Superannuation, the ultimate government cash cow?

[sptrawler]

Further to the @Belli excellent post, I have found a plain english summary of the Munro Vs Munro case, well worth a read for those with a SMSF.
Below is a summary from the article:

Munro v Munro: the importance of a valid binding death benefit nomination

www.cleardocs.com

The facts of the case​

The Death Benefit Nomination​

Mr Munro signed a binding death benefit nomination in September 2009 specifying the beneficiary to receive his superannuation benefits as:

Person	Proportion	Relationship
Trustee of Deceased Estate	100%	Trustee

The Fund​

Mr Munro, a solicitor, was the trustee and member of an SMSF with his wife (Mrs Munro).

Mr Munro died in August 2011.

The executors of Mr Munro's will were Mr Munro's two daughters from a previous marriage and Mrs Munro.

After Mr Munro's death, Mrs Munro's daughter (who was not related to Mr Munro) was appointed as an additional trustee of the SMSF.

The Trust Deed​

The SMSF's trust deed required the trustee to pay any benefits in accordance with a binding nomination provided that the nomination, amongst other things:

• specified that the benefits were to be paid to (as nominated by the member):
  • one or more of the member's 'dependants'; or
  • the member's 'legal personal representative',
  which reflects the requirements of superannuation law;[2] and
• complied with any requirements which the trustee must comply with to avoid a contravention of the requirements or in order for the SMSF to qualify for concessional taxation treatment as a complying superannuation fund.

The SMSF's trust deed provided that if these requirements were not satisfied, then the trustees were not bound by the nomination and could pay the benefits at their discretion (subject to the trust deed and superannuation law, which limited payment of the benefits to 'dependants' or the 'legal personal representative' as above)

The Dispute​

The trustees (being Mrs Munro and her daughter) gave notice to the two executors (being Mr Munro's two daughters) that they intended to exercise their discretion as trustees in paying Mr Munro's superannuation benefits, on the basis that they considered the death benefit nomination invalid for the purposes of the trust deed.

Mr Munro's daughters (two of the three executors of his will) sought a court order that the nomination was binding on the trustees.

The outcome​

The court held that the death benefit nomination was not a binding nomination as was required by superannuation law and the SMSF's trust deed — and so the trustees were not bound by it.

The issue with the nomination was that the nominated beneficiary of 'Trustee of Deceased Estate' did not comply with superannuation law and the trust deed — which required payments to 'dependants' or a 'legal personal representative'.

The definition of 'legal personal representative' in superannuation law means, relevantly in this situation, the executor of the will of a deceased person.

Mr Munro's daughters argued that 'Trustee of Deceased Estate' meant Mr Munro's executors.

The judge noted that while the terms 'executor' and 'trustee' may be used interchangeably colloquially, the terms are distinct. This is generally an issue of timing. The 'executor' holds the property of a deceased person for the purpose of carrying out the administration duties of the estate (for example, collecting the assets, paying the debts of the deceased and administration expenses, and selling the assets to give effects to the gifts in the will). The 'trustee' then applies the assets to the trusts under the will.

As a result, the nomination of 'Trustee of Deceased Estate' was insufficient to direct the trustee to pay the benefits to Mr Munro's 'legal personal representative', being his executors. As a result, the nomination was not binding.

Who should have been nominated as the beneficiary?​

It appears that Mr Munro's intention was that his superannuation benefits be paid to his estate.

If Mr Munro intended to nominate his 'legal personal representative' (that is, his executors), then his binding death benefit nomination should have specified either:

• that it was nominating the 'legal personal representative' (this is preferable) or the executor of the will; or
• the name of the executor of the will (if that coincided with the executor named in the last will), but identified that the named person was the legal personal representative.

In our view 'legal personal representative' is preferable because this reflects the wording in the superannuation law.[3]

What does the case mean for SMSFs?​

Members will need to check any death benefit nominations they have entered into to ensure that that the nomination will in fact bind the trustee.

This is particularly important for members who intend their superannuation benefits to be paid to their estate. If a member has signed a death benefit nomination specifying payments to a 'trustee', this may be ineffective and the SMSF trustees may not be bound by it.

Members should be mindful of situations such as Munro v Munro, where the remaining trustees (or directors of the trustee) wish to distribute the benefits otherwise than in accordance with the nomination — and may look for reasons not to be bound by the nomination.

If members are unsure about their death benefit nominations, they should obtain legal advice.

 

[Junior]

Super can be very valuable for low income earners, to top up Age Pension. It is a huge difference retiring with Age Pension income only, versus having an additional income stream from super.

Those average balances will obviously climb, as we start to see retirees who have benefitted from mandatory super contributions for their entire working lives.

Take this example. A 30 year old earning $50k per annum (and assuming that only increases with CPI), retiring at 67 years old, SG Contributions only. Age pension for a single person is $27k per annum. This retiree would be able to take a lump sum out of super at retirement. Fix the house up, clear the last bit of mortgage, buy a caravan, and then have a much better lifestyle through retirement.

The idea that low income earners should forgo super altogether is not the answer in my view. You are just making them 100% on Government support at retirement, in most cases.

 

[Belli]

I have found a plain english summary of the Munro Vs Munro case, well worth a read for those with a SMSF.
Below is a summary from the article:

Nice find @sptrawler.

Although the Munro decision was in 2015, I posted it as a result of discussions I had yesterday. A number of SMSF Trusts Deed variations may have been made after 2015 and incorporated the Munro decision. However, we looked at a few BDBN's and they were signed before the SMSF TD variation date and so could be invalid. Best to check out any deed and BDBN made before 2015 and even after just in case. Sure it'll cost a few $$ but in comparison to your SMSF and your wishes are invalid, it's chump change really.

Alternatively, wind up the SMSF and make sure you die both broke and bankrupt.

 

[Belli]

Bloody heck. Trustees of SMSF should read this High Court decision very carefully, think deeply of the consequences and seek a professional opinion in regard to the Trust Deed and any BDBN currently in place.

Hill v Zuda Pty Ltd [2022] HCA 21 (15 June 2022)

www.austlii.edu.au

 

[sptrawler]

We don't have a BDBN in place, so must check out the value of one, I would guess the standard regulations would apply to a SMSF which consists of two members, when one member dies.

 

[Belli]

We don't have a BDBN in place, so must check out the value of one, I would guess the standard regulations would apply to a SMSF which consists of two members, when one member dies.

A short summary of the decision from what I understand. It was remiss of me not to do that in my previous post so apologies to all.

High Court decided that effectively SIS Regulation 6.17A does not apply to SMSFs.

As a result it means non-lapsing BDBNs are indefinite. That's something we assumed but the High Court has confirmed it. Also a BDBN by a member of an SMSF does not require two witnesses and there is no requirement to provide such a notice to the Trustee - those are provisions in the Regulation. There are other aspects as a consequence of the decision.

Having said that however, the BDBN must comply with the Trust Deed.

One aspect I have found over the years of being a Trustee of an SMSF, it isn't just "Buy this, Sell that" approach. There is a need to keep up to date with any case law or court decisions which may impact. That requires the Trust Deed to be reviewed on occasions. It doesn't happen often but it does happen.

I suspect there are many Trust Deeds out there which have never been updated since the time the SMSF was established either through ignorance or not wanting to spend a few $$ to update the Deed. Probably most will go through probate and all that without an issue but you never know. It's the "you never know" which you try to address by having the Deed reviewed every so often.

As an aside never have your kids as members of the SMSF. That can be a whole world of pain. Also if one of your relatives is to become the Trustee of your SMSF, try and ensure if they have a partner they are not also made a Trustee (unless the wording is as tight as a duck's a**) as it is possible, given you cannot fetter the discretion of a Trustee, the funds in the SMSF will not end up where you would have preferred but in their pocket. Yes, it has happened.

 

[Dona Ferentes]

all too true, @Belli .

And particularly apposite is your comment:

One aspect I have found over the years of being a Trustee of an SMSF, it isn't just "Buy this, Sell that" approach. There is a need to keep up to date with any case law or court decisions which may impact. That requires the Trust Deed to be reviewed on occasions. It doesn't happen often but it does happen.

Sadly, for investors and especially SMSF, most measures, and sales pitches, are in terms of "returns" (including the egregious "compared to an index" ones). I have found from experience there are much better outcomes from strategy than investment decisions.

 

[dyna]

As an aside never have your kids as members of the SMSF

Amen to that, alright.
Another thing I've just thought of : pay for professional advice when it comes to borrowing for real estate .
Non- recourse loans can be really tricky to get right. There is so much to be careful about , here. Don't try to do it on your own.
All this, from some one who has no probs doing his own tax return.

 

[Belli]

@sptrawler I found a pretty good article which you may want to read. Here is the link.

How long can an SMSF BDBN last for? The High Court answers in Hill v Zuda | Leading SMSF Law Firm %

The High Court of Australia has settled the debate on how long an SMSF BDBN can last for. Implicitly this judgement also provides support in answering other critical SMSF succession planning questions, such as: • Can a BDBN make a pension reversion mid-stream?• Can a BDBN override pension...

www.dbalawyers.com.au

 

[Belli]

Amen to that, alright.
Another thing I've just thought of : pay for professional advice when it comes to borrowing for real estate .
Non- recourse loans can be really tricky to get right. There is so much to be careful about , here. Don't try to do it on your own.
All this, from some one who has no probs doing his own tax return.

Yeah, some think it's a great idea and it can work in some cases but there is the issue of voting power on decisions. Really want someone who has contributed say $50k having decision over your $1.6m? What about if they want crypto and others don't? If things go sour how do you remove them as Trustee? What are your audit procedures to stop them accessing the funds to feed the personal party animal or illicit substances? All of these issues and more have occurred.

Many, many matters to consider even before your start to think about going down that path of having anyone other than yourself and significant other as members of the SMSF.

 

[Belli]

We don't have a BDBN in place, so must check out the value of one, I would guess the standard regulations would apply to a SMSF which consists of two members, when one member dies.

I intended to address this in a previous post but I forgot. Sorry about that @sptrawler.

Essentially it is the trustee of the super fund who decides who gets what once a member shuffles off this mortal coil. Doesn't matter what your Will may say as superannuation does not form part of a deceased estate. The trust deed prevails. That's where the BDBN comes into play to bypass trustee consideration and impose an obligation on the trustee. If a BDBN is worded incorrectly it may be disregarded by the trustee as being defective.

I'm no expert so don't take that as gospel. It's best to get professional advice.

 

[rcw1]

I intended to address this in a previous post but I forgot. Sorry about that @sptrawler.

Essentially it is the trustee of the super fund who decides who gets what once a member shuffles off this mortal coil. Doesn't matter what your Will may say as superannuation does not form part of a deceased estate. The trust deed prevails. That's where the BDBN comes into play to bypass trustee consideration and impose an obligation on the trustee. If a BDBN is worded incorrectly it may be disregarded by the trustee as being defective.

I'm no expert so don't take that as gospel. It's best to get professional advice.

Good evening
It is rcw1's understanding that a Binding Death Benefit Nomination form is required to be renewed every two years otherwise it will be null and voided.

Have a very night night.

Kind regards
rcw1

 

[Belli]

Good evening
It is rcw1's understanding that a Binding Death Benefit Nomination form is required to be renewed every two years otherwise it will be null and voided.

Have a very night night.

Kind regards
rcw1

Good morning.

It's every three years for industry funds. The High Court decision in Hill v Zuda in June 2022 confirmed it is indefinite for SMSFs since SIS Regulation 6.17A does not apply to an SMSF.

SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 - REG 6.17A Payment of benefit on or after death of member (Act, s 59(1A))

classic.austlii.edu.au

Cheers

 

[Belli]

Got word back yesterday arvo. No need for amendment; all good with Deed and BDBN. While SIS Reg 6.17A not being applicable, the Deed itself stipulates the form of the BDBN to be served on the Trustee and also requires two witnesses.

Best of all there was no charge for that info.

 

[sptrawler]

I always wonder why these retirees, who feel guilty that they get a tax advantage from being retired on a superannuation pension, why dont they just remove their money from super and invest outside of super? No one forces anyone to keep their money in super after they have retired.
They come across as not being very aware of what they are saying, or maybe the ABC hit them with selective reporting to suit the narrative, it certainly comes across to me that someone is a sandwich short of a picnic.
They earn $65k and feel guilty, they would be given nearly $40k if they had saved nothing and been on a pension, weird IMO?
Super tax concessions are costing the government billions. Should they be wound back?

'Why should we get a free run?': Retirees and experts call for super tax reform

Super tax concessions have encouraged Australians to save for their own retirement. But have they become too generous?

www.abc.net.au

 

[qldfrog]

I always wonder why these retirees, who feel guilty that they get a tax advantage from being retired on a superannuation pension, why dont they just remove their money from super and invest outside of super? No one forces anyone to keep their money in super after they have retired.
Super tax concessions are costing the government billions. Should they be wound back?

'Why should we get a free run?': Retirees and experts call for super tax reform

Super tax concessions have encouraged Australians to save for their own retirement. But have they become too generous?

www.abc.net.au

just their ABC brainwash and manipulation;
even better get your tax savings and donate them to a cause your really support, not the travel expenses of Peter Dutton or Adam Bandt..your pick..I am open...
Moreover, these donations are deductible so you could even donate more than these "tax savings" amount.

 

[Belli]

I always wonder why these retirees, who feel guilty that they get a tax advantage from being retired on a superannuation pension, why dont they just remove their money from super and invest outside of super? No one forces anyone to keep their money in super after they have retired.
They come across as not being very aware of what they are saying, or maybe the ABC hit them with selective reporting to suit the narrative, it certainly comes across to me that someone is a sandwich short of a picnic.
Super tax concessions are costing the government billions. Should they be wound back?

'Why should we get a free run?': Retirees and experts call for super tax reform

Super tax concessions have encouraged Australians to save for their own retirement. But have they become too generous?

www.abc.net.au

It is two-faced to a degree. If they don't like it either cash in the SMSF and invest outside superannuation or roll the funds over to an industry fund. Just an article to show how caring and sharing some are ("Aren't I a sweetie saying how unfair things are?") and naught much else.

If you are getting $60k pa (assuming franking is included in that @ 30%) outside superannuation then your taxable income would be $42k cash plus $18k franking. Tax for 2023FY would be:

Taxable Income: $60k
Income Tax: $9,967
LITO: ($100)
Medicare: $1,200
Tax Credit: ($18k)

Tax Refund: $6,933

If able to split 50/50 for a couple, basically halve the numbers but each would then receive a tax refund of $6,858.*

* Reason for this is both get the tax-free threshold. Single income households and single person households have always been shafted as a consequence of that.

 

[qldfrog]

It is two-faced to a degree. If they don't like it either cash in the SMSF and invest outside superannuation or roll the funds over to an industry fund. Just an article to show how caring and sharing some are ("Aren't I a sweetie saying how unfair things are?") and naught much else.

If you are getting $60k pa (assuming franking is included in that @ 30%) outside superannuation then your taxable income would be $42k cash plus $18k franking. Tax for 2023FY would be:

Taxable Income: $60k
Income Tax: $9,967
LITO: ($100)
Medicare: $1,200
Tax Credit: ($18k)

Tax Refund: $6,933

If able to split 50/50 for a couple, basically halve the numbers but each would then receive a tax refund of $6,858.*

* Reason for this is both get the tax-free threshold. Single income households and single person households have always been shafted as a consequence of that.

Be careful Mr @Belli, you are using numbers, real facts and intelligence against narratives.It is a very dangerous stand you are taking ;-)

 

[Dona Ferentes]

Just a pre-Budget warm-up/ soften up/ see what will fly.

 

[Belli]

I am more bemused than anything else with proposals by a number in the industry for superannuation funds to consider automatically moving members in retirement into products which pay an income stream (a form of annuity but not quite rather than account-based pensions.)

I suspect this concept, if adopted, with gradually move to SMSF's being required to consider the same along with the present obligatory investment strategy.

Inward groan on my part at the thought of having to comply with this. What to say? Maybe:

Hey Government, there was a budget decision which imposed a balance cap on my fund of $1.6m, which currently is above that by a substantial margin, and reverted the rest of the funds in the SMSF to accumulation phase thereby by obviating the mandatory draw down of the total amount in the fund and subsequently turning that portion into nothing more than a wealth accumulation exercise. In addition, as I was required to provided the SMSF with my personal TFN, surely the ATO is able to match that with my income tax returns together with the total fund balance at which point the light bulb should turn on and authorities will realise there is no point to the exercise for some fund members.

Won't happen of course as there is a need to tick the boxes. We got a form and we're not afraid to use it.