015/2016 budget the Abbott government announced improvements to the small business CGT roll-over provisions. These became law and effective from 1 July 2016. The purpose of the law is to allow small business to more easily restructure into a more appropriate structure without running into some of the usual impediments such as Division 7A deemed dividends and crystallizing unrealised profits. 

Further effective 1 July 2016 the NSW State government removed stamp duty on non-real property business asset transfers. This has been done as part of the implementation of the GST introduction program (16 years late, but better late than never we think!)

We are not saying that these changes are the panacea to all our structuring issues, but they do open up opportunities that previously had some serious road blocks in front of them. So, much like how the better tax treatment for fodder storage allowed some farmers to bulldoze the old hay shed and tax effectively put up a new one, it could be that these recent changes could allow you to remove that thirty year old company that's on its last legs and move onto something now more appropriate.

The rules are unfortunately complex. However, if you think that this could relate to you, or someone that you know, please give your Johnsons MME contact a call because we can help you to better position your business now and into the future.

Gary Essex is managing partner of Johnsons MME. Gary is a member of the Institute of Chartered Accountants of Australia and holds a Bachelor of Commerce from the University of Melbourne. Gary deals with a wide range of clients, including primary producers, transport operators, builders, motor vehicle dealers, irrigation operators, estate and stock & station agents, licensed premises as well as investor clients.

Gary has been involved in negotiations with Treasury and senior ATO Officers regarding various taxation issues including complex CGT matters for both small and large businesses alike.