1. Estate Planning for Self Managed Super Funds Presented by Stephen Higgins Business Development Manager July 2010

2. 1 Agenda ■ Death benefits review –Overview –Nomination types –Taxation –Merits or otherwise of death benefit income streams ■ Estate Planning Strategies ■ Case study

3. 2 Death Benefits Review

4. 3 Death Benefits overview ■ SMSF’s provide members with maximum control when it comes to estate planning ■ Trust deed must address: –Form benefits to be paid –How death benefit is calculated –Who it can be paid to ■ While trust deed governed by SIS Act may also contain clauses that cover for example: –Whether nominations are binding –Agreements relating to members death benefits –Requirements that certain member benefits be paid to specific individuals

5. 4 Death Benefits overview ■ Who can death benefits be paid to? –Lump sum dependant under SIS Act –Income stream dependant under SIS regulations Tech Note! Only spouse can commute and rollover death benefit income stream ■ Concessional tax treatment only applies to tax dependants –Children under 18 only –Includes ex-spouse

6. 5 Death Benefit nominations ■ Binding nominations –Ensure trust deed is carefully drafted to provide for binding nominations –3-year life –Binding nominations to minors override super split orders to occur on retirement ■ Non-binding nominations –Non-binding nomination provides guidance only –Trustee discretion applies unless otherwise stated in trust deed –Warning! Trustees may direct benefit against deceased wishes (Katz vs Grossman case)

7. 6 Death Benefit nominations ■ Trustee agreement –Alternative to binding nominations and only available to SMSFs ■ Reversionary beneficiaries –Payments continue to be paid upon death of member –Binding on trustee –Where beneficiary has pre-deceased member trustee discretion applies –Where beneficiary no longer eligible (named Pre 1 July 2007) must be paid as lump sum Tech Note! No access to SCT for disgruntled beneficiaries of SMSF

8. 7 Death Benefits taxation- Lump Sum Beneficiary TypeTax ComponentTax Treatment Dependant (for tax purposes)Tax-free Taxable (taxed and untaxed) Tax-free Non-tax dependantTax-free Taxable (taxed) Taxable (untaxed) Tax-free 16.5% (includes ML) 31.5% (includes ML)

9. 8 Death Benefits taxation- Lump Sum How does a untaxed element occur? ■ Life insurance held within SMSF ■ Untaxed element calculated as follows: Taxable component – (A) – tax free component Where A = Death benefit x (service days/service days + days to retirement)

10. 9 Death Benefits taxation- Lump Sum  Daniel (age 56) died on 1 July 2008  His service period began on 1 July 1997  His death benefits will be paid to his 30-year old son  Daniel’s SMSF claimed a tax deduction for the cost of his life insurance  The total death benefit is $1 million made up as follows:  250,000 taxable  $250,000 tax-free  $500,000 from insurance proceeds

11. 10 Death Benefits taxation- Lump Sum Step 1: Calculate A $1,000,000 x 4,015/(4,015 + 3,650) = $523,810 Step 2: Calculate taxable (untaxed) $1,000,000 - $523,810 - $250,000 = $476,190 Total tax payable = $195,179 Tech Alert! Think carefully before holding insurance for non- dependants through SMSF ComponentAmountTax rateTax payable Tax free$250,000Nil Taxable (taxed) $273,81016.5%$45,179 Taxable (untaxed) $476,19031.5%$150,000 Total$1,000,000$195,179

12. 11 Death Benefits taxation- Income Stream Age of deceased/recipientTax componentTax treatment If either aged 60 or overTax-free Taxable (taxed element) Taxable (untaxed element) Tax-free Marginal tax rate less 10% offset If both under age 60Tax-free Taxable (taxed element) Taxable (untaxed element) Tax-free Marginal tax rate less 15% offset (tax-free once turns 60) Marginal tax rate

13. 12 Merits or otherwise of death benefit income streams ■ Key Advantages for children –Viable alternative to testamentary trust for minor children –Investment earnings tax-free –Payments may be tax-free or at worst taxed at adult tax rates with 15% tax offset ■ Key disadvantages for children –Less flexibility compared to trust to access capital and split distributions between children –Child can generally access capital at 18 –Balance must be cased upon reaching age 25 unless disabled

14. 13 Merits or otherwise of death benefit income streams ■ Key advantages for spouse –Earnings are tax-free –Keep money in super environment as otherwise may not be eligible to contribute –If deceased was not over 60, payments become tax-free once recipient reaches age 60 –Can rollover to purchase a new death benefit income stream ■ Key disadvantage for spouse –If commuted outside death benefit period not exempt from paying super lump sum tax unless 60 or over.

15. 14 Estate Planning Strategies

16. 15 Use SMSF to transfer assets from one generation to the next ■ Where a fund has older and younger members, parents and adult children – contributions can be used to fund parent pensions ■ Allows fund to transfer property assets (e.g. commercial property from which family business is run) from one generation to the next without selling it ■ Fund retains property as part of its investment pool throughout. ■ Contributions from adult children gradually lead to them being entitled to a greater share relative to parents

17. 16 Sell assets in pension phase (at least before death..) ■ Death of member in pension phase and benefits paid to non-tax dependant ■ No provision to pay pension to adult child from 1 July 2007 ■ ATO ID 2004/688 states fund loses tax exempt status on income where no provision to pay pension ■ Therefore CGT applies upon realisation of assets to pay death benefit

18. 17 Sell assets in pension phase (at least before death..) ■ Where benefits left to non-dependant it is important to regularly crystallise assets ■ No tax for member in pension phase and effectively increases cost base ■ Take care with Part IVA –Part of portfolio review –Sell assets for pension payments

19. 18 Claim a tax deduction in year death or disability benefit is paid ■ Tax deduction can generally be claimed for premium on death and disability insurance ■ ITAA 97 s 295-465 ■ Effectively provides a reduction in premiums of 15% ■ Alternatively, can claim a deduction for future service element of death benefit paid to dependants in year that death or disability benefit is paid Deduction to fund = Benefit amount x future service days total service days

20. 19 Claim a tax deduction in year death or disability benefit is paid ■ Jane is a member of her DIY super fund ■ She passes away on 30 June 2009 ■ The fund had an insurance policy of $400,000 on her life ■ Her account balance in the fund was $100,000 ■ The total proceeds are paid to her husband ■ Her service period commenced 1 July 1988 and her normal retirement date would have been 1 July 2020 What deduction is available to the fund if it claims the future service period rather than the premium?

21. 20 Claim a tax deduction in year death or disability benefit is paid Deduction = Death benefit x future service days/total service days = $500,000 x 3,961/11,520 = $171,918 Tech tip Deduction can be carried to offset tax in future years and could mean members never have to pay contributions tax again

22. 21 Think twice before undertaking a re-contribution strategy ■ Death benefit paid from accumulation or pension phase can be increased to reflect contributions tax paid by member ■ Amount based on actual contributions tax deducted or applying formula: C x (0.15 x P) R – (0.15 x P) C= Non-insurance portion of taxable benefit R= Service days after 30 June 1983 P= Number of days in service period after 30 June 1988 ■ Deduction available to fund and passed on to beneficiaries ■ Re-contribution strategy can reduce or eliminate amount taxable component and therefore result in beneficiaries missing out on refund of contributions tax (where formula used)

23. 22 Think twice before undertaking a re-contribution strategy Re-contribution strategyNo re-contribution strategy Amount of benefit$450,000 tax free$450,000 taxable Refund of contributions taxN/A$79,412 Less death benefit taxNil Net lump sum$450,000$529,412 ■ Client has recently passed away with death benefit of $450,000 being paid as a lump sum on 1 February 2010 to spouse ■ Eligible service date was 1 March 1998

24. 23 Think twice before undertaking a re-contribution strategy ■ Alternatively consider the situation where the benefit is paid to an adult child Re-contribution strategy No re-contribution strategy Amount of benefit$450,000 tax-free$450,000 taxable Refund of contributions taxN/a$79,412 Less death benefit tax (includes Medicare Levy) Nil($74,250) Net lump sum$450,000$455,162

25. 24 Funds available to pay grossed up death benefit ■ Refund of contributions tax requires the fund to be able to pay out the proceeds prior to claiming a deduction ■ If not prepared may mean members beneficiaries miss out ■ Solutions include: ─ Where terminal illness/impending death consider rolling out to public offer fund. ─ Paid from reserves ─ Insurance policy held by fund on individual members

26. 25 Case Study

27. 26 Case Study ■ Peter aged 55 is a client of yours who has until now refused to talk about estate planning as he believes it is a bad omen. However he is now ready to talk and would like your advice on how to ensure his estate is distributed tax-effectively amongst his beneficiaries in retirement. ■ He has been separated from his wife, Tracy for the last 10-years and has been living with Sharon for the past three-years. ■ He has two adult children (Jack and Jill aged 28 and 30 respectively) from his marriage to Tracy and a baby from his relation ship with Sharon. ■ Jack suffers from a permanent disability and is cared for permanently by his mother (Peter’s legal wife Tracy). ■ Jill is in a marriage that has been under a strain for a number of years, she has one child.

28. 27 Case Study Current AssetsAmountComments SMSF$700,00080% taxable 20% tax-free $600,000 insurance policy He is the only member and his daughter Jill is the other trustee Main residence$850,000Mortgage Free 100% owned by Peter Investment property (Pre- CGT asset) $700,000Mortgage Free Share portfolio (CGT asset with cost base of $100,000) $450,000Held directly in his own name Made up of blue chip stocks

29. 28 Case Study ■ Peter would like about 25% to go to each adult child and 50% to his minor child of available assets after Sharon receives the family home. ■ Consider the strategies that should be considered to achieve the following: –How can he make provision for each class of beneficiary in the most tax effective manner? –What steps could be taken to protect the estate from others who may try to challenge the estate? –What could he do to ensure his SMSF assets are protected? –Should he consider holding insurance outside of his fund?

30. 29 Important note This presentation was prepared by Perpetual Investment Management Limited (PIML), ABN 18 000 866 535, AFSL 234426. For the use of financial advisers only. The views expressed in this presentation are the opinions of the author at the time of writing and do not constitute a recommendation to act. Any information referenced in this presentation is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. It is general information only and is not intended to provide advice to particular investors, or take into account an individual's investment objectives, circumstances or needs for investment. Investors should consult a financial adviser. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. PIML is part of the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries). No company in the Perpetual Group guarantees the performance of any fund or the return of an investor’s capital. The offer to invest in any of Perpetual’s Funds will be made in a copy of the relevant product disclosure statement (PDS) for the Fund. The relevant PDS should be considered before deciding whether to acquire or hold units in the Fund. The PDS can be obtained by calling 1800 062 725 or visiting www.perpetual.com.au. Anyone wishing to invest will need to complete the application form in the relevant PDS.