A do-it-yourself (DIY) superannuation fund is particularly attractive from the perspective of asset protection, legal tax minimisation and estate succession.
A properly structured DIY fund allows your client the flexibility to implement a range of strategies that can help efficiently pass wealth between spouses and from one generation to the next. These include:
(a) the use of defined benefit pensions including lifetime and fixed term, complying and non-complying commutable;
(b) the use of child allocated pensions;
(c) the appointment of adult or child reversionary pensioners;
(d) the use of binding death benefit nominations; and
(e) the choice of receiving death benefits as a lump sum or pension.
The key is to have a flexible trust deed and to ensure that your clients get the right advice when establishing their fund. Also key is ensuring your clients’ beneficiaries continue to get the right advice on their death. The benefits of using some of these strategies are summarised below.
Child allocated pensions
Most advisers are familiar with the benefits of a child allocated pension, which is an allocated pension payable to a child, under the age of 18, upon the death of a parent. The benefits associated with a child allocated pension include:
* Investment earnings credited to the child’s allocated pension account are tax free;
* The income from the pension is taxed at adult rates rather than the more punitive child tax rates; and
* The superannuation benefit is not assessed against the child’s reasonable benefit limit (RBL) (or the deceased’s RBL) and so a 15 per cent rebate applies to the entire assessable income, irrespective of the existence of excess benefits.
Reversionary pensions
Reversionary pensions allow for a seamless transfer of income on the death of one member to the surviving spouse or child.
Importantly, they are not assessed against the recipient’s RBL and in the case of a reversion to a non-dependant (under the Australian Taxation Office’s definition), they can be a way of avoiding lump sum tax that might otherwise have been payable on the payment of a lump sum death benefit.
In case the reversion was not established when your client started their pension, their DIY fund should also allow their beneficiaries to be able to elect to receive their benefits as a pension rather than as a lump sum.
This can achieve a similar outcome in terms of avoiding lump sum tax and retaining monies in the superannuation environment. However, you do need to be aware that in this case, the pension benefits will be assessed against the recipient’s RBL.
Defined benefit pensions
These provide probably the most exciting estate planning opportunities within a DIY fund. That is because, depending on the type of defined benefit pension payable, on the death of the final pensioner, there are generally surplus assets that were being used to support the pension payments.
As long as the deed is structured correctly, these surplus assets can form a ‘reserve’ of the fund and the reserves can then be used in a range of manners, including to supplement the benefits of other members in the fund.
Consequently, provided the spouse and children are also members of the DIY fund, on death, the remaining assets can be passed to the benefit of their member accounts in the fund.
However, be aware that transfers from a reserve account to a member account while not taxable, may attract the superannuation surcharge.
Of course, for all strategies involving the use of a DIY fund, it is better if there are only two children and one spouse, so that the client keeps within the restriction of having fewer than five members in the fund.
It is also essential that any estate planning strategy involving a DIY fund is executed with care.
The consequences of getting it wrong are extremely severe.
A breach of the superannuation regulatory provisions can result in both the income and assets of the fund being taxed at 47 per cent (effectively clawing back all tax concessions given during the life of the fund). Severe fines and even jail sentences can also apply for the trustees.
Steve Davis is national manager financial planning withPerpetual Private Clients .
