Scenarios
1. I have a friend who was recently advised to sell his ski chalet to his self-managed super fund. Can he do this?
Good question. Trustees are prohibited from acquiring assets for the fund from a related party of the fund, with some limited exceptions. In particular, SMSFs are prohibited from acquiring residential property from related parties, and may only lease residential properties to related parties where the value of the property represents 5% or less of the fund’s total assets. So if the Chalet is residential and is owned by your “friend” or his relatives or to any other party related to the SMSF, then the answer is no.
What if the SMSF buys the chalet from a non-related party, can my friend and his family use the chalet? He says he would pay market rates.
Yes or No. SMSFs may only lease residential properties to related parties where the value of the property represents 5% or less of the fund’s total assets. If the property is worth more then 5% of the funds total assets, the answer is no with one very narrow exception. Any investment that provides an SMSF member with a direct benefit (other than a retirement benefit) is likely to breach superannuation law. The relevant piece of the law is the "sole purpose" test. The sole purpose test is to ensure SMSFs are maintained for the purpose of providing benefits to members upon their retirement, or their dependants in the case of the member’s death before retirement. However, an exception to that test allows an investment even if it gives a member an "incidental advantage". …in this case, accommodation to your friend at the snow. The ATO's Superannuation Ruling SMSFR 2008/2 provides guidance on the circumstances that the Commissioner views as constituting an acceptable "incidental advantage" and therefore that do not breach the Sole Purpose Test. These circumstances are very limited and I would recommend your friend call Your Super Solutions to discuss this further.
2. Why is a good quality trust deed critical to a self-managed super fund?
A trust deed is an essential document for all self-managed superannuation funds, yet often a trust deed’s importance is not treated with any seriousness.
Most SMSF deeds will contain two clauses.
- One which effectively puts all the various super laws into the trust deed.
- The second requires the trustees to do everything they reasonably can to ensure the fund does not lose its tax concessions.
These catch-all-clauses merely stop you doing something contrary to the law. It will not put flexibility into the trust deed. If it is not in the deed then you might not be able to do something that the law allows.
Changes to the Trust Deed
From time to time, there is a need to update a trust deed. A choice has to be made between changing the whole deed or only adding, deleting or amending part of an existing deed. It would cost more to make small changes to a trust deed than if you upgraded the full deed. You should also get a much better result because all the changes in the law should be included in the new deed. As a result, either all of the deed should be replaced or none of it should be replaced.
It is very common to see many older SMSFs with trust deeds that are 10 or more years old. In the last 10 years there has been an enormous change in the super regulatory environment. Also in that time there has been a big increase in our level of knowledge about the super rules. None of this would be reflected in an old trust deed.
SMSFs are a special type of super fund and are different to larger super funds in almost every respect. This means that the trust deed itself should be drafted specifically for SMSFs.
So how does a trustee know if their trust deed is a good one or not?
A good place to start is to read the trust deed to see what it says. This can be hard work but it can also be very fruitful. If a trustee is inexperienced they it might need to seek the services of a SMSF professional to guide them to a trust deed that will satisfy their circumstances.
3. How can my Will become ineffective when disposing of self-managed super fund benefits?
Many clients are surprised to find that their Will is completely ineffective when it comes to disposing of their superannuation benefits on their death. They wrongly assume that because they have made provision for the passing of their superannuation benefits in their Will that this will happen.
The following are examples of what can happen if you do not establish a comprehensive Estate Plan.
Katz v Grossman [2005]
In Katz’s case, a member of the fund died with two children – a daughter who was a trustee of the family SMSF and a non member son. The father left $1Mil in SMSF benefits with a direction in his Will that all his superannuation assets were to be split between his two children equally. On his death, the remaining trustee – his daughter (as trustee) did not take into account his non-binding death benefit nomination and paid all of the deceased member’s benefits to herself. The NSW Supreme Court held that she was entitled to take this action under the fund’s trust deed and the Will was ineffective. As a result of not making sure the SMSF was structured correctly, the deceased's daughter received his entire SMSF portfolio and his son received nothing.
Donovan v's Donovan [2009]
In a recent case where the Supreme Court of Queensland considered whether a letter written by a member of a self managed superannuation fund (SMSF) to the corporate trustee of the fund constituted a valid binding death benefit nomination. The court held that it did not as it failed to meet the requirements of reg. 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth). As a result of not making sure the SMSF Death Benefit Nominations were set up correctly, the deceased's spouse received his entire SMSF portfolio instead of it being split 50% to his spouse and 50% to his daughter as per his will.
Both of these situations could have been avoided by obtaining professional estate planning advice.