Townsends Business & Corporate Lawyers’ Brian Hor, Special Counsel – Superannuation & Estate Planning, summarises recent changes to superannuation law, including the impact of the introduction of the Transfer Balance Cap on Binding Death Benefit Nominations.
Introducing a Transfer Balance Cap (TBC) of $1.6m to limit the amount that can be transferred to a tax free retirement phase income stream;The changes to superannuation which took effect from 1 July 2017 are the most significant since the Howard government’s Simpler Super Reforms of 2007, including in particular:
- Reducing the concessional contribution cap to $25,000 for everyone;
- Lowering the annual and bring-forward non-concessional contribution caps to $100,000 and $300,000 respectively;
- Individuals with a Total Superannuation Balance (TSB) above the TBC of $1.6m cannot make a non-concessional contribution – although CGT non-concessional contributions are not subject to the TSB and can still be made up to their own contribution cap (currently $1,480,000 for 2018–19).
So, what if you want to build your super balance quickly, but are constrained by the new annual contribution caps?
One option is to use the power of leverage to buy assets under a Limited Recourse Borrowing Arrangement (LRBA).The main features of an LRBA are that:
- An SMSF trustee borrows from a third party lender (either an unrelated party or a related party).
- The trustee uses those funds to purchase a single asset (such as real estate) or a collection of identical assets with the same market value (such as a parcel of shares in the one company) to be held in a separate holding trust.
- Investment returns from the asset go to the SMSF trustee.
- If the loan defaults, the lender’s recourse is limited to the asset held in the separate holding trust.
Or, what if you have reached your TSB and cannot contribute further to super?
As previously mentioned, the new rules do not affect the ability to make CGT non-concessional contributions resulting from a taxpayer’s use of certain small business CGT concessions under the Income Tax Assessment Act 1997, namely the 15-year exemption (Subdiv 152-B) or the retirement exemption (Subdiv 152-D). This is particularly significant for small business owners who seek to contribute to superannuation as part of their transition to retirement.
Effect on the use of Binding Death Benefit Nominations
Introducing the $1.6m TBC has profoundly affected the use of Binding Death Benefit Nominations (BDBNs) for estate planning. Whereas previously a couple in retirement phase might simply make BDBNs to each other (specifying a pension benefit), that strategy may now give the surviving spouse a serious problem with exceeding their TBC.
Now the surviving spouse must decide what to do with their own pension as well as the new pension from their deceased spouse – ideally before the new pension becomes credited to their TBC. There are two choices:
- Commute the pension from the deceased’s super to a lump sum (so that this amount leaves the concessionally taxed superannuation environment), and keep the surviving spouse’s own pension on foot; or
- Accept the pension from the deceased’s super and commute the survivor’s own pension back into accumulation – whilst this would subject earnings thereon to 15% tax, this rate may be less than the surviving spouse’s own marginal tax rate, whilst maximising the assets remaining within superannuation.
Subject to the fund trust deed, it may now be preferable to make a BDBN that gives the surviving spouse achoice regarding how much of the deceased’s death benefits are taken as a pension versus as a lump sum, and in the case of the latter whether it should be taken by the surviving spouse or instead directed to the estate of the deceased.
Alternatively a couple could make their pensions reversionary to each other, as well as make BDBNs in the above terms. This gives the survivor 12 months to re-adjust their superannuation in view of their TBC at the time, as the credit in their Transfer Balance Account only arises 12 months after the date of the deceased member’s death. The credit will be the value of the income stream as at the date of the deceased member’s death.
Updating BDBNs utilising powers of attorney
What if a fund member has lost capacity (e.g. from dementia or a stroke)? If they had appointed someone to be their Enduring Power of Attorney (EPOA), could their EPOA make, revoke or renew a BDBN on their behalf?
In Re Narumon Pty Ltd  QSC 185, the Supreme Court of Queensland confirmed that, subject to the SMSF trust deed and the terms of the EPOA instrument (particularly where a “conflict transaction” is concerned), an EPOA may make or renew a BDBN for their principal.
However, whether an EPOA should be permitted to make or revoke a BDBN for their principal is an entirely different matter.
Cases like Katz v Grossman  NSWSC 934 show that even in small families there can be conflicts of interest between family members such that the wishes of an SMSF fund member can be entirely thwarted by persons who they thought they could trust.
In “blended families” the conflicts of interest are more apparent. For instance, if a SMSF member wished to use their death benefit to provide for their second spouse, could they really trust their children from a previous relationship (to whom the member granted their EPOA jointly) not to revoke a BDBN made in favour of that second spouse and make a new one to benefit themselves instead?
The foregoing issues and strategies demonstrate that the modern estate planning lawyer must have a firm grasp of superannuation in order to provide and adequately implement estate planning recommendations for clients with assets in superannuation.
The rules governing SIS dependency, the impact of the changes since 1 July 2017, the increasing prevalence of “blended families”, and the interaction of the client’s Will with their BDBN, all mean that it is now simply not good enough for a lawyer to say that they can prepare the client’s Will but tell them to go elsewhere for advice on their super death benefits.
For over 30 years Brian Hor BEc, LLB (Syd), Dip FP (Deakin), CL, CTM, CTA, has advised on tax, CGT, trusts, superannuation, sophisticated estate planning and asset protection, and has designed and implemented estate planning strategies for hundreds of HNW clients. Brian’s past industry roles include being a long-standing Chairman of the FPA’s Tax Committee and Member of the FPA Public Policy Committee, and a Member of the ATO’s Alienation and Part IVA Working Group. Brian is the author of the chapters “Legal Personal Representatives in Estate Planning”, “Claims against the Client and/or Estate”, and “Implementation of Estate Plan” in LexisNexis Estate Planning launched May 2014; the author of the “Wills Drafting” module for LexisNexis Practical Guidance launched June 2012; and a major co-author of the “FPA & CCH Financial Services Compliance Manual” launched 2003. Brian has published many professional articles and is a regular presenter at professional seminars and webinars. He has also been interviewed by the Sydney Morning Herald, the Australian Financial Review, and appeared several times as an expert guest live on Sky News Business and on the Studio 10 morning talk show on Network Ten. Contact Brian at email@example.com