Pension Changes

This article highlights an important change applying to pensions commencing on or after 1 October 2003. We will first discuss the new rules having regard to allocated pensions (AP) and then briefly discuss their application to complying pensions.

Broadly, the new rules require the minimum payment in the financial year a pension is commuted to be pro-rated based on the number of ‘days in payment period’ divided by the ‘days in financial year’ (ie, typically 365 apart from the year of commencement).

Thus, an AP that commences on 1 July 2004 and that is commuted on 31 December 2004 would require the minimum pension to be 50% of the financial year’s minimum amount (ie, 186/365 pro-rated).

The pro-rating of the minimum amount however does not apply:

• upon death;
• to pay a superannuation surcharge debt;
• to satisfy a payment split on divorce;
• to cool-off (a 14 day cooling-off now applies to pensions including those from SMSFs); and
• to the extent the member’s fund balance is insufficient to pay the minimum.

It is interesting to compare the new rules with the rules that apply to pre-1 October 2003 pensions. There is no pro-rating rule unless the pension comes to an end (eg, when the pension ends – otherwise than by way of commutation – and the member’s fund balance is insufficient to pay the minimum). Accordingly, the minimum amount still has to be paid on a commutation of a pre-1 October 2003 AP even if the pension is only payable for 6 months (ie, 50%) of the year.

For example, if you commute an AP that started on 1 July 2003, then the minimum amount for the entire financial year still has to be paid (despite the commutation).

This means that when a person seeks to commute a pension, they must first of all establish whether it commenced prior to or after 1 October 2003. Only pensions commenced and commuted after that date are pro-rated.

Note, it is disappointing that the new rules do not also extend to pre-1 October 2003 pensions. This would certainly make administration simpler.

Similar pro-rating rules now apply to complying pensions that commence after 1 October 2003 (with a number of significant differences).

The new rules highlight the need for advisers to be aware of the above issues. The fund’s trust deed should accommodate the change. Finally, failure to comply with the new rules can give rise to significant penalties.

New Enduring Powers of Attorney – Vic

A new form of enduring power of attorney (EPOA) applies from 1 April 2004 in Victoria.

Broadly, this form will be far more extensive both in layout and formalities to complete than the existing EPOA.

The new EPOA requires:

• witnesses to certify that the donor has the necessary capacity;
• no more than one witness can be a relative of the donor;
• the attorney must sign and date a statement of acceptance of the EPOA; and
• an attorney must keep and preserve accurate records and accounts of all dealings made under the EPOA.

Note that the new EPOA will require at least one qualified witness. Although police officers, pharmacists, etc, can currently witness statutory declarations, they are unlikely to agree to undertake the more complicated procedure required to witness the new EPOA.

It is important to note that an EPOA made under the current law and existing before the commencement of the new Act will continue to have effect. Thus, an EPOA completed prior to 1 April may save time and money!

CGT Exemption for Deceased Estates

Are your clients in business? What if they die and leave the business to their spouse in their Will? Can your client’s spouse rely on the small business retirement exemption?

It may be possible for a beneficiary who has a present indefeasible interest in the assets of the deceased’s estate to be able to claim the small business CGT retirement concession on the deceased’s business assets, in certain circumstances.

This is a useful concession as it would allow certain persons to leave their businesses via their Will and know that if the executor of the estate continues to carry on the business and then sells the business, then the proceeds from a sale which occurs at the direction of the beneficiary after they have a present indefeasible interest to that business, could go to the beneficiary tax-free (subject to all of the conditions in the small business CGT retirement concession being satisfied).

This is because, generally, where a beneficiary is presently entitled to a CGT asset as against a trustee of a trust, the small business CGT concession provisions apply to an act done by the trustee in relation to the asset as if the beneficiary had done it.

This is important in order for the beneficiary to satisfy the active asset test where the trustee continued to carry on the business up until the sale of the business and then sold it after the beneficiary had a present and indefeasible interest in the business and then paid the proceeds to the spouse.

The ATO published ATO ID 2004/121 on 6 February 2004, which covers this issue. This Interpretative Decision (ID) deals with a sole proprietor who leaves all of his assets to his spouse. The principles in this ID give rise to a useful planning strategy and may, in appropriate cases, be applied to other scenarios involving deceased estates. It should also be noted that IDs are not binding on the ATO, depend on their particular facts and care should therefore be taken before relying on them.

Death Benefit Disputes & SMSFs

There are many possible disputes that can arise in relation to a person’s benefit in a SMSF following their death.

Superannuation benefits do not form part of a deceased person’s estate. Accordingly, they are not dealt with under their Will, unless the trustee decides to pay the benefit to their legal personal representative (LPR), eg, a member of a SMSF may direct the trustee to pay their superannuation benefits to their LPR.

DBA has advised on numerous disputes arising following the death of a member of a SMSF. These situations typically include the following:

• the death of a member of a SMSF resulted in a breach of the trustee/member rules. This is especially an issue when the deceased’s benefit is not paid out within 6 months of death, which means that the 6 month period of grace in relation to temporary breaches of the trustee/member rules do not apply;
• the surviving trustee of a SMSF paid all the deceased’s benefit to themself, suggesting not only a conflict of interest, but also a breach of the requirements in the deed. For example, if a minimum of two trustees is required, then another trustee should have been appointed;
• the deed did not allow the member’s LPR to become a trustee of the SMSF on the member’s death; and
• a member prepares a binding death benefit nomination (BDBN) when the trust deed does not allow for BDBNs or the deed was not properly varied, thereby rendering the BDBN ineffective.

It is important for members of SMSFs to consider these issues and possible complications now, as once they have died, it may be too late!