Trusts

Downsizer superannuation contributions

*The contents of this article are general in nature – as always, you should seek financial planning advice before doing anything to alter your financial position.*

From 1 July 2018, the Australian Government will allow “downsizer contributions” into superannuation as part of a package of reforms aimed at reducing pressure on housing affordability in Australia.

This measure applies where the exchange of contracts for the sale of your home (which must be your principal place of residence) occurs on or after 1 July 2018.

If you are 65 or older, and you meet the eligibility requirements, you may be able to choose to make a “downsizer contribution” from the proceeds of selling your home into your superannuation account for an amount of potentially up to $300,000.

Importantly, your downsizer contribution is not a non-concessional contribution and will not count towards your contributions cap, nor do the normal contributions rules apply, such as the “works test”.

Downsizer contributions are not tax deductible and will be taken into account for determining your eligibility for the age pension.

If you do not meet the “downsizer contribution” requirements, then the contribution will be assessed under the normal contributions caps (and penalties may apply).

If considering a downsizer contribution, you should also look to ensure that your estate plan is appropriate and if not, put appropriate arrangements in place.

From 1 July 2018, the Australian Government will allow “downsizer superannuation contributions

ELIGIBILITY

You will generally be eligible to make a downsizer contribution to super if you can answer “yes” to all of the following:

  • you are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit),
  • the amount you are contributing is from the proceeds of selling your home where the contract of sale was exchanged on or after 1 July 2018,
  • your home was owned by you (or your spouse) for at least 10 years prior to the sale,
  • your home is in Australia (and is not a caravan, houseboat or other mobile home),
  • the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT, rather than a pre-CGT (acquired before 20 September 1985) asset,
  • you have provided your super fund with the downsizer contribution form, either before or at the time of making your downsizer contribution,
  • you make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually the date of settlement, and
  • you have not previously made a downsizer contribution to your super from the sale of another home.

HOW MUCH CAN YOU MAKE AS A DOWNSIZER CONTRIBUTION?

If you are eligible to make a downsizer contribution, there is a maximum amount of $300,000 that can be made.

The contribution amount can’t be greater than the total proceeds of the sale of your home.

It only applies to the sale of your main residence, and you can only use it for the sale of one home. You can’t access it again for the sale of a second home, but there is also no requirement to purchase another home.

TIMING

You must make your downsizer contribution within 90 days of receiving the proceeds of sale. This is usually at the date of settlement.

You may make multiple “downsizer contributions” from the proceeds of a single sale however:

  • they must be made within 90 days of the date you receive the sale proceeds (usually the settlement date of the sale), and
  • the total of all your contributions must not exceed $300,000 (or the total proceeds of the sale less any other downsizer contributions that have been made by your spouse).

If circumstances outside your control prevent payment within that time, you can seek an extension of time.

HOW TO MAKE A DOWNSIZER CONTRIBUTION

Before you decide to make a downsizer contribution, you should:

  • obtain financial planning advice in relation to the relevant requirements and any effect on your social security benefits or other entitlements (there may be other things to consider with any surplus sale proceeds such as acquiring a “granny flat right” and updating your estate planning documents),
  • check the eligibility requirements for making a downsizer contribution,
  • contact your super fund to check that it will accept downsizer contributions, and
  • complete a downsizer contribution form for each downsizer contribution and provide this to your super fund when making – or prior to making – each contribution

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to estate planning, business succession, superannuation or SMSFs, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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SMSF owns property. Member dies. Oh oh!

Do you, like many Australians, have a self managed superannuation fund (SMSF)?

If you want to own direct investments within your superannuation or have greater control of your superannuation portfolio, a SMSF can be a suitable alternative to retail superannuation funds.

SOME ADVANTAGES OF SMSFs

SMSFs have:

  • direct investment choice
  • access to wholesale managed funds
  • the benefit of being able to combine the superannuation balances of up to 4 people
  • the advantage of 15% taxation on investment earnings (as opposed to marginal or company tax rates) and potentially reduced capital gains tax
  • the ability to assist with estate planning and possibly for non-lapsing binding death benefit nominations

DIRECT PROPERTY

Often seen as a key advantage is the ability of an SMSF to invest in direct property, such as owning office or factory space from which a business operates from (assuming your SMSF’s Investment Strategy allows for direct property).

Where member balances are insufficient to buy a property outright, SMSFs can also borrow but only using a limited recourse borrowing arrangement (LRBA) using a bare trustee that holds the property on behalf of the SMSF for the duration of the loan and once the debt is paid, the legal ownership of the property passes to the SMSF.

Property values hopefully go up over the next 20 or so years and the members benefit from and can live happily off the benefits during retirement …

… well that’s the plan anyway. So, what happens if a member dies or gets really sick a few years into the plan? (hint – it can ruin everything, for the other members).

CONSEQUENCES OF DEATH OR TPD

On the death of a member, that member’s superannuation balance is to be paid out (to the member’s estate of their nominated beneficiary/ies) as soon as is practicable.

On the total and permanent disablement (TPD) of a member, the member may be able to exit from the SMSF and call for their member balance to be paid out.

… but if the SMSF’s cash is all tied up in the property and the property is still subject to the LRBA, where does the money come from to pay out the member balance?

The property may have to be sold to fund this! That is, unless there is a SMSF Member Death & TPD Exit Deed in place.

SMSF MEMBER DEATH & TPD EXIT DEED

A SMSF Member Death & TPD Exit Deed can help in reducing the financial effects arising from the unexpected death or TPD of a member by for example:

  • requiring the SMSF members to effect a life insurance policy over the lives of the other members and where there is a death and a payout under the policy, the policy owners contribute funds to the SMSF with the intention of paying out the deceased member’s superannuation balance (and using any remainder to reduce or pay out any debt on the property under the LRBA); and
  • requiring the SMSF members to either put in place appropriate TPD cover or to agree that on the occurrence of a TPD event of a member, that member may remain a passive investor in the SMSF but cannot immediately call for payment of their member balance, even if they would otherwise be entitled to under the superannuation legislation, but rather, if they want the payment, their member balance is to be paid out over several years (ie, from the SMSF’s cashflow).

Unless there are appropriate insurances in place or an agreement for members to only get paid out benefits over time in the event of a TPD event, then the likely outcome of the death or TPD of one member is the sale of the SMSF’s property.

This can be a particularly bad problem if the SMSF has only recently acquired the property and had therefore incurred all of the legal, financial planning and accounting costs as well as stamp duty, but had no time for the asset to generate income or appreciate in value. The death or TPD of the one member therefore affects up to 3 other members who may not even be related to the affected member!

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to estate planning, business succession, superannuation or SMSFs, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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SMSF owns property. Member dies. Oh oh!

Do you own land in NSW through a family trust?

Do you own land in NSW through a family trust ? If so, then take note…

Revenue NSW (previously the NSW Office of State Revenue) automatically applies the Land Tax Surcharge  on land tax assessments for properties owned through a family trust. The surcharge, which was introduced as part of the 2016 NSW budget, is currently at 2%, and can be significant.  There is a similar application to stamp duty also.

This surcharge does not apply where Revenue NSW has been advised of the fact that the trust deed specifically excludes foreign persons or entities as potential beneficiaries.

Revenue NSW may allow trustees up to 6 months from the date of an assessment date to update their trust deed to remove foreign persons as beneficiaries. After the deed is updated and Revenue NSW is satisfied with the changes, the trustee can then apply for the surcharge to be refunded.

We have assisted several clients to update their trust deeds at the time of initial registration for land tax (to exclude foreign persons or entities as potential beneficiaries) however, where there is an existing trust with an existing landholding, this may be something that needs to be monitored and updated, so check your assessments.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to land tax, trust deed amendments or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your legal needs.

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Bringing on business partners?

For businesses that are growing and putting on other shareholders and directors, a Shareholders Agreement is a must have. If your business is not a company but it a partnership or a unit trust structure, the document would be a Partnership Deed or Unitholders Agreement.

Don’t leave some of the most important and fundamental issues for your business to chance. Consider a company with 2 or 3 shareholders – a typical small to medium sized business scenario…

COMMON PROBLEMS FOR SHAREHOLDERS

Issues that commonly that can affect shareholders include:

  • A shareholder sells their shares, leaving you with an unintended business partner;
  • A shareholder dies and you inherit an unintended business partner or you have to buy the shares from their estate for more than you ought to;
  • As a shareholder, you want out but cannot find a suitable purchaser but the other shareholders won’t buy you out;
  • The shareholders don’t have available funds to pay out an exiting shareholder;
  • The majority shareholder wishes to run the business one way, but is restricted by a minority shareholder;
  • You, as a minority shareholder, are being treated poorly by other shareholders who are running the business with little regard to your interests;
  • You wish to sell the company’s business as there is an excellent offer on the table, but another shareholder will not and is jeopardizing the sale;
  • You wish to receive dividends from the business, but others want to reinvest the profits.

The aim of a Shareholder Agreement is to bring some certainty to the business relationship so there is confidence in how the business will operate

TAILORED SOLUTIONS

A Shareholder Agreement tailors the rights and obligations of the shareholders to fit the particular purposes of the company, the nature of its business and the aims and wishes of its shareholders – to help avoid some of the potential problems identified above.

Some factors that should be considered in a Shareholders Agreement include:

  • The company’s activities/type of business – its purpose;
  • The roles and obligations of the shareholders;
  • Who are the directors and how the shareholders can change them;
  • Director remuneration;
  • Who will manage and control the business day to day, such as a managing director;
  • Meetings – how they are called, how they are run, counting of votes;
  • How decisions are made by shareholders or the board of directors;
  • What types of decisions require a simple majority, special resolution or a unanimous vote;
  • Payment of dividends;
  • Funding/borrowing;
  • Restrictions on the issue/transfer of shares and calculating the share price;
  • How shareholders can exit from the company and on what terms;
  • Funding of exits (including death) – buy/sell obligations and personal insurances;
  • Restraints on existing shareholders as to company customers etc;
  • Insurances to be taken out; and
  • How any disputes are to be resolved.

The aim of a Shareholders Agreement is to bring some certainty to the business relationship so that shareholders can have some confidence as to how the company will be run and, if there is a falling out, to provide a mechanism for that falling out to be dealt with, as painlessly as possible.

Ideally, the Shareholders Agreement would be in place from the outset whilst all parties are in agreement in relation to all issues however, they can be documented at any time (provided all parties agree).

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to starting or buying a business, drafting business documents or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your business needs.

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Minimizing risk in your business

Running a business is risky and small businesses can be especially so. Minimizing risk in your business is crucial.

Often, SME owners put their own personal assets on the line, whether to borrow funds from a lender to start up or buy stock or equipment or by signing a guarantee in relation to suppliers and others for the debts of the business.

There are several methods of protecting personal assets from creditors, but it is a process that many don’t follow. Some are quite simple and easy to put in place. They include…

Placing assets in a spouses’ name or in a family trust

In most circumstances, creditors will not be able to make a claim upon assets owned by your spouse or held by a discretionary trust, provided that you are not the trustee. If your spouse is the trustee, then he or she is the person who will usually decide how to divide up the income or capital of a trust (or not to).

Of course, stamp duty and capital gains tax issues must also be considered before acquiring or transferring assets as well as the potential operation of claw back provisions. The loss of the principal place of residence CGT exemption or the land tax issues may be a factor weighing against doing this.

In the end, it is weighing up risk vs benefits and making an informed decision regarding any asset protection measures.

Encumbering assets if you cannot transfer them

An asset that is mortgaged to its value is not attractive to a creditor. The mortgagee in such a case is the only entity that will benefit from the subsequent sale of the asset.

A guarantee form a person without assets is effectively valueless. Often businesses don’t check to see what a guarantor actually owns.

If you seek a guarantee from a director of another business, you could make some inquiries about their credit/financial position before creating an account,

Correctly structuring your business

Sometimes it is not feasible to establish an asset-holding entity and a trading entity (as many small business start-ups are strapped for cash) but it can be a great way to protect the business assets from day to day trading risks. Even getting the type of business structure right from the beginning (sole trader, partnership, company, trust or combination etc) can have a massive impact on your business.

It is possible to establish a company with a single director and/or single shareholder. The company dealing with third parties, supplies, customers and the like is the entity that may be liable to them, not the shareholders.

The shareholders are only liable to the company for the unpaid amounts (if any) on any issued share capital. This liability is usually a nominal amount such as a dollar. Shareholders have no liability to third parties unless they agree to it, such as by giving a guarantee.

Company directors may have some liability but only in limited circumstances can the corporate veil be lifted. Courts may be prepared to lift the veil in limited circumstances, such as in the case of insolvent trading, fraud or misrepresentation, inappropriate transactions or where public policy requires it.

Charging assets (and properly recording the charge)

Before lending money to your business, a charge should be created in the correct form and that form recorded as against assets such as real property (by way of mortgage recorded at Land and Property Information or another State’s land titles registry) or against non-real estate assets (by way of a Specific or General Security Deed and making a registration on the Personal Property Securities Register (PPSR)) to secure repayment of that money in preference to other creditors should the business fail.

Having proper terms of trade

Most businesses, if they have them at all, have terribly inadequate terms and conditions of trade. Often they are just copied and pasted from other documents and not tailored, leaving businesses thinking they are adequately protected when they really are not covered at all.

T&Cs should be built to protect your particular business and should be a work in progress, tweaked to solve or prevent problems that have arisen in your business from occurring again,

Avoiding personal guarantees altogether

A guarantee is a contract by which a guarantor promises that another person or entity will comply with his, her or its obligations to a third party and if they don’t, the guarantor will. The most common example involves bank loans where a guarantor such as a parent promises to repay the loan of their child if the child defaults.

Becoming a guarantor can be extremely risky, particularly when large liabilities are involved. Under most guarantees, the guarantor becomes immediately and primarily liable to repay the debt (and the lender does not have to wait for attempt to recover from the borrower before calling on the guarantee).

As a practical matter, many businesses cannot obtain finance unless a personal guarantee is provided. If this is the case however, whenever the loan is actually repaid or if the business can prove it is financial stable and secure, the guarantee should be discharged so that the guarantor cannot continue to rely on it at a later date concerning subsequent transactions.

Managing staff

One of the biggest risks to your business is that of staff leaving, and worse still, taking valuable information and assets with them.

Having appropriately drafted Employment Contracts with restraints of trade in them is a must.

Superannuation contributions

In many circumstances, superannuation entitlements can be protected from bankruptcy trustees. There may be no protection for example where the payments are made for the primary purpose of defeating creditors.

Making contributions to super is getting harder and harder with the Federal Government’s recent changes to the superannuation laws however, this can be an effective long term tool for wealth creation and asset protection. This will also usually involve the assistance of your financial planner.

Business succession planning

If you are in business with another person, what happens to your business if you or your business partner gets seriously injured or dies?

Do you have an appropriate and valid Will, Enduring Power of Attorney and Appointment of Enduring Guardians in place?

Usually having these estate planning documents is not enough. Presumably your business partner would give all of his or her assets to their spouse on their death through their Will. What if you don’t want to me in business with your business partner’s partner?

You should have in place business succession documents to deal with this such as a Buy/Sell Deed with appropriate insurances, a Shareholders Agreement (for companies), Unitholders Agreement (for unit trusts) or a Partnership Agreement (for businesses operating through a partnership structure).

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to starting a new business, commercial law, business disputes or estate planning/business succession issues generally, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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Trusts – who is who in the zoo?

TYPES OF TRUSTS

There are many different types of trust including those created by wills (testamentary trusts) or by the operation of law, but for the purpose of this article, we are referring to the usual types of trust structures that accountants and lawyers prepare for their clients to operate businesses, own assets and the like, including:
  • unit trusts,
  • family/discretionary trusts,
  • hybrid trusts.

Trusts are often used to ensure that the person or entity with the legal ownership of assets is different to the persons or entities that enjoy the benefit of those assets.

WHAT IS A TRUST DEED?

The Trust Deed is a document that governs the terms of the Trust and sets out the rights and obligations of the Trustee, the Appointor and the Beneficiaries.

SETTLOR

The Settlor is often a person who has started the Trust (often an accountant or lawyer that obtained or drafted the Trust Deed at the request of a client) by paying a nominal amount such as $10 to the Trustee. This amount is known as the ‘settled sum’. The Trust Fund is then added to over time.

WHAT DOES THE TRUSTEE DO?

The Trustee of a Trust is responsible for administering the Trust and managing its assets for the benefit of the Beneficiaries. The Trust can only operate through its Trustee (one or more people or a company)

There are many duties that affect how Trustees can fulfill their role. Many of them are set out in the Trust Deed but there are also legislative provisions that apply, such as those set out in the Trustee Act.
Some of the duties include keeping accurate records, acting in a prudent manner as regards decisions, not mixing Trust assets with the Trustee’s own assets (which is why a often a company is set up to be the Trustee and do nothing but be the Trustee) and not using trust assets for the trustee’s own benefit. This is often one of the reasons a special purpose trustee company is used.

WHAT IS AN APPOINTOR?

The Appointor is the person with the power under the Trust Deed to remove a Trustee and appoint a new Trustee. They, therefore, ultimately control the trust.

Usually, changing the Trustee can be effected at any time by the Appointor executing a deed to remove and appoint a Trustee. Often the Trust Deed allows for the change to be effected by a person’s Will.

It is common for the Appointor of a discretionary family trust to be a parent or sibling and is often 2 people (or in the alternative, there is a Primary or First Appointor and a Second or Alternate Appointor that can act if something prevents the First Appointor from acting).

WHO ARE THE BENEFICIARIES?

In the types of Trusts we are talking about in this article, the Beneficiaries are those that are ultimately entitled to the benefit of the Trust. For Family/Discretionary Trusts, the Beneficiaries are not stated specifically but rather, for asset protection reasons, they are expressed as a class of potential beneficiaries that the Trustee can choose from (but is not obliged to – the protection arises as there is no specific share they are entitled to – it is in the Trustee’s discretion).

Often, the class of potential beneficiaries is very wide and includes children, grandchildren, grandparents, siblings and other trusts and companies which those people may have an interest in.

In the case of a Unit Trust, the Beneficiaries are the unitholders -the unitholders are entitled to a defined/fixed share of the Trust’s assets and income.

For asset protection and income splitting/tax minimisation reasons, often the units in a Unit Trust are owned by a Discretionary Trust.

FURTHER INFORMATION

Trust law is an extremely complex area and it is important to ensure that you understand your rights and responsibilities in relation to any Trust you are involved with or may have an interest in.

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to trusts, structuring or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

Deceased estate litigation

Succession Act claims

We are often called upon to advise clients in relation to claims on estates in relation to such things as challenging the validity of the Will (such as due to lack of mental capacity when the deceased person made the will or duress) or what is known as a Succession Act claim or a family provision claim (where a person says that adequate provision was not made for them in a Will). We discuss the latter here.

The purpose of the Succession Act is to seek to ensure that “adequate” provision is provided from a deceased’s estate to the family members of a deceased person (and others). Claims under the Act are based on needs.

Important facts

  • Claims must be made within 12 months of the date of death of the deceased (although in limited circumstanced, this time limit can be extended).
  • To make a claim, you must first establish that you are an “eligible person”.
  • Assuming you are an “eligible person”, you must demonstrate needs beyond the provision that was made for you in the Will (if any) for your proper maintenance, education or advancement in life.

Who is an eligible person?

Those who are eligible to make a claim for a provision out of deceased estate include:
  • A spouse of the deceased at the time of the deceased’s death;
  • A person in a de facto relationship with the deceased at the time of death
  • Children (including adopted children) of the deceased;
  • Former spouses of the deceased;
  • Someone with whom the deceased was in a close personal relationship* at the time of their death;
  • Those who have, at any time, been wholly or partly dependent upon the deceased:

- were either a grandchild of the deceased; or

- were, at any time, member of a household of which the deceased a member.

* A “close personal relationship” is a relationship other than a marriage or a de facto relationship between two adult persons, whether or not related by family, who are living together, one or each of whom provides the other with domestic support and personal care but not for reward or on behalf of another person or organisation.

What is involved?

To make a claim, the proceedings are usually commenced in the Supreme Court by way of Summons and evidence will be required in an affidavit setting out the nature and history of the relationship, contributions made to the deceased’s property and wellbeing, details of your financial need and any other relevant factors.

Simply having financial needs and showing some level of dependence on the deceased is not the end of it. The Court will have to weigh up many other factors, such as the size of the estate, the deceased’s wishes (such as those stated in a statement of testamentary intention or other similar document), competing claims from others, circumstances and events that may tend to dis-entitle a person from a benefit and so on.

Time and costs involved

Litigation is a lengthy and time-consuming process and it is an emotional one with family relationships being strained by what may be contained in affidavits or said in the witness box at a hearing. That said, often the estate pays the costs (or a large proportion of them) involved in such cases so it may not be a financial burden to enforce your rights.

Most cases settle prior hearing and usually at a mediation that can be arranged by the Court or by private agreement between the parties. Settlement is often advised to avoid the risks, costs (and emotional cost) of litigation and to help preserve any family relationships.

Often we act for the executors of an estate, but we also act for beneficiaries and those that are not mentioned in Wills at all.
Further information

If you would like any more information in relation to Wills, deceased estate litigation or estate planning/business succession issues generally, please contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au