Masterclass SMSF – How Franked income works in the super fund in Australia

How Franked income works in the super fund in Australia

Franked income, such as franked dividends and in some cases trust distributions, can offer significant advantages when managing your self-managed super fund (SMSF)’s tax liability in Australia.  It is another example of the benefit of taking control of your super with an SMSF.

Australian companies and trusts give franking or tax credits, also known as imputation credits or franked dividends, for the Australian income tax they have paid. These are passed on to investors when the company or trust pays franked dividends or distributions or income. Since the Australian company tax rate is 30% currently, the tax credit attached to most fully franked dividends is 30%.

Once in an investor’s hands, the ‘tax credits’ or franked income, are used to reduce the amount of income tax payable by the investor, or if the credits exceed their total tax bill, the credits will be refunded to the investor by the Australian Taxation Office (ATO) on lodgement of their tax return.

In an SMSF, franked income is beneficial, because the maximum rate of tax paid by a self managed fund on investment income is 15% when in the accumulation phase and 0% when in pension phase. Therefore, when an SMSF receives a fully franked dividend, the franking credit will not only offset tax payable on the dividend income itself, it will either offset tax payable on the SMSF’s other income (including concessional contributions) or may be refunded by the ATO.

For example: SMSF receives:

$560       Dividend received in cash

$240       Franking credit with distribution

$800       Total “Distribution” (dividend + franking credit)

$500       Interest Income to SMSF (bank etc)

$1300    Total Taxable Income

$195       Tax payable on Income $1300, at 15% in SMSF

$240       Less these Franking credits above (tax already paid)

-$45        Net refund from ATO (240credit-195due)

As can be seen, the Franking Credit more than covers the tax due, resulting in a refund

If Pension phase was running in the SMSF, the $195 would not be due at all, and the FULL $240 would be returned to the fund.

The main rule dictating whether your SMSF is entitled to use the franking credits it receives is known as the 45 day holding rule. This rule generally requires your SMSF to hold an investment for at least 45 days (not counting the day of acquisition or disposal) to be eligible for a tax offset or refund of the franking credit.

However the benefits of franking credits should not be the driver of you investment decisions, other factors must also be considered, so discuss with your advisor!

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

MASTERCLASS Investment – ROC Importance – Company Health Ratios Part 4 – Return on Capital Employed is Important

ROC Importance – Company Health Ratios Part 4 – Return on Capital Employed is Important

The formula /ratio for Return on Capital (ROC) is similar to Return on Equity (ROE) but ROC takes into account long-term debt. An investor looking for long term investments should consider quality, as well as value measures/ratios. In order to grow and compound earnings a company must generate capital returns higher than its cost of capital. Of course, the higher the returns over the cost of capital, the better.

Return on capital provides the investor with quality measures that can be employed with many other ratios. A long term investor aims to purchase assets at a discount, but also wants to buy companies that are earning excess returns on capital. This is the only way a company can sustain an above average growth rate.

A firm’s return on capital can be an indicator of the size and strength of its health. If a company is able to generate returns of 15-20% year after year, it has a great method for transforming investor capital into profits.

Return on capital is especially useful where companies invest a large amount of capital – oil and gas firms, computer hardware companies, and even big department stores. As an investor, it’s important to know that if a company uses your money, you’ll get a respectable return on your investment.

Note – if there is NO debt, the result for ROC will be the SAME as Return on Equity (ROE), however, when there is debt, the denominator figure is larger, resulting in a lower ROC ratio figure than the ROE.

ROC is most useful when using it to calculate the returns generated by the CORE business operation itself, not the short-lived results from one-time events. Gains/losses from foreign currency fluctuations and other one-time events contribute to the net income listed on the bottom line, but they’re not results from business operations. Try to think of what your business “does” and only consider income related to those core business operations.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

Centrelink Services Aust. – Older Australians – What is available

Centrelink Services Aust. – Older Australians – What is available

Here is a summary of what is available in  payments and services for Older Australians who plan to retire, have retired, or are considering working past Age Pension age.

Age Pension

Age Pension provides income support for eligible older Australians. If you get Age Pension you also have access to a range of concessions.

If you meet age and residence requirements, we’ll calculate how much Age Pension you can get. This depends on your income, assets and other circumstances.

You may get Age Pension without needing to meet the income and assets tests if both of the following apply:

• You’re legally blind;
• You’re not claiming Rent Assistance.

If you’re still working past Age Pension age, you may get a partial Age Pension payment.

If you get Age Pension, you may need to take steps to claim a pension from another country. This is if you have lived or worked in a country other than Australia.

Read about Age Pension and planning to retire.

Transfer to Age Pension

You can apply to transfer to Age Pension if you’re Age Pension age and get an eligible Centrelink payment.

Use our Payment and Service Finder to see how much Age Pension you may get.

Other financial help

If you’re Age Pension age or older and can’t get Age Pension, you may be able to get other help.

The Pension Loans Scheme can help you supplement your retirement income with a non-taxable loan.

If you’re a self-funded retiree, you may be eligible for a Commonwealth Seniors Health Card and related payments and services.

Other payments include:

• Carer Payment or Carer Allowance if you’re caring for someone with severe disability, illness or is frail aged
• Parenting Payment if you’re the main carer of a young child
• Austudy or ABSTUDY if you’re a student or apprentice
• Farm Household Allowance if you’re a farmer or farmer’s partner in financial hardship
• Special Benefit if you’re in severe financial hardship and can’t get other income support from us.

Use our Payment and Service Finder to see what you can get depending on your circumstances.

Help with living and household costs

We have payments to help you with your living and household costs:

• Rent Assistance gives you extra financial help if you rent privately and get a payment from us.
• Energy Supplement is an ongoing payment if you get a pension.

Help with health care expenses

We have payments to help you with health care expenses.

The Continence Aids Payment Scheme helps eligible people with incontinence product expenses. It’s paid once a year.

The External Breast Prostheses Reimbursement Program helps women who’ve had a mastectomy as a result of breast cancer. It’s for eligible women who purchased a new or replacement external breast prosthesis after 1 July 2008.

Other government and community support services

You can use Payment and Service Finder to find local services that provide support and information.

Moneysmart has tools and tips to help you make the most of your money. Read the Over 55s section on the Moneysmart website.

myagedcare can help with advice on aged care and support services, including:

• What help is available;
• Assistance at home;
• Aged care homes;
• Caring for someone.

If you’re feeling depressed, anxious or stressed, you might find it helpful to talk to someone about your mental health. Use our Payment and Service Finder to find support groups and services in your state.

You can find out about services for people with hearing loss from the Australian Government Department of Health.

Visit the Be Connected website for free resources designed to help you feel confident using the internet. It has a range of courses including how to:

• Improve online skills;
• Keep your details safe;
• Do online banking.

Get your FREE 5 Easy Steps to Plan Retirement One-Page planner from the Resources

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then call for a FREE strategy session today

No obligation call 0407 361 596, Paul

Masterclass SMSF – Can SMSF run a business?

Can SMSF run a business?

It’s a common question or advisors are asked – Can an SMSF (Self-Managed Super Fund) run a business?

The regulator of SMSF is the ATO, so let’s look at what they say –

Self-managed super funds (SMSFs) are not prohibited from carrying on a business, but the business must be:

• Allowed under the trust deed;
• Operated for the sole purpose of providing retirement benefits for fund members.

The rules governing SMSFs prohibit or limit some activities available to other businesses, such as entering into credit arrangements or having overdrafts. You should get professional advice before carrying on a business through your SMSF.

Sole purpose test

If the trustee of an SMSF carries on a business, we examine the activities closely to ensure the sole purpose test is not breached. Cases that attract our attention include those where:

• The trustee employs a family member (we look at things such as, the stated rationale for employing the family member and the salary or wages paid);
• The ‘business’ is an activity commonly carried out as a hobby or pastime;
• The business carried on by the fund has links to associated trading entities;
• There are indications the fund’s business assets are available for the private use and benefit of the trustee or related parties.

Other regulatory provisions

As a trustee, ensure a business conducted through your SMSF complies with investment rules and restrictions applying to SMSFs.

Your investment strategy – the nature of the business activities and the way they are conducted must be in accordance with the SMSF’s investment strategy.

Restrictions on investments – all investments by your SMSF must be made on a commercial ‘arm’s length’ basis. If you don’t comply with the investment restrictions, penalties could apply.

Loans and financial assistance – the business activities must not involve:

• Selling an SMSF asset for less than its market value to a member or relative of a member;
• Purchasing an asset for greater than its market value from a member or relative of a member;
• Acquiring services in excess of what the SMSF requires from a member or relative of a member;
• Paying an inflated price for services acquired from a member or relative of a member.

Acquiring assets from related parties – purchasing assets (such as plant and equipment) for use in business activities from a member or other related party could contravene the related party acquisition rules.

Borrowing – drawing on a bank overdraft or margin lending account to fund the business activities could contravene the borrowing restrictions. Borrowing money and placing a mortgage on an asset would contravene the borrowing and charge-over assets restrictions.

Arm’s length dealings – employing a member, or relative of a member, in the business at a salary higher than an arm’s length rate could contravene the arm’s length provisions.

Collectables and personal use assets – these type of assets owned by the SMSF can’t be displayed at the business premises.

If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and see how our Super-Connector Service assists you to  find the right expert to answer your question – it’s FREE also!

No obligation. 0407 361 596, Paul.

NEWS – Call to re-think pension TBAR calculations for SMSFs

Call to re-think pension TBAR calculations for SMSFs

With the ATO looking to streamline the transfer balance account reporting (TBAR) framework, the new changes can explore the potential to reshape new accuracy for pensions commencements in SMSFs.

The ATO had recently flagged that it is seeking feedback on moving to a single transfer balance cap events-based reporting framework for all self-managed superannuation funds (SMSFs).

The ATO is looking to streamline transfer balance cap events-based reporting arrangements so that the same reporting time frame applies to all SMSFs, which will deliver better outcomes and provide more timely transfer balance account reporting.

In a recent update, Heffron managing director Meg Heffron said that having a single set of deadlines for all SMSFs makes perfect sense. 

“Remember that right now, most SMSFs are ‘quarterly reporters’. Only those where all members had total super balances of less than $1 million at the 30 June immediately before their first reporting event are ‘annual reporters’,” she said.

“Even at the time this special concession was made, it was talked about as a stepping stone to help SMSFs adjust to a new reporting regime. So while no-one likes reporting that is brought forward, I suggest we all just get on board with this.”

“But I would like the ATO to also think a little more imaginatively about the whole issue of reporting while they’re at it.”

Specifically, Ms Heffron noted that new changes could explore what it really means to report an “accurate” value for the commencement of a pension.

“For transfer balance account purposes, the value to be reported when a pension starts is the ‘value on the starting day of the superannuation interest that supports the superannuation income stream’,” she noted.

“That value is defined as the total lump sum that could be paid from the interest at the time. In a public offer fund, that figure is very transparent. And because it’s quoted precisely in dollars and cents, we assume it’s incredibly accurate. But of course it’s not. Just like an SMSF, there’s no way a public offer fund values absolutely every asset and liability every day. Estimates are made, supported by strong process and logic, but they are estimates just the same.”

The big difference between a public offer fund and an SMSF is that in the public offer world, no-one goes back over the books and adjusts the amount reported for the commencement of the pension once all the tax provisions are correctly tallied, according to Ms Heffron.

“In other words, no-one ever updates the estimate. If every single member of a public offer fund commenced a pension on 1 July 2021, I’ll bet the total amounts reported across the fund as a whole would not conveniently add up (exactly) to the value of the fund shown on its 30 June 2021 audited accounts,” Ms Heffron explained.

“And that makes perfect sense! What is the use of doing that months after the event? And the estimate was actually the ‘correct’ number in the first place. If an individual member had asked for their full balance as a lump sum, it’s the estimate that would have been paid, not some notional amount calculated retrospectively once all the things that were unknown at that date are known for sure.”

As SMSFs are held to a higher standard, Ms Heffron pondered why there is always an assumption that there is a dollar perfect correct amount that represents the member’s pension balance on the date it starts and why is there insistence on going back and exactly matching TBAR figures with the audited accounts?

“If we ran SMSFs like public offer funds, pension commencement amounts would always be estimates. And these estimates would never be updated. And that would make quarterly reporting a breeze,” Ms Heffron explained.

“So rather than getting up in arms about potential changes to the frequency of reporting, let’s have this discussion. Let’s legitimise (with guidelines if really necessary) the use of well-supported estimates as the real figures for reporting, just like a public fund would.”

“I wonder if the ATO is even quite comfortable with that, and it’s those of us on the industry side of the fence that are hesitating. In their guidance on TBA reporting, the ATO even says, ‘If the trustee has used a reasonable estimate and the value of that income stream significantly changes, the trustee may correct the value initially reported to us’.”

“Perhaps we should place more emphasis on the word ‘significantly’ and only adjust the reporting after the fact if it really is a material change. That’s something it would be good to get on the table.”

Tony Zhang reporting at SMSF Adviser.

What are your Thoughts? Comment below!

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MASTERCLASS Investment – ROC – Company Health Ratios Part 4 – Return on Capital – What does it mean and how to calculate & use the return on capital ratio?

ROC – Company Health Ratios Part 4 – Return on Capital – What does it mean and how to calculate & use the return on capital ratio?

Continuing our series on Company Health Ratios, today we look at the Return on Capital (ROC) which is similar to Return on Equity, ROE which we covered before, but ROC also includes capital costs as well as Equity. So what is Return on Capital and how do you calculate this rate of return?

Return on capital is the same formula as return on equity ROE, but in addition to the value of ownership in a company (equity), we include the capital employed such as the total value of debts owed by the company in the form of loans and bonds.

The Formula is:
ROC =             Net Income (profit/earnings) EBIT

                      (Shareholders’ Equity + Total Liabilities)

How It Works/Example:

Let’s assume Company ABC generated

1. $5,000,000 in net income last year
2. shareholders’ equity equaled $20,000,000 last year, and
3. total debt or total liability $10,000,000,

then we can calculate ROC as:
ROC = $5,000,000/($20,000,000+10,000,000) = 0.17 or 17%
This means that Company ABC generated $0.17 of profit for every $1 of capital.

Why It Matters:

ROC is a measure of profit against capital as well as a measure of “efficiency”, which takes into account debt/borrowings.

If there is NO debt, the result will be the same as return on equity (ROE), however, when there is debt, the denominator (bottom) figure is larger, resulting in a lower ratio figure than the ROE.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

Pensions – In SMSF, how to start and stop

In SMSF, how to start and stop

The Australian Tax Office (ATO) is the regulator of self-managed super funds (SMSF), and enforcer of the law. Here is how to start and stop a pension in your SMSF (Self-Managed Super Fund).

Commencement of a pension officially begins when?

The commencement day of an SMSF pension is the first day of the time period to which the first payment of the pension relates. This will generally be determined by the date set by Trustees as the day the pension starts as well as the governing rules of the fund. For pensions that commenced before 1 July 2007, they must continue to be paid under the previous pension payment standards unless the pension is an allocated pension. With allocated pensions, one can choose to start paying them under the minimum standards any time after 1 July 2007, without having to commute and start a new pension, as long as this is allowed by the rules of your fund.

For pensions that commenced between 1 July 2007 and 19 September 2007, you can choose to pay the pension under the previous or the new pension rules, provided it is allowed by the rules of your fund. All pensions that commencing after 19 September 2007 must meet the minimum pension standards. Allocated pensions are generally now called Account-Based pensions. An account-based pension refers to a pension where an account balance is attributable to the member. That means, the amount supporting the pension must be allocated to a separate account for each member.

Minimum Pension Amounts defined –

The minimum amounts or standards mean that the super pensions paid must meet all of the following requirements:

1. The pension must be account-based, except in limited circumstances.
2. You must pay a minimum amount at least annually, stipulated by law see HERE.
3. You cannot increase the capital supporting the pension using contributions or rollover amounts once the pension has started.
4. A pension being paid to a member who dies can only be transferred to a dependant beneficiary of that member.
5. You cannot use the capital value of the pension or the income from it as security for borrowing.
6. Before you can commute a pension, you must pay a minimum amount in certain circumstances.

There are no maximum draw-down limits for pensions commencing after 19 September 2007, except for transition-to-retirement income streams.

Ceasing a pension

These are the most common ways to stop or know that a pension has ceased

Pension capital is exhausted

A super income stream ceases as no super income stream benefits are payable when both the:

• Capital supporting the pension has been reduced to nil;
• Member’s right to have any other amounts applied (other than by way of contribution or roll over) to their superannuation interest has been exhausted.

For an account-based pension, the pension ceases when the money funding the pension has run out.

Failure to meet the super pension standards

If a fund fails to meet the required super pension standards for an account-based pension in an income year, the super income stream is taken to have ceased at the start of that income year for income tax purposes.

From the start of the income year, the member’s account is no longer taken to be supporting a super income stream. Any payments made during the year will be super lump sums for income tax purposes and lump sums for SISR purposes.

Where the underpayments relate to a retirement phase income stream, this also means the fund will not be entitled to treat income or capital gains as ECPI for the year.

When a new super income stream commences, you as trustee will be required to recalculate the tax-free and taxable components of the new pension.

One of the most common reasons for not meeting the pension standards is failure by funds to meet the minimum annual pension payment requirements.

There are limited circumstances where the Commissioner of Taxation will allow a pension to continue, even though the trustee has failed to pay the minimum amount of pension.

We have published a Q&A on our website (below). These highlight the conditions to satisfy to allow a pension to continue if a fund fails to meet the minimum pension payment requirements in an income year.

See also: SMSFs – Minimum pension payment requirements FAQs

Pension is fully commuted

A super income stream ceases when a member or a dependant beneficiary requests to fully commute their entitlements to future super income stream benefits to a lump sum entitlement takes effect.

A request to fully commute a superannuation income stream takes effect as soon as the trustee’s liability to pay periodic superannuation income stream benefits is substituted with a liability to pay a superannuation lump sum to the member or dependant beneficiary.

A payment resulting from a full commutation can’t count towards the required minimum annual pension payment amount.

The taxable and tax-free components of the commutation payment will have the same proportions as those determined for the separate interest that supported the pension when the pension commenced.

Before fully commuting a member’s pension, you should ensure all minimum annual pension payments are made.

You must also consider the more restrictive commutation rules that apply to TRIS.

If a member fully commutes a pension and retains the amount of the commutation lump sum within the fund, you will be required to recalculate the tax-free and taxable components of any new benefit subsequently paid from the fund.

Pension ceasing upon death

A pension ceases as soon as a member in receipt of the pension dies. That is unless a dependant beneficiary is automatically entitled to a reversionary pension.

For examples and more details, see the ATO site – SMSF starting and stopping a pension HERE.

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Basics about Super – Choice of Super – How it works – Superannuation Standard Choice Form

Choice of Super – How it works – Superannuation standard choice form

In Australia, the majority of employees are eligible for super and in many cases are also eligible to choose the super fund you pay the super into for them, on the Superannuation Standard Choice Form. But if they aren’t eligible to choose or don’t make a choice, you must pay their contributions into your employer-nominated or default fund. Here’s how it works –

Step 1: Identify employees who are eligible to choose

When you employ new staff, check if they’re eligible to choose a super fund.

Your new employee is eligible to choose their super fund if they are:

• Employed under a Federal Award;
• Employed under a former State Award, now known as a Notional Agreement Preserving State Award (NAPSA);
• Employed under an award or industrial agreement that does not require super contributions;
• Not employed under any State Award or Industrial Agreement (including contractors who are regarded as eligible employees for super purposes).

If you’re not sure what award, if any, or industrial agreement covers your employee:

• Visit the Fair Work website at fairwork.gov.au;
• Phone the workplace relations department in your state or territory;
• Check with your employer association.

From 1 July 2015:

• You don’t need to offer choice to employees on temporary working visas. Your employee retains the right to request a standard choice form from you;
• You no longer have to provide a standard choice form to employees whose superannuation fund undergoes a merger or acquisition. Employees retain the right to request a choice form from their employer should they not wish to be placed in the successor fund.

Step 2: Provide a standard choice form

You must provide employees who are eligible to choose a super fund with a Standard choice form (or equivalent) within 28 days of their start date, unless they give you details of their chosen fund first.

You don’t have to use the Standard choice form, but any alternative document must cover all the information that the Standard choice form covers.

Existing eligible employees are entitled to change their choice of fund as often as they want to, but you have to accept a new choice from them only once in any 12-month period. If your employee asks for a choice form you have 28 days to provide it.

You need to keep a copy of the completed Standard choice form for your own records for five years. You don’t have to send a copy to us or to your employee’s chosen super fund.

You also have to give an employee a Standard choice form within 28 days if you:

• Can’t contribute to their chosen fund or it’s no longer a complying fund;
• Change your employer-nominated fund and you’re paying the employee’s contributions into that fund.

Step 3: Pay into your employer default fund until the choice form is returned

If your employees don’t choose a fund or haven’t provided the necessary information and a super contribution is due, you must make the payment for them into your employer-nominated fund by the due date.

Step 4: Act on your employee’s choice

Once an employee advises you of their choice of super fund, you have two months to start paying contributions into that fund.

You may be penalised if you don’t offer your eligible employees a choice of fund or you don’t pay their super to their chosen fund.

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and You – top right hand side above.

If you have any questions, why not give us a call – it’s FREE also! No obligation. 0407 361 596, Paul

Masterclass SMSF – Fractional Property Investment in SMSF

Fractional Property Investment in SMSF

An SMSF trustee can consider fractional property investment in their SMSF, which is similar to purchasing units in a managed property trust. Fractional investment offers an alternative to forking out big dollars to get into the housing market.

How it works –

Fractional investing, much like its name suggests, means investing in a smaller piece of a whole asset. The property is divided up into small shares and sold off to investors at a price that is affordable compared to the whole property.

These investors will then receive income via rent from the property and can also benefit from capital gains once it sells or they sell their shares. It is important to note though that all gains and returns will be proportional to the size of the share in the investment.

Benefits –

Fractional property investment is gaining traction across Australia and for good reason – it enables you to buy a portion of a property, so you get all of the benefits of owning a property (or part of it at least) without the upfront expense and the ongoing hassle of covering expenses. Think of it as property crowd-funding.

One of the biggest advantages of fractional investment is the low barrier to entry when compared to traditional property investment. Investors don’t need to save 10-20% of a property’s value as a deposit – they can own a share of a property for a very small initial outlay.

There are a number of options available for buying an investment property through factional ownership but it’s a good idea to do your research before jumping in. Some do offer relatively low risk options though because the amount you invest is low. Typically they generate a low level of ongoing income – they are primarily positioned for long-term capital growth.

Tax Office View –

The ATO has approved fractional investing for SMSF – but always with the Sole Purpose Test in mind (that super monies are used for the FUTURE benefit of members, not current benefit such as renting to themselves or relations). The ATO gave guidance following the 2018 Federal Court decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122External Link.

Specifically, the ATO is considering the sole purpose test implications of fractional property investments especially in relation to one particular company, and how it is dealt with.

The ATO has indicated it is open to fractional property investments being used within an SMSF, but product providers would need to seek approval from the regulator before going to market.

The SMSF regulator (ATO) made the comments as part of a statement titled “Guidance for SMSFs on fractional property investment”, in which it invited fractional investment product providers that were considering the sole purpose test implications of their products to speak with the ATO.

The other way AN SMSF can invest in property is place a deposit and borrow, (Limited Recourse Borrowing Arrangement – LRBA) but in 2019 the availability of lenders for this is limited, and much more restricted.

Want to learn about LRBA borrowing and how property works in SMSF? See our FREE slides SMSF & Property Overview

Call for FREE education, or to speak to an advisor about your specific situation.

SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need. A call is FREE.

If you have any questions, why not give us a call – it’s FREE! No obligation. 0407 361 596, Paul

Masterclass SMSF – Changing Trustee – Special Situations

Changing Trustee – Special Situations

All self-managed super fund (SMSF) members must be trustees of the fund, but a trustee need not be a member, however there are some exceptions such as:

• Minors, being too ill or old, mental incapacity or travel overseas for an extended period, they can become (or remain) a member of an SMSF if another person is appointed to act as trustee on their behalf;
• If a fund member dies, their legal personal representative (LPR) will normally act on their behalf until a decision has been made to make a death benefit payable; and
• If a person becomes the last remaining fund member, they can keep the fund running if another person is appointed as trustee or implements other solutions.

All members of an SMSF should be aware that failing to meet the trustee rules and requirements could render the fund non-compliant.

Specific situations about Changing Trustees and possible solutions:

Minors

Minors are not able to be SMSF trustees because they are classed as being “under a legal disability” and are not permitted to enter into contracts, but can be a member of an SMSF if a parent (who may also be a member of the fund), a guardian or a LPR is prepared to act as trustee on their behalf. Once the minor reaches the age of 18, the parent, guardian, or LPR must resign as trustee and the minor is then appointed as trustee if they want to remain a member.

Mental Incapacity

Having a mental incapacity is also considered to be under a legal disability and means a person cannot be an SMSF trustee, but they can be an SMSF member if a person who holds an enduring power of attorney (EPOA) is appointed to act as trustee on their behalf.

Situations where a trustee becomes mentally incapacitated without an EPOA can be problematic.

An eligible person(s) eg family member, needs to be court-appointed to act on that person’s behalf (ie, become the person’s LPR) and then are they able to become trustee of the SMSF in place of the disabled member.

Members Going Overseas for an Extended Period

Be careful if a fund member plans to go overseas permanently and in some cases, even temporarily, as the Australian Tax Office (ATO) may deem that the ‘central management and control’ of the fund has not remained in Australia and the fund will not meet the definitions of ‘resident Australian superannuation fund’ and will lose access to the tax concessions. The solution is to appoint an EPOA to a resident of Australia, or rolling over the departing member’s benefits to a public offer fund or converting the fund to a small Australian Prudential Regulation Authority (APRA) fund (SAF).

Older Members

In time a member of an SMSF will age and/or suffer from some sort of illness that will impact their ability for continuing to act as trustee or a director of a corporate trustee of their SMSF. Some actions are  – they have a choice of winding up the SMSF, or choosing to continue to run the SMSF by appointing a LPR who holds an EPOA on their behalf to take their place as trustee of the SMSF.

Deceased Members

When a member dies, they are no longer a trustee of the SMSF and an LPR will act as trustee until a death benefit can be paid.

The Trust Deed rules become the guide and may allow the remaining trustee/member to appoint someone else to act as trustee until a decision has been made to make a death benefit payable. Binding Death Nominations can assist with directing benefits as per the member’s wishes but to be valid, the nomination must also be consistent with the requirements set out in the trust deed rules.

The person appointed as trustee for the deceased member remains in this role until a decision has been made to make a death benefit payable, either in part or in full, and then usually they step down from trustee

Also note that if a part payment is made, the person must step down as trustee when a decision has been made to pay a death benefit, and the subsequent payments are determined by the remaining trustee(s).

Becoming a Single Member Fund

If a fund that has two or more (but less than five) members it will eventually become a single-member fund and then that member can appoint a second trustee to the fund. They do not have to be or become a member of the fund as well, and cannot be an employee of the remaining SMSF member (unless a relative). Alternatively, the fund could appoint a corporate trustee, and meet certain other conditions.

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