Legal Brief

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Self Managed Super Funds – the danger of DIY

Never before have Self Managed Super Fund (SMSF) people been so on their own. Or as the ATO says in it latest release "truly self managing".

From now on it is up to you to comply with all the regulations of SMSF.

As of 3 years ago, all SMSF Trustees are also the members.

They are one and the same group. The ATO states that, "SMSFs will not be subject to prudential regulation. Instead, all Trustees of SMSFs must comply with the rules and take on the responsibility of protecting their retirement income."

Can you afford the time to keep up to date with everything in your SMSF?

This approach is based on the ATO's Self-Assessment Compliance Model. The ATO states "This model reflects the Government's intention that Trustees must take greater responsibility in managing the compliance of their fund. Our objective is to encourage self management, self regulation and self assessment."

SMSFs are becoming exceptionally popular. With so many Deeds produced, it is easy to assume that they can be used without any advice. The truth is that SMSFs rarely benefit their members unless the Trustees have their Financial Adviser and Accountant working by their side. Without their help the Trustees (who are hard working mums and dads) can seriously breach the law.

Usually a SMSF Deed needs amending every 18 months - these days you need an update every 12 months.

My company, my money – Right?

Ever grabbed your company cheque book and purchased something personal for yourself. Then you said, "I will leave it to my accountant to document that later". You can't do that anymore.
Division 7A of the Income Tax Assessment Act 1936 deems the money you take to be a bad type of dividend. It is usually better to "borrow" the money from the company, rather than just "take" it. In order to "borrow" the money you must have a loan agreement - ALREADY IN PLACE.

If you borrow the money and then do a loan agreement later, it won't work. You need the loan agreement signed and stamped before you can borrow money from the company.

Have you been playing with the company’s money?

Div 7A deems the payment a bad dividend in 3 ways:

1.      when your Pty Ltd pays you money and you are a shareholder or relative;

2.      your Pty Ltd lends you or your "shareholder's associate" money; and

3.      your Pty Ltd forgives debts that you or your "associate" owe to it.

In addition to amounts paid to you and your associate, an amount is treated as a bad dividend if it is paid by the company to you or your associate through an interposed entity.

So I only need an agreement saying the amount is a loan and all is OK?

The ATO requires more than just intent to avoid the payment being deemed a bad dividend. The Taxman has said:

1.      The loan must be in writing.

2.      The Div 7A loan agreement is signed (and preferably stamped) before your company lends you any money.

3.      All loans can't be for more than 7 years. (If you want to secure the loan to real estate then you can borrow the money for 25 years).

4.      You have to pay interest on the loan at least equal to the benchmark interest rate.

5.      You have to pay all the interest each financial year and make minimum yearly repayments.

6.      You and your "associates" (such as family members) need their own Div 7A loan agreements.

You can generate your own Division 7A loan agreements at www.lawcentral.com.au. It takes under 12 minutes.

The test of a true Testamentary Trust

At a recent conference of Financial Planners, the question of Estate Planning arose.

Two questions stood out regarding the use of Testamentary Trusts:

1.      Is there any downside to a "3 Generation Testamentary Trust"?

2.      Does everyone need a "3 Generation Testamentary Trust" in their Will?

Beware of the common garden variety "Testamentary Trust". The term “Testamentary Trust” is bandied about so much that people assume that all Testamentary Trusts are the same. There are different types of Testamentary Trusts. Some may not offer the flexibility you need.

Estate Planning is all about "flexibility".

Many Non “3 Generation Testamentary Trusts” are dangerous as they require ALL assets to go into them. That isn't flexible! Your Adviser and Accountant needs the discretion. One child may not care for a Testamentary Trust. Another child may only want a few assets to go into a Testamentary Trust. That is why we prepare "3 Generation Testamentary Trusts". The "3 Generation Testamentary Trust" is "discretionary". Your Adviser and Accountant can set up none or many Testamentary Trusts for each child as required. They can then put in as much or as little of the assets as they choose.

Don’t Tie your Advisers hands with inflexible documents.

There is therefore no downside with a "3 Generation Testamentary Trust".

If you have any questions about Estate Planning or the "3 Generation Testamentary Trust" you are welcome to visit our Estate Planning web page at www.TaxLawyers.com.au/manuals/EstatePlanning.htm

I can’t believe Drew is really dead!

Yes, but sadly it is true. One of our favourite neighbours has been suddenly snatched away from us, confirming the old adage that only the good die young.

But what of his young wife Libby and baby Ben? How did Drew provide for them?

True, he had his thriving mechanic workshop - but wasn't it part-owned by his silent partner, Big Lou the local wheeler-dealer? With Drew gone, he is likely to claim the lot!

Even if Drew did own his share of the business outright and it passes to Libby, she has no mechanical skills and besides, she has her own part-time career as a journalist - and a baby to raise.

Now it looks like their long-time friends, Stuart and Steph, want to keep the workshop going. In fact, they are already in there, working it. Do they deal with Libby? Or with Lou? Or both?

Perhaps, it's all too hard. Perhaps the business just follows Drew into the ground, leaving Libby with nothing. Unless of course Drew had had the foresight to speak to his advisers and put a simple Business Succession Plan in place. A Business Succession Plan is not only for large and medium sized businesses. Small business is particularly vulnerable to the loss of key persons.

By speaking to his Advisers, Drew safeguards his family’s future, and ensures that the workshop isn’t buried with him.

Many Sole Proprietors are in the same boat as Drew. Their businesses are equally at risk of going under without them at the helm.

Alas this doesn’t seem to be the case. We can only hope that Libby’s tragedy will not tear the neighbourhood apart.