McKillop Legal

The difference between joint tenants and tenants in common

You own property with another person and you are in the process of making a Will.

Of course, you want your interest in the property to go to your intended beneficiaries.

Your solicitor asks you if you own the property as “joint tenants” or as “tenants in common“. You stop and think…

Until now, you had no idea that there was any difference between joint tenants and tenants in common and had probably never considered it.

The concepts are the same for any asset, but are more commonly used in relation to land. So what is the difference?

What is tenants in common?

The simplest way to think about owning real estate (or real property) as tenants in common is that each owner has a legal interest in the land in a defined or specific share or proportion.

For example, the phrase “as tenants in common in equal shares” means that each owner has an equal interest in the land (so in the case of 2 owners, they each hold a 50% interest and in the case of 3 owners, they each hold a 1/3 interest).

Where property is owned as tenants in common but in unequal shares, the proportion of ownership is specifically stated (such as “John Smith as to 1/4 share and Bob Brown as to 3/4 share as tenants in common”).

With tenants in common, each owner (subject of course to any Co-Ownership Agreement or encumbrance such as a Mortgage or Caveat) may freely transfer or dispose of their share of the property, including in their Will when they die.

On their death, their interest in the property will be included in the inventory of property annexed to the grant of Probate or if they don’t have a Will, annexed to the grant of Letters of Administration.

What does joint tenancy mean?

Joint tenants however each own the whole of the relevant asset. The concept is that the co-owners’ ownership of the asset overlaps such that on the death of one joint tenant, the remaining joint tenant/s will continue to hold the whole of the asset. This is known as the “right of survivorship“.

A deceased joint tenant’s interest in the property does not form part of their estate and is not available for distribution to the beneficiaries of that person’s Will. Often this is overlooked by those drafting Wills.

The same principles apply to bank accounts held jointly.

It is for this reason that most married couples (or those in longer term relationships) hold their property or at least their principal place of residence as joint tenants. There are however, sometimes good reasons for holding property differently as part of an overall Estate Plan. Blended families for example often necessitate this right of survivorship not being given effect to so as to more fairly distribute their estate on their death.

Other situations where a joint tenancy may be appropriate for those not in a relationship like marriage is a Lease by parties to a Partnership – the death of one partner would then not necessarily affect the continuation of the Lease.

Severing a joint tenancy

If you hold property as joint tenants with another person it is possible to sever the joint tenancy – which then converts it to a tenancy in common in equal shares.

This can be done unilaterally by lodging the appropriate documentation at NSW Land Registry Services (formerly NSW Land & Property Information and the Land Titles Office) and is often done by lawyers when parties to a marriage or de facto relationship no longer wish for the other party to own the entire property on their death, such as when they separate or get divorced.

Mixed tenancies

It is also possible to have a combination of both a “joint tenancy” and a “tenancy in common“, such as where a property is owned by 2 families. For example,  a husband and wife may own one half of the land but they own it jointly as between them (so that if one passes away, the other continues to own it) and the brother of the husband owns the other half absolutely.

The title to the property would show “John Smith and Mary Smith as joint tenants as to 50% and David Smith as to 50% as tenants in common”.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to estate planning, changing the tenancy of a property or documenting a co-habitation or property use agreement, 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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Forcing the sale of land in NSW

Where land is owned by multiple people (whether as joint tenants or tenants in common), any one of the owners can approach the Supreme Court to seek an order for the appointment of a trustee for sale and for the property to be sold.

Ordinarily, the owners can come to agreement on the need for a sale and the basis on which it is to be conducted. For example, following some negotiations or a mediation, the co-owners may agree to:

  • sale by auction with an agreed reserve price;
  • sale by public treaty with an agreed price; or
  • sale by one owner to another, with agreement on how the price is determined (such as agreeing on a valuer or methodology).

When co-owners are in a dispute however as to whether a property should be sold, when and on what terms, the provisions of section 66G of the Conveyancing Act 1919 (NSW) can be utilized to force the sale of the property, even where the other owner (or owners) do not want to sell it.

Once appointed, the trustee has the legal power to sell the property on the best terms available and to engage real estate agents, valuers and lawyers/conveyancers as may be required. So as to help ensure that the property sells for fair market value and to avoid any breach of trust allegations from any of the owners for not obtaining the best price possible, it is sensible for a trustee to sell at public auction

A usual order made is that the unsuccessful party (usually the defendant/respondent) pays the plaintiff /applicant’s legal costs. The costs risk arising from litigation (which can be substantial in amount) is usually a key factor in out of court settlements being made.

Applications for the appointment of a statutory trustee for sale are generally only refused in special circumstances, such as where the is a prior agreement not to sell, around the terms of any sale or to sell only when certain conditions are met (which is why any co-ownership agreements ought to be in writing as verbal evidence can be less persuasive).

Usually, after a successful application is made and the property is sold, the proceeds of sale after payment of:

  • any encumbrances (such as mortgages and unregistered mortgages secured by caveats);
  • the costs of sale (real estate agent and auctioneer fees and marketing costs etc); and
  • the trustee’s costs

are held on trust by the appointed trustee and then distributed proportionally according to ownership.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to family disagreements in relation to land or estates or any business or commercial dispute, 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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Double demerits this long weekend

Double demerits this long weekend – from Midnight tonight, Thursday 27 September to midnight, Monday 1 October

The double demerit point scheme applies for the following types of offences:

  • Speeding
  • Illegal use of mobile phones
  • Not wearing a seatbelt
  • Riding without a helmet

ASIC to remove trading names from ABN Lookup

Business owners please note that from November 2018, trading names will be removed from the ABN Lookup facility.

The ABN Lookup contains a list of all Australian Business Numbers (ABN) and any associated business names.

If you want to continue to trade under a specific name, if you haven’t already done so, you must register it as a business name with the Australian Securities and Investments Commission (ASIC) as is required by the Business Names Registration Act 2001 (Cth).

You don’t need to register a business name if you trade under your own name (eg ‘John Smith’) or a company name (eg ‘John Smith Pty Ltd’), but you do need to have a business name if it’s anything else (eg ‘John Smith Plumbing’, ‘John Smith & Co’, ‘John Smith & Partners’, ‘John Smith & Sons’  or ‘John Smith & Associates’ then it must be registered).

Don’t rely on a business name registration thinking that it gives you any protection – as it doesn’t give you any protection at all – only a trade mark under the Trade Marks Act 1995 (Cth) can provide that kind of protection.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to intellectual property, commercial law or business related matters, 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 concerns or objectives.

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Director duties

There are numerous and important legal responsibilities imposed on directors of companies under the Corporations Act 2001 and other laws, including the general law.

Of these director duties, some of the most significant are contained in Chapter 2D of the Corporations Act:

  • to exercise the degree of care and diligence that a reasonable person might be expected to show in the role – the business judgment rule (s.180).
  • to act in good faith in the best interests of the company and for a proper purpose (s.181)
  • to not improperly use their position to gain an advantage for themselves or someone else, or to the detriment to the company (s.182)
  • to not improperly use the information they gain in the course of their director duties to gain an advantage for themselves or someone else, or to the detriment to the company (s.183)
  • to lodge information with ASIC (s.188)

but there are others, including to:

  • to avoid conflicts of interest between the interests of the company and theirpersonal interests and to reveal and manage conflicts if they arise (s.191)
  • to take reasonable steps to ensure that a company complies with its obligations in the Corporations Act related to the keeping of financial records and financial reporting (s.344)
  • to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent (eg, if it is unable to pay its debts as and when they fall due) (s.588G)
  • if the company is being wound up, to assist the liquidator and provide accurate details of the company’s affairs.

Directors can also be liable for unpaid taxation obligations and unpaid superannuation monies – for which the ATO can issue Director Penalty Notices.

Failing to comply with director duties can result in criminal sanctions, fines, disqualification from acting as a director and other consequences, such as breach of contract such as obligations under a Directors & Shareholders Agreement.

People can be responsible as directors even if not formally appointed

What many people don’t know is that the term “director” is defined in section 9 of the Corporations Act to include a person:

  • who is appointed as a director (or alternate director), regardless of the name given to their position; and
  • even though not validly appointed and recorded at ASIC as a director:
    • who acts in the position of a director (also known as a ‘de facto director‘); or
    • whose instructions or wishes the appointed directors are accustomed to act in accordance with (also known as a ‘shadow director’)

Commonly used terms for the titles of ‘director’ include ‘non-executive director‘, ‘executive director‘, ‘managing director‘, ‘independent director‘ and ‘nominee director‘.

Often, businesses give titles to employees rather than pay rises. Similar considerations apply to partnerships, where some partners are ‘salaried partners‘, not ‘equity partners‘ so they take home a salary rather then enjoy the fruits of the business. What these ‘salaried partners‘ (in the same vein as ‘non-executive directors‘) often fail to understand or appreciate is that they are holding themselves out as directors or partners of the business and will have full responsibility as such if something goes wrong, such as an insolvency.

How to meet the responsibilities

Those with key roles in any business, regardless of its legal form, you should:

  • understand your legal obligations and make compliance with them part of your business
  • keep informed about your business’ financial position and performance, ensuring that it can pay its debts on time and keeps proper financial records
  • give the interests of the business, its stakeholders/owners and its creditors top priority, which includes acting in the business’ best interests (even if this may not be in your own interests)
  • use information you get through your position properly and in the best interests of the business
  • get professional advice or more information if you are in doubt.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to Corporations Act or corporate governance issues or any business or 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 needs.

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Minimum wage increase

The Fair Work Commission has, by the National Minimum Wage Order 2018, increased minimum wages by 3.5% from the first pay period starting on or after 1 July 2018.

This minimum wage increase applies to all employees paid the national minimum wage – employees will be entitled to a minimum take-home weekly pay of $719.20, or $18.93/hour.

Employers should review the pay rates of all employees to ensure that they are being paid at or above the appropriate pay rate.

A review should also be undertaken to ensure those employees on “annualized salaries” remain appropriately remunerated.

Employment contracts

If your business has not done so recently, it may be a good time to update any Employment Contracts to ensure that they cover important issues such as Restraints of Trade and consider any amendments to Workplace Policies

Further information

If you would like any more information in relation to employment law, disputes or business issues generally, please 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 concerns or objectives.

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What is a Granny Flat Right?

WHAT IS A GRANNY FLAT RIGHT?

You can have a granny flat interest in any kind of dwelling, not just those typically referred to as a “granny flat” (a separate, self-contained building or living area attached to a home or property). It must be a private residence and your principal home.

You cannot however, have a granny flat interest in a property in which you have legal ownership (or your partner or a company or trust that you control).

A “granny flat right” or a “granny flat interest” is where you pay for the right to live in a specific home for life.

Granny flat interests are usually family arrangements providing company and support for older people, but they don’t have to be for social security purposes. They are created when you exchange assets, money or both for a right to live in someone else’s property for life. For example, you could:

  • transfer ownership of your home but keep a lifelong right to live there or in another private property; or
  • transfer assets, including money, in return for a lifelong right to live in a home.

The granny flat right only lasts for your lifetime. It’s not part of your estate when you die, so you can’t give it in your will as part of your estate plan.

DOCUMENTATION

A granny flat right does not have to be in writing however, given that amounts that can be paid for a granny flat right can be significant and they are usually funded by significant events like the sale of a family home, it can be a very good idea to get a lawyer to draw up a legal document so you have proof of what you and the owner have agreed to in relation to the granny flat arrangement.

A Granny Flat Right Agreement can include many things in addition to the amount paid, such as what happens if the property is sold, whether the right can be transferred to another property or what you may get back if you give up your granny flat right, as well as what regular contributions for rent, maintenance or outgoings (insurance, rates, phone etc) may have been agreed.

GIFTING RULES & THE REASONABLENESS TEST

In Centrelink/Department of Human Services terms, a “deprived asset”, also known as “gifting”, is where you give away an asset without getting something of at least equal value in return.

The value of a granny flat right is the amount paid, or the value of the assets transferred, in return for a life interest or life estate in a property.

Centrelink may apply the “reasonableness test” in determining the amount that should be paid for a granny flat right. This test is based on a formula based on a conversation factor relating to your age next birthday and the couple age pension rate.

If the amount paid is equal to or below the value determined by the reasonableness test, then there is no deprivation. However, if the amount you paid for the granny flat right is more than the cost or value of the granny flat right, the excess amount paid is considered to be a “deprived asset”.

This could affect the amount of pension you are paid.

Depending on the value of the granny flat right, you may be considered as a home owner for Centrelink (assets test) assessment purposes, even though you don’t own the home you have the granny flat right in.

WANT MORE INFORMATION?

Speak to us about how we can assist you to draft a Granny Flat Right Agreement to document your arrangements regarding the use and occupation of part of your home. We will liaise with your financial planner to cover off the financial and social security aspects as there may be other things you can do like contribute proceeds of sale to super.

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to documenting co-habitation and property use agreements and estate planning matters 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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Country of origin food labelling

From 1 July 2018, most of the foods you buy will need to display new country of origin labels. This is required to comply with the Country of Origin Food Labelling Information Standard 2016.

Different labelling requirements apply depending on:

  • whether the food is grown, produced, made or packed in Australia or another country
  • whether the food is a ‘priority’ or ‘non-priority’ food
  • how the food is displayed for sale

“It is illegal for a business to make a claim that goods were grown, produced, made or packed in a particular country when this was not the case.”

You will find country of origin labelling on most food you buy at the supermarket, local stores, markets, online or from a vending machine.

Food bought from restaurants, cafes, take-away shops, schools and caterers hwoever does not have to be labelled.

Food that was packaged and labelled on or before 30 June 2018 can still be sold without the new labels so there will be a transition period.

Types of food covered by the Standard

The Standard applies to most food offered for retail sale in Australia (e.g. food sold to the public in stores or markets, online or from vending machines) if it is:

  • in a package or
  • unpackaged seafood, particular meats, fruit and vegetables, nuts, spices, herbs, fungi, legumes, seeds or a mix of these foods.

The Standard does not apply to food that is:

  • otherwise unpackaged (e.g. unpackaged cheese, pastries or sandwiches)
  • only intended for export to overseas markets
  • sold by restaurants, canteens, schools, caterers, self-catering institutions, prisons, hospitals, medical institutions and at fund-raising events (e.g. a cake stall at a school fete)
  • made and packaged on the same premises where it is sold (e.g. bread in a bakery)
  • delivered and packaged ready for consumption, as ordered by the consumer (e.g. home delivered pizza)
  • for special medical purposes
  • not for human consumption (e.g. pet food).

Grown in, produced in, made in or packed in?

The key country of origin claims mean different things:

  • “Grown in” is a claim about where the ingredients come from and is commonly used for fresh food. It can also be used for multi-ingredient products to show where the food was grown and processed
  • “Produced in” is a claim about where the ingredients come from and where processing has occurred. This claim is often used for processed, as well as fresh foods
  • “Made in” is a claim about the manufacturing process involved in making the food

When a food has not been grown, produced or made in a single country, it will need to display a label identifying the country it was “packed in”.

It is illegal for a business to make a claim that goods were grown, produced, made or packed in a particular country when this was not the case.

Priority and non-priority goods

“Non-priority foods” must carry a country of origin statement about where the food was grown, produced, made or packed.

A product is a non-priority food if it belongs to one of the following 7 categories:

  • seasoning (e.g. salt, spices and herbs)
  • confectionery (e.g. chocolate, lollies, ice cream, popcorn)
  • tea and coffee (in dry, or ready to drink, form)
  • biscuits and snack food (e.g. chips, crackers and ready to eat savoury snacks)
  • bottled water
  • soft drinks and sports drinks
  • alcohol

Everything else is a “priority food”. For example, priority foods include fruit, vegetables, meat, seafood, bread, milk, juice, sauces, honey, nuts and cereal.

Priority foods can only claim to be “produced” or ”grown” in Australia if they contain 100% Australian ingredients.

If a priority food was grown, produced or made in Australia, its country of origin label will also feature:

  • a kangaroo in a triangle logo to help you quickly identify that the food is Australian in origin;
  • a bar chart and text identifying the proportion of Australian content in the food (if any).

Businesses may voluntarily choose to provide country of origin information for food that is exempt from the Standard, provided it is not false or misleading.

However, if a business wishes to use the kangaroo logo or the bar chart on food products to be sold in Australia, they will be required to comply with the Standard regarding the use of those graphics.

Labels

The Standard sets out 3 possible country of origin labels for food, each with its own mandatory text requirements:

Three component standard mark – a graphic and text-based label which is mandatory for priority food items grown, produced or made in Australia. The label includes:

  • the kangaroo in a triangle symbol so you can easily and quickly identify the food’s Australian origin
  • the minimum proportion, by ingoing weight, of Australian ingredients, indicated by a percentage amount and shown in a bar chart
  • a statement indicating what percentage of the food was grown or produced in Australia
Three component label

 

Two component standard mark – a graphic and text-based label which is mandatory for most priority food items packed in Australia. It may also be used for imported priority foods that contain Australian ingredients. The label includes:

  • the minimum proportion, by ingoing weight, of Australian ingredients, indicated by a percentage amount and shown in a bar chart
  • a statement indicating what percentage of the food was grown or produced in Australia
The bar chart indicates what percentage of the product is Australian made, and the explanatory text spells this out in simple terms.

 

Country of origin statement – a text-only label which is used for non-priority food items. Imported priority foods must also, as a minimum, carry a country of origin statement in a clearly defined box. 
The country of origin statement indicates where the product was made

Other claims

Sometimes businesses add words, or easily recognisable logos, symbols or pictures to their food packaging, which could suggest or imply a connection between the product and a particular country. For example, a statement such as ‘Proudly Australian owned’ next to an Australian flag tells you about the ownership of the company.

Businesses must ensure that any such representations made about their products are clear, truthful and accurate.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to consumer rights, business or 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 needs.

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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!

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