InvestSMART

Focus on estate planning

In the final part of our series on DIY funds, we take a look at asset management.

In the final part of our series on DIY funds, we take a look at asset management.

Trustees of self-managed superannuation funds will have to develop strategies for "refreshing the cost base" of their funds if they want to minimise death benefits taxes.

The Australian Taxation Office (ATO) issued a draft tax ruling last month (TR 2011/D3) that says assets in the pension accounts of deceased fund members are not exempt from capital gains tax when they are sold to pay death benefits.

This ruling, which applies to all types of super funds, is a clarification of the ATO's established position but it has come as a surprise to many trustees. It has particular impact on self-managed funds because SMSF trustees tend to hold assets long term and build up unrealised capital gains. When assets are held in a pension account, the income and capital gains earned on these assets are exempt from tax. The disposal of assets held in a pension account will not attract any CGT.

However, the ATO says that when the member for whom the assets are being held dies, the pension will be regarded as having ceased.

When a pension is taken to have ceased, the tax exemption previously retained by the assets is lost. When the assets are sold to pay a death benefit, CGT may be payable. There are a couple of exemptions to this rule. The death benefit is exempt from tax if it is paid to a spouse or dependent children.

What has upset people about last month's draft ruling is that the ATO intends to apply the tax retrospectively from July 1, 2007.

The head of wealth management at accountants and financial advisers HLB Mann Judd, Michael Hutton, says the way to reduce your exposure is to actively manage the assets in the fund: "You need to update the cost base of the portfolio. Consider selling assets that have built up a big unrealised capital gain while they are still in the pension account."

The national technical director of the Self-Managed Super Fund Professionals' Association, Peter Burgess, agrees refreshing the cost base is the most effective strategy trustees have at their disposal to reduce the impact of the death benefits tax.

Burgess says trustees also need to look at the structure of their funds.

Self-managed funds can be either what is termed segregated or unsegregated: in a segregated fund each member's assets are held in different accounts, while in an unsegregated account all the members' assets are held in a single pool.

Burgess says: "In a fund with unsegregated assets it is the actuary's job to determine what portion of income relates to the pension account and what relates to accumulation members of the fund.

"In the event of a death, the actuary works out what is taxed for death benefit purposes. That can be to the trustees' advantage. Trustees with segregated funds should look into changing the structure of their funds."

According to a recent Roy Morgan Research report, Superannuation and Wealth Management in Australia, the level of satisfaction among super members generally is low, with only 52.6 per cent fairly or very satisfied with the financial performance of their fund.

Those in SMSFs are the happiest, with 72.9 per cent satisfied with their funds. What makes them happy is the control they have over their investments and their estate planning.

AMP senior technical analyst Fabian Bussoletti says those advantages remain. "Many estate planning opportunities available to trustees of SMSFs are also available to members of public offer funds but in an SMSF environment, they can be tailored to suit individual circumstances."

"It is important to note that superannuation assets cannot simply be dealt with through the will of the deceased. In a public offer fund, in the absence of a valid binding death benefit nomination, the fund's trustees make the decision about how a member's death benefit is distributed.

"But in a self-managed fund it is generally the surviving trustee(s) who make the decisions in relation to death benefits. Also, binding death benefit nominations, if properly executed, can last longer and provide for more certainty in an SMSF."

Death benefits tax

- Income and capital gains in a pension accounts are exempt from tax.

- The disposal of assets held in a pension account don't attract CGT.

- But this changes on death the pension is regarded as having ceased.

- When a pension is taken to have ceased, the tax exemption is lost.

- When assets are sold to pay a death benefit, CGT may be payable.


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