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FINANCIAL PLANNING With superannuation an increasingly important asset it is becoming essential to understand matters such as self-managed super funds and super death benefits. BY STEVE BLAKER In considering a topic for my article in this edition of Peace of Mind, I happened to come across an article some weeks ago written by John Wasiliev in the Smart Money section of the Wednesday Australian Financial Review. I felt it very appropriate for this magazine as the issue of bequeathing assets to one’s charity of choice is one that is raised more and more often. Where John refers to DIY (Do It Yourself) fund, I would prefer the title; Self-Managed Super Fund (SMSF). As a practice that specialises in providing advice to trustees of SMSFs, it is extremely rare to come across a trustee (whether individual/s or corporate) who has the time, expertise or inclination to ‘do it themselves’. The compliance and administration requirements alone require specialist assistance, not to mention the appropriate implementation of an Investment Policy Statement, incorporating a sound investment strategy and portfolio construction advice. The benefits of owning assets within a SMSF are too numerous to mention in this article, and may well be the basis of a future article. However, failure to not comply with your trust deed, The Superannuation Industry Supervision Act 1993 (SIS), The Income Tax Assessment Act (ITAA) 1936 and the Family Law Act, will cause your Fund to suffer the wrath of the regulator...that being our friendly Australian Tax Office. There are many people who set up quite involved estate plans to deal with what should happen to their assets after their death. With superannuation an important asset, it’s becoming increasingly relevant to know how to treat a super death benefit. A reader who is interested in this topic asks how her DIY fund administered allocated pension might be organised should she and her spouse wish to leave any surplus to a charitable foundation. They are already proposing to leave other assets to the charity through their wills. Her question concerns the tax treatment of a super benefit left to a charity. Melbourne superannuation lawyer Daniel Butler, of DBA Butler, explains that anyone who wishes to donate money from their super cannot make a direct payment from a super fund to a charity. Super funds can make direct payments only to a spouse or a dependant, such as a child or someone who is financially dependent on a member. Otherwise a benefit must first be paid to the member’s estate where a Will can then dictate where it is to go. The superannuation tax rules treat a death benefit paid to a spouse and children under the age of 18 very concessionally. They can receive a tax-free lump sum benefit up to the pension reasonable benefits limit (PRBL), currently $1 124 384. A child over 18 years of age must be financially dependent to qualify for similar treatment. Children (including adult children) who are not financial dependents can receive a payment directly from the super fund but this is first taxed as a lump sum death benefit. The tax rate in this instance is close to the tax the late member would have paid if he or she had taken his or her super as a lump sum but with no entitlement to the tax free portion of a super benefit deemed to have been accumulated after 1 July 1983. So long as the benefit is within the late member’s pension RBL, the maximum tax levied on a super death benefit is 15 per cent plus 1.5 per cent Medicare levy (16.5 per cent). Butler says that this same tax treatment applies when a benefit is paid to a late member’s estate: “If you want to pay a benefit to charity, the general rule is that you must first pay the benefit to the member’s estate, which can then be passed on through a wish expressed in a Will to the chosen charity”. While some members might consider that they can do better than this by asking a dependent to receive the payment and then pass it on to the charity, with the dependent entitled to a tax deduction for making a donation, this wish can’t be imposed through any superannuation arrangement. “You can’t impose a contractual obligation on the trustee of a super fund or a beneficiary,” Butler says. The only request that can be put to a trustee is to either pay the benefit to a spouse or dependent/s or pay the benefit to the member’s legal personal representative who will look after their estate as the executor. To ensure the benefit goes where they wish and isn’t challenged, a member might make a binding death benefit request, which nominates the estate as the preferred beneficiary of a superannuation entitlement. To be valid, such nominations need to be signed and dated by the member and also have signed and dated declarations from two witnesses who are over 18 and are not beneficiaries of the nomination. Butler says that where a benefit is paid to an estate with a wish in the Will that it go to a charity, there are circumstances when this can be challenged if there are potential family beneficiaries who believe they have missed out, especially if the nomination was less than two years old. Butler says that anyone who expects to leave a sizeable benefit to a charity, such as $100 000 or more, and doesn’t anticipate any family challenge, has another course of action open to them. They could establish a special charitable trust or what is commonly described as a prescribed private fund. The benefit would travel from the super fund to the member’s estate to the charitable trust. The money would still face being taxed as a death benefit but the charitable trust would be entitled to a tax deduction.
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