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
- direct investment choice
- access to wholesale managed funds
- the benefit of being able to combine the superannuation balances of up to 6* 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
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!
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 firstname.lastname@example.org.
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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*amendment 01 July 2021 – only 4 members were allowed prior to 1 July 2021.
SMSF owns property. Member dies. Oh oh!