1. Strategic Advice Solutions: Advice and Support Retreat– 19 th November 2013 Presenter: Chris Haggart

2. Useful Strategies that are/could be beneficial A brief review of some of the strategies that advisers are using: Spouse contributions – are they still worthwhile Avoiding non-compliant trustees for SMSF clients Contribution Caps and borrowing using a SMSF Communication tips and tricks between advisers and support staff Put it in writing Manage Upwards Be specific Checklist

3. Spouse Contributions – Are they still worthwhile? Quick re-cap of spouse contribution splitting rules Only concessional contributions (super guarantee, salary sacrifice or personal deductible contributions) made in the immediately preceding financial year can be split from one member of a couple to another. After tax contributions and existing superannuation balances cannot be split. The maximum amount that can be split is the lesser of: 85% of concessional contributions made in the previous financial year, and The concessional contributions cap for that financial year. The receiving spouse must be either: under preservation age, or between preservation age and age 65, and must declare they do not satisfy the ‘retirement’ condition of release.

4. Strategy 1 – Split to an older Spouse to gain earlier access to preserved benefits As you know, a client must reach preservation age before they can access their preserved superannuation benefits. For many years, the preservation age has been 55 – this age applies to anyone born before 1 July 1960. However, preservation age is legislated1 to increase by one year every year for anyone born after 1 July 1960 (currently 52 years of age) until eventually reaching age 60. Anyone born after 1 July 1964 (currently aged 48) will have a preservation age of 60. In other words, a client currently aged 48 will have to wait 12 years before attaining preservation age (age 60) to be eligible to access their preserved benefits. Is spouse contribution splitting still worthwhile? Contribution splitting can move superannuation contributions into the name of an older spouse who reaches preservation age earlier. For example, a 48 year old client who has a spouse aged 52, could split part or all of their concessional contributions to their spouse who will attain preservation age in only three years. Upon attaining preservation age, the receiving spouse could then commence a transition to retirement pension allowing both members of the couple to salary sacrifice and achieve tax savings while maintaining the same take home income.

5. Strategy 2 – split to a younger spouse to maximise Centrelink Superannuation benefits in accumulation phase are exempt from the Centrelink asset and income tests where the client is under age pension age. For members of a couple, a common strategy is to hold in or transfer assets to, the younger spouse’s super once the older spouse reaches age pension age. The benefit of this strategy is that the elder spouse’s age pension can be maximised until the younger spouse attains age pension age. While this strategy works for many clients, the amount that can be contributed into the younger spouse’s superannuation fund is limited by their non- concessional contribution cap. With a bit of forward planning, spouse contribution splitting can increase the amount invested in the younger spouse’s superannuation fund.

6. Keeping a SMSF whilst overseas Do you have SMSF clients who are going overseas for a substantial period of time? If so, it is crucial that during their period of absence the SMSF will continue to satisfy the definition of “Australian Superannuation Fund”. Why is it so Important? For an SMSF to qualify as a complying fund, and therefore be eligible for concessional tax treatment, it must satisfy the definition of an Australian Superannuation Fund (ASF). Where a fund fails the definition of an ASF it will lose it complying status and the following amounts will be subject to tax at 45%: the fund’s taxable income in the financial year it became non-complying, and the market value of the fund’s assets (less any tax free component) as at 1 July in the financial year it became non-complying.

7. What is an Australian Super Fund? A SMSF will be an ASF in a year of income where it satisfies the following three tests at all times during the year of income: the fund was established in Australia or one of its assets is held in Australia the fund’s central management and control is ordinarily in Australia the fund satisfies the active member test Test 1 – Fund established in Australia or asset situated in Australia For a fund to be “established in Australia” the initial contribution made to establish the fund must be paid to the trustee of the fund in Australia. Once a fund has been established in Australia it satisfies the first test at all relevant times. Alternatively, if a fund is not established in Australia, it must hold at least one asset that is located in Australia at all times. For example, have a portfolio of shares that are listed on the Australian Stock Exchange.

8. Test 2 – Central Management & Control (CM&C) The central management and control of an SMSF refers to the high level and strategic decisions made for the fund. These generally include: formulating, reviewing and updating the fund’s investment strategy reviewing and monitoring the fund’s investments formulating and reviewing the fund’s strategy for managing reserves (if any) determining how the fund’s assets will be used to fund benefit payments. However, the ATO has confirmed that day to day administrative functions, such as accepting contributions and rollovers, maintaining fund assets and paying fund liabilities do not constitute the central management and control of a fund.

9. Where is a SMSF CM&C exercised? In general, the central management and control of a fund will be exercised by the trustee(s) or directors of the corporate trustee of the fund where they are involved in making the high level and strategic decisions for the fund. Therefore, the CM&C of a fund will be exercised where the trustees or directors of the corporate trustee meet to make the high level strategic decisions for the fund. For example, where the trustees of an SMSF meet to make the high level and strategic decisions for the fund in Australia, the CM&C of the fund will be in Australia. Alternatively, where the trustees meet to make the high level and strategic decisions for the fund outside Australia, the CM&C of the fund will not be located in Australia. Where there are an equal number of individual trustees or directors of corporate trustees both in Australia and overseas and each of these trustees/directors substantially and actively participate in the CM&C of the fund, the CM&C is considered to be located in Australia.

10. Temporary Absence? To provide certainty for trustees wanting to go overseas the Tax Act provides that a temporary absence from Australia of a period of two years or less will not cause the CM&C to be ordinarily outside Australia. Temporary absences that exceed two years may also be acceptable; but the trustees will need to clearly demonstrate that their absence was only temporary in nature. e.g. relocating overseas for work for a predetermined period of time. Other factors that would indicate whether a person’s absence was temporary include: whether they intend to return to Australia at some definitive point in time if they established a permanent place of residence overseas whether the person maintained connections with Australia i.e. whether they maintained a residence in Australia as well as bank and investment accounts

11. Permanent departure from Aus? Where the trustee departs on a permanent basis, the 2 year safe harbour rule will not apply as the central management and control will no longer ordinarily be in Australia. In this case, the members may wish to take steps to wind up their fund or to convert to a small APRA fund prior to departing, otherwise their fund will have its complying status revoked.

12. Test 3 – Active member test The active member test assesses the proportion of assets attributed to the account balances of resident active members compared to that of all active members (including non-resident active members) at a point in time. An active member of a fund is a member who makes a contribution to the fund (irrespective of the contribution type) or on whose behalf contributions have been made (e.g. a contribution from the employer). To pass this test, the accumulated entitlements (account balances) of all resident active members must represent at least 50% of entitlements of all active members. If no contribution or rollover was made for any of the member(s), such that there are no active members in the fund during a financial year, this test is satisfied.

13. Getting Additional Funds into Super For some trustees who have substantial assets outside the superannuation environment and wish to move those assets inside their SMSF, they can be thwarted in their attempts by the contribution caps. This is where the interaction between the Super borrowing laws and the contribution caps can come into play. If all the usual requirements of a limited recourse borrowing arrangement (LRBA) is met, then there is no problem with the member being the lender to their own SMSF. Requirements of LRBA: Single acquirable asset Held in a separate trust Trustee of this trust is the legal owner SMSF has beneficial interest This enables more assets over and above the contribution caps to make their way into the SMSF.

14. Example... James James has been self employed most of his life and as such never really put much into his super. His assets built up all outside the super environment. At age 60, James is retired and realizes the tax advantaged environment of Super will be to his advantage. He has just set up a SMSF. James has $900,000 to get inside his SMSF. James contributes $450,000 into his SMSF, triggering the bring forward provisions. James invests this money into conservative fixed income securities, bonds, and some term deposits. He then lends the other $450,000 to the SMSF to fund the purchase of a property, with all the LRBA requirements being met. In 3 years time, James “forgives” the debt, thereby eliminating the loan in the SMSF. Note however that this loan forgiveness will give rise to a contribution. But that’s OK, as 3 years have passed and James is once again able to use the bring forward provisions that enable him to contribute up to $450,000 in non concessional contributions in one go. This could be used for husband and wife, allowing $1.8M to be contributed, resulting in significant tax savings.

15. Communication Between Advisers and Support Staff

16. #1 - Put it in Writing Put it in Writing! Any time an important interaction takes place between an adviser and support staff, the instructions should be put in writing or noted. This allows for clarification of instructions and keeps both honest. It also keeps a timeline of events, whilst ensuring excellent file notes from a compliance point of view. For example, if an adviser makes an investment adjustment there should be a note made. This approach ensures that everyone is operating with the same information and expectations.

17. #2 - Manage Upwards Understand the adviser - Think about how your adviser likes to communicate; does he prefer written emails or verbal discussion? Does he like structured one-on-one meetings or informal chats? Get a clear understanding of how they like to engage and adapt your style.

18. #3 - Be Specific.. Be specific about what you need Whether it be money, resources, or some other form of assistance, be very specific about what you need, why you need it, and what will happen if you don't get what you need.

19. Checklists! The simple checklist — can improve the effectiveness of teams and individuals performing complex tasks. When properly conceived and used, a checklist ensures communication and confirmation among members of a team and catches errors. Even small errors can be costly, where instructions handles by a number of people can result in large client loses. #4 - Checklists..