News 07/08

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

In this e-SuperUpdate we will look at two relatively unrelated topics. These are tax deductions for trust deeds and the types of death benefit nominations that are available for superannuation.

Tax Deductions for Trust Deeds and Deed Amendments

A recent Super Concepts seminar covered an often asked question by clients as to whether the cost of establishing the fund and subsequent amendments to the fund are tax deductible.

Under the tax law the costs of establishing the fund, the original trust deed and any amendment thereto are not tax deductible as it is considered to be a capital expense.

However, it is possible to obtain a tax deduction for the amendment to the fund’s trust deed where the cost of the amendment is paid by an employer sponsor of the fund or by the fund where the amendment is to ensure the fund continues as a complying superannuation fund because of a change in the law.

Case Study 1

Philip and Louise established a self managed superannuation fund in 1999. Both are retired and drawing an allocated pension. Both wish to restructure their pensions to take advantage of the greater flexibility of account based pensions. The trustees have never updated the fund’s deed and as such it does not include any provisions around the recent Simpler Super Legislation. Upgrading the deed will permit the fund to pay an alternative type of pension to those currently permitted under the existing deed.

The expense to amend the deed would not be tax deductible as the fund is a complying superannuation fund and will continue to be a complying superannuation fund if the deed is not upgraded. The upgrade simply expands the pension options available to the members of the fund.

Case Study 2

Rudy and Marilyn wish to establish a self managed superannuation fund. They pay for the cost of a new trust deed and a starter kit to get the fund going. The expense to establish the fund would not be tax deductible as it is a capital expense.

A few years later the law has changed which requires that the trust deed of the fund must have a provision relating to a particular type of trustee otherwise the fund will not be a regulated superannuation fund. The cost of this amendment is deductible as the fund will become a non-complying fund if the deed is not amended as required.

Case Study 3

Ken's Carpentry Pty Limited is the employer sponsor of Ken’s Superannuation Fund. The company pays for the amendment to the fund’s trust deed. The cost of the amendment is tax deductible as it is incurred by the company as an expense of carrying on the business.

Always seek advice from your tax adviser on whether any expenses relating to your superannuation fund are tax deductible.

Who Will Get Your Death Benefit from Super in the End?

These days people with blended families, changing relationships and second marriages mean that sorting out who is to receive your superannuation death benefit may be a difficult and sensitive task. Nearly one in every four complaints that reach the Superannuation Complaints Tribunal is about the payment of superannuation death benefits. Use of a death benefit nomination will help to ensure your superannuation goes to the right person.

What is a Death Benefit Nomination?

Just as the name suggests a death benefit nomination allows you to nominate who is to receive your superannuation benefits on your death. You are able to nominate the dependant(s) and/or your estate to receive your superannuation benefits. In addition, you can indicate the proportion of your benefit which is to be paid to a particular person and whether it is to be paid as a lump sum or pension.

There are basically three types of death benefit nominations:

• A lapsing binding death benefit nomination;
• A non-lapsing binding death benefit nomination; and
• A non-binding death benefit nomination.

Binding Death Benefit Nominations

A binding death benefit nomination is a legal document which requires the trustee of the fund to pay the death benefit of the member to their dependants and/or to their estate. It will indicate the proportion of the benefit to be paid to the beneficiaries nominated. The document must be witnessed by two people who are 18 or older and are not nominated to receive a benefit.

A lapsing nomination is binding for no more than 3 years or earlier if you amend or revoke it. There is no time limit on a non-lapsing nomination and it is binding until it is amended or revoked by you.

Case Study

Greg is a member of a self managed superannuation fund. He is married to Jenny and has two children from his current marriage and one from a previous marriage. As Greg and Jenny both have substantial personal assets they have decided Greg’s superannuation benefit should be split equally between his children on his death. He makes a lapsing binding death benefit nomination which will require the trustee to pay his benefit in equal proportions to each of his three children. He will need to review the nomination within three years of signing and reconfirm it or make any necessary changes if required.

Non-binding Death Benefit Nominations

It is also possible to make a non-binding death benefit nomination which is not legally binding on the trustee. The role of a non-binding nomination is to provide an indication to the trustee of the fund the member’s preferences for the payment of a death benefit. The trustee has an option whether or not they will follow the terms of the nomination. The benefit of this type of nomination is that in some circumstances payment of a death benefit to a nominated person may result in a greater amount of tax being paid or they could be receiving more than the member intended prior to their death. The non-binding nomination leaves the trustee with the flexibility to pay amounts to the estate of the member or to dependants in the most equitable way.

Case Study

Lucas is a member of his self managed superannuation fund. He has a wife and three children, two who are from a previous marriage and don’t live with him. He has decided to make a non-binding death benefit nomination. While he would like all the children to benefit from his superannuation he requires it to be done in the most tax effective way. Depending on the age of his children at the time of his death they may end up paying tax on the payment. By having a non-binding nomination the trustee has the flexibility to pay the benefit in the most tax effective way possible.

As an alternative to nominating a dependant in a death benefit nomination it is also possible for a fund member to nominate their estate. If the estate is nominated the superannuation benefit can be distributed in terms of the member’s will. This may provide advantages where it is intended the person to receive the benefit is not a dependant.

Taxation of Death Benefits

Binding death benefit nominations are all the more important with the changes to the death benefit rules for superannuation payments from 1 July this year. Under the new rules all benefits paid to non-dependant children over 18 will be required to be paid as lump sums. Previously some control could be exercised by requiring a pension be paid to a non-dependant child until they reached a pre determined age so that the money would not be frittered away in their youth. Control is still possible, however, it may mean that superannuation death benefits are distributed via a testamentary trust or superannuation proceeds trust established under the will.

It is worthwhile to seek advice from an estate planning professional who can help ensure your superannuation benefits and personal assets are distributed as you wish.

We recommend you seek professional financial planning advice to ensure that you are able to obtain your preserved superannuation benefits without falling foul of the rules.