So what’s in your Estate?
David and Shirley own their home as joint tenants, which is normal for most married couples. David also has a small business that he and his brother Jimmy started many years ago, and it has been very successful. The goodwill and assets are worth $500,000 and is owned as a company where Jimmy and David are directors and shareholders. The business is so successful that David has been able to establish a family investment trust, which Shirley is the Trustee and holds a number of investment properties now fully paid off. David also has about $300,000 in an industry superannuation fund. So what assets will form part of David’s Estate?
To start with we need to look at the home - if David died the home would automatically pass to Shirley his wife, as the joint tenant, so it is not part of his estate.
Next we look at the business he operates with his brother Jimmy, the company owns the assets of the business so neither David nor Jimmy directly own these assets. All that David could leave would be his share in the company that owns the business. David might pass this share to Shirley and Shirley would then become a co-director of the company owning the business.
So let’s look at the Family Trust that owns the investment properties - Shirley is the trustee of this trust and even though David may have been a solid contributor towards accumulating these assets, and is also a beneficiary of the trust, he does not own the investment properties within. They remain owned by the trust and Shirley continues to retain control there.
Lastly, let’s look at David’s superannuation - the Trustees of David’s industry fund would make all the decisions as to where David’s super goes. If David has children from a previous relationship they may well be considered especially if there are minors involved. This could be easily changed with David executing a Binding Death Nomination that instructs the superannuation trustees to direct his super to Shirley - or to his Estate – however he nominates. Challenges may follow this, however the decision has at least been taken away from the trustees of his super fund.
So David’s legal Will and Testament would not include the disposition of his home, the assets of his business, the investment properties, or even his superannuation. Even the joint bank accounts with Shirley would fall outside his estate. All he could pass via his Will are his personal effects and the shares in the company that owned the business. Even if David was the sole trustee of the Family Discretionary Trust, he still couldn’t pass on the investment properties, all he could do was instruct that a new Trustee be appointed in his place.
It’s very important to make a list of all assets that you would like dealt with when you pass away. You need to allocate them to the entity that either owns the asset or controls the asset. Only then can you properly understand what assets need to be dealt with and how they can be managed to achieve your testamentary aims. Often it is possible to have a pathway for distribution of particular assets without involving them in your Estate where they may come under attack. Remember, the expense of a legal action to claim against an Estate is usually paid for by the Estate. There have been many Estate claims that out of bitterness, the expenses exhausted the entire amount of the Estate.
Explaining the Improved Pensioner Work Bonus Scheme
As at 1 July 2011, the Government announced a number of improvements to the Work Bonus for pensioners. The Work Bonus is an incentive to encourage older Australians to work part-time should they choose to. This is a very important innovation as an increasing number of retirees are continuing part-time work into their retirement years, be it for income needs only or for professional continuance reasons. What’s even better is that this bonus applies to each member of a couple!
Retirees who are at age pension age are now able to work in employment for wages and see less effect to their age pension.
How does it work?
The first $250 of your employment income each fortnight is not assessed under the income test, and any unused amounts not earned in excess of the $250 per fortnight can accrue up to a maximum of $6,500. This accrued amount can be carried forward even to future financial years and is recognised as their ‘Employment Income Concession Bank’ however, any accrual beyond the $6,500 is wasted. The scheme does not recognise self-employed work or passive income - that income will be counted under the normal ‘Income Test Free Area’ allowance.
So the Work Bonus is an addition to the pension ‘Income Test Free Area’ already existing of $150 per fortnight for singles, or $264 per fortnight for a couple combined. In essence, it might be possible for an aged pensioner to be able to earn employment income of up to $250 per fortnight, as well as earn interest or investment income of an additional $150 per fortnight before their age pension begins to be affected under the income test.
Let’s look at an example:
Rob is a retired aged pensioner but likes to do a little seasonal work as a grape picker at the local vineyard. Rob is ideal as a worker because he can be called upon at short notice when the grapes are perfect and can work hard for a few weeks to get the pick in. He actually enjoys the work and camaraderie and it is a regular annual event in his town. Under the Work Bonus scheme, Rob can accrue his Work Bonus on an annual basis and his wages of $3,000 for the month would not affect his age pension under the income test. In fact, if Rob so desired, he could probably work like this twice a year and still not be affected. Rob uses the money to fund his annual holidays to see his family in Queensland.
I see the pensioner Work Bonus as an excellent innovation. Many of today’s retirees feel fit enough and willing to work on past age pension age, however many cease working because losing up to 50% of their earnings in age pension as a penalty was quite a disincentive. Now there is scope for them to earn a modest amount and it is fully worthwhile to do so. Added to this is the newer flexibility to accumulate/accrue income to accommodate seasonal work patterns even across financial years. This would allow for example, a retired teaching couple to perform supply teaching 1 or 2 days a fortnight each if they chose.
For a couple on the full age pension it might be possible to be earning up to $764 per fortnight with no effect to their age pension entitlements at all. With the full age pension for a couple now being almost $30,000 per annum, $764 per fortnight will add nearly $20,000 on top of that. That brings those who retire very short-funded, but with continued good health, a chance to enjoy a good standard of living into retirement. It will also help those who are assessed under the assets test to be able to earn some additional income without being affected by the income test outstripping their asset test assessment. But the best part is they can work around their regular holidays so still enjoy an active retirement.
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To SMSF or not to SMSF?
In my role here as an adviser at Hudson, I constantly speak with members who have started their own self-managed super fund (SMSF) and because I have a qualification to advise on self-managed super, I am happy to discuss aspects of their strategy and what they are attempting to achieve with their own DIY fund.
The motivations for members starting their own funds are wide and varied but there are some constant themes as to why. The reasons I am most often quoted are:
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Control
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Performance
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Costs
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Specific strategies
Given the abysmal behaviours of the share markets around the world recently, it is not surprising to see many members looking for alternatives in an effort to preserve their capital from further erosion. But often what I see is that the experience is very different to what they expected. Let me take you through the reasons and examine if those reasons need to be satisfied by the SMSF option.
Control
Control is only one side of a double-edged sword - the other side of the blade is responsibility. The more I dig into this reason the more I discover that the level of control expressed could be easily satisfied with a range of other platform offerings, and not just by a SMSF. Absolute control by using a SMSF is well tempered by the strict rules and regulations applied to this sector, and until the Trustee understands this fully, or they transgress the rules and become non-compliant, they will be none-the-wiser.
Valid control strategies would pertain more to the acquisition of non-standard investments such as buying your own business premises, certain direct assets, unusual asset classes, or particular Estate Planning strategies. I agree there are a number of good strategies for beginning a SMSF – it’s just that many of the people I discussed this topic with thought it was a wonderful idea at first but it ended up far from ideal in reality.
Performance
My suspicion is that performance is the major underlying reason for starting a SMSF. Given most retail, industry and other superannuation offerings contain assets diversified across most of the asset classes; there is no surprise that performance since the outset of the Global Financial Crisis is abysmal. When you are looking at returns that have been negative for the last 3 years, it would be easy to think you simply could do it better yourself, and that may just be possible. Most financial advisers I know would recommend that a diversified asset selection is most suitable for just about everyone. The reason for this is that advisers generally look to the long-term and realise that most downturns are temporary and usually resolve within 1 to 3 years.
However, when a downturn extends past 3 years and looks like it might even last 5 years or longer, then it is almost impossible for their clients to maintain the same long-term outlook as the adviser. However once they start the investment process, most still find it impossible to outperform anyway. The few that have managed to outperform usually have done it by narrowing their investment horizon and reaping the rewards short-term without understanding the increased risk of non-diversification. Some are genuinely clever and some are a bit like the new gambler entering the casino and getting a small jackpot after only a few coins.
Costs
This question has changed substantially over recent years. As recently as 5 years ago, the normal industry fund had an expense ratio of just less than 1% for management and investment costs. Financial advice had to be purchase separately, and retail funds were on average 1.8% to 2.3% but that included some level of ongoing advice amounting to roughly 0.6% of that fee level. It was not very cheap and if returns were poor, it was a major concern to see these levels of costs eating into your retirement savings.
And in that context, it was quite possible to set up your own SMSF and match this level of costs. But with a SMSF there is a level of set administration costs and unless your balance was significant, then the percentage these represented could have been significant. Many of those who established a SMSF felt they didn’t need to get investment advice anyway so they simply did away with that cost along the way. Not strangely, they tend not to seek financial advice until they get into trouble.
In recent times, the introduction of wholesale funds has thrown the cost question out the window. Wholesale administration and investment costs can be as low as 0.5% and advice can be sourced and agreed upon at a reasonable rate. The result is that administration, investment and advice can now be purchased as cheaply as a moderately sized SMSF or an industry fund, and neither of latter would include regular ongoing advice.
Specific Strategies
Now, I have never said that a SMSF is a bad idea, it’s just that many of the reasons people start their SMSF can be satisfied by using other platforms that satisfy similar levels of control, performance and cost. There are a number of specific strategies that a SMSF can be of great help with. Some strategies I have seen seem to fly so very close to the wind that ATO guidance via private rulings may be required, and in some cases, if the ruling is positive at the moment, widespread uptake may result in a change of attitude by the ATO later on.
If your situation is such that you need to establish a complex arrangement that may be viewed as contrived by the regulators, then you might just be taking on a very dangerous risk that you do not realise until it is too late.
To sum up, what I tell most members contemplating establishing a SMSF is to examine their reasons and motivation for doing so. Listing them out as I have done above and going through them, examining more closely if they could be dealt with more simply, should at least be the first step. Otherwise, you may be in danger of joining the half-dozen or so members I have spoken with on a yearly basis that become disenchanted, and enlist my help to unwind their fund for a simpler and cheaper managed option. If your reasons for starting a SMSF makes good sense, then I’ll be the first to confirm that with you.
Book a consultation with Paul Jackson by calling free call 1800 804 296 or book online
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