Saw this today on Business Spectator site:

"Spouses and children face the prospect of significant tax bills upon the death of a parent or partner following a ruling by the Australian Taxation Office (ATO), according to a report by the Australian Financial Review.

The ATO ruling clarifies the manner in which pension assets will be treated following a death, and mean that private pensions are no longer tax-free upon the death of a pensioner and that any beneficiaries will have to pay capital gains and income tax on the assets, the report said.

Additionally, when the beneficiary is an adult child, the recipient will have to pay additional taxes on top of the 16.5 per cent death benefits tax. ..."

some comment:

The headline on the front page of the AFR today was “ATO ruling confirms tax liability after death” and the article pointed out that SMSFs would be hit the hardest with tax bills because of the ATO view.

The ATO has released a draft tax ruling which outlines their view of what happens from an income and capital gains perspective when a pension payable from a fund ceases to be payable.

But rather than being a new and controversial view the ATO is simply confirming what many practitioners in this area have understood to be the case. On the death of an SMSF pensioner, the pension ceases, and unless there is someone else automatically entitled to receive the pension, the income tax exemption for pension funds ceases.

The main impact of this can be the effective re-introduction of capital gains tax, and sometimes the potential tax bill can be many tens of thousands of dollars.

So can you do anything to avoid this tax?

The answer is yes and involves making sure that SMSF beneficiary nominations are correctly designed to meet the ATO requirements, making sure that SMSF trustees apply careful tax management annually and planning pension payments properly.

the last line is an answer that is not really an answer

Hi fellas,

I think the Business Spectator heading for this item is a bit misleading as to the emphasis and purpose of the ATO's Draft Tax Ruling - TR 2011/D3 - which was released recently for comment.

Comments can be submitted up to 26/08/2011 and the ruling, once it is made final, is intended to apply retrospectively from 01/07/2007.

The section which relates to the consequences following the death of a fund member receiving an accounts based pension runs from para 109 to para 117 but, bearing in mind the intended retrospective application of the ruling, the whole document is worth a close reading by SMSF members and trustees to see if affects their estate planning arrangements or if their trust deed needs updating,

The draft is available in the Law section of the ATO website.

Cheers,
Catron

Although the ATO has not made a ruling as yet,It has been suggested to me that the most efficient way to meet the Tax Office’s requirements is, in fact, to stop current pension and restart a new pension with spouse nominated up-front as a reversionary pensioner.

What are others hearing on this matter.

a link Pedro:

http://www.superguide.com.au/retirement ... ry-pension

Thanks for that.

It pretty hard to plan when there are no clear guidelines.

Anyway will make further enquiries and keep my ear to the ground as to possible strategies.

Just wind up the SMSF, invest the proceeds in exactly the same and forget about the death tax liability. I'm serious. When I reach the age - not long to go - I can access the super in my fund (not a SMSF), I will pull the whole lot out. No requirement to base a pension on something that fluctuates from day-to-day let alone year-to-year, no adviser fees, no accountancy fees, no auditing fees, no ATO levy, just a simple inclusion of dividends and interest in one tax return.

And when I shuffle off, the remaining assets will be sucked up, at a cost base calculated the day after my death, into a Testamentary Trust administered by two impartial trustees - an accountancy firm and law firm (anything to keep the assets out of the hands of the Public Trustee which charge like a wounded bull.)

KISS is very much my objective.

that observation, to wind up, raises an interesting question (or 3)

In plain dollar terms, there would have to be a point where compliance costs outweigh the tax saving of the Superfund structure.

Include the emotional 'toll' and the bar is a little lower. Mmm.... but there must be other benefits? I also see huge issues, as members age, and lose the ability/ interest to be on top of things. KISS indeed.

(most people with small balances would be attracted ... but many of them would blow the balance then look for a hand out?)

Most people in retail or industry fund structures would have little idea of what they pay in the way of fees, for example. SMSF members would see the numbers, and be more engaged. My SMSF got by this year on 0.43%pa total cost (no managed funds) .

The sad reality is most people aren't as switched on as Judd, and don't have the discipline, nor experience, to invest and live off the earnings. That's the nub.

Judd wrote:Just wind up the SMSF, invest the proceeds in exactly the same and forget about the death tax liability. I'm serious. When I reach the age - not long to go - I can access the super in my fund (not a SMSF), I will pull the whole lot out. No requirement to base a pension on something that fluctuates from day-to-day let alone year-to-year, no adviser fees, no accountancy fees, no auditing fees, no ATO levy, just a simple inclusion of dividends and interest in one tax return.

And when I shuffle off, the remaining assets will be sucked up, at a cost base calculated the day after my death, into a Testamentary Trust administered by two impartial trustees - an accountancy firm and law firm (anything to keep the assets out of the hands of the Public Trustee which charge like a wounded bull.)

KISS is very much my objective.

Apart from no tax on earnings or income a Pension from the new Simpler Super incurs no CGT on assets sold.

If these same assets were held outside of Super the cost base is at date of purchase , and could create a problem for my spouse after I drop off the perch.
So what I am trying to do is maintain the assets value for my spouse and then when in her hands she can look at strategy to leave as much to our children as she can.

This might involve something along your strategy.

benthonic wrote:....The sad reality is most people aren't as switched on as Judd, and don't have the discipline, nor experience, to invest and live off the earnings. That's the nub....

Apart from the undeserved kudos directed at me, I believe that you are correct. It is why I like the concept of compulsory superannuation and would even go as far as compulsory annuities (monger, monger go the populace "It's my money.") with any residual being paid to the Estate tax free on death.

Pedro-Egoli wrote: Apart from no tax on earnings or income a Pension from the new Simpler Super incurs no CGT on assets sold.

If these same assets were held outside of Super the cost base is at date of purchase , and could create a problem for my spouse after I drop off the perch.
So what I am trying to do is maintain the assets value for my spouse and then when in her hands she can look at strategy to leave as much to our children as she can.

This might involve something along your strategy.

I take you point Pedro and you have raised valid ones. However, while there may be no tax on earning or pension income, there is still a cost. For me, the tax aspect is the last thing on my mind. I just want for as least involvement with the Tax Office as I can possibly achieve.

As for the cost base aspect for assets outside Super, a Discretionary Testamentary Trust, established by a valid Will, can assist in that regard I understand. Best to speak to a solicitor if you wish to explore it further.

In my case, such a Trust was automatically established following my wife's death. Assets in her name became part of that Trust and the cost-base was determined the day after her death. There was, and is, no CGT involved from that aspect only when the assets are finally sold. However, as I, along with our children, were named as beneficiaries, as well as me being the Trustee of her Estate, it was advisable to establish a Corporate Trustee to administer the assets to avoid any potential "conflict of interest" issues. Such is the law and nasty thoughts that people can have - as if I'd do my children out of their assets!!! I resigned as Trustee and the CT was appointed. A bit of paperwork involved but the lawyers can deal with that. Just find a good one.

However, a CT can make life a bit simpler for others as the Corporate Trustee can administer multiple Trusts, ie my wife's and mine or, indeed my childrens'. While there is a cost in transferring the assets from the name of the individual to the CT, once they are there the administration is relatively simple. In addition, it is very easy to change Directors of a CP as opposed to messing about with changes where there are or were multiple holders of an asset.

Apparently, it is advisable not to use a SMSF CT to administer Estates. Seems it gets really messy if there is requirement to change the SMSF trust deed due to legislative amendments, etc and the reverse may also apply. Didn't apply in my case but at least the solicitor thought about it enough to ask about all financial arrangements.

Sorry if the above is a bit off tangent but there maybe something there which can stir a few of those deep, meaningful thoughts we all have, are afraid to ask but really need to know

PS: One thing I forgot to mention. We jointly held shares (not a SMSF). This required that the holdings be transferred to my name only. There is a cost to this now as brokerage houses woke up to loss of income when a former Treasurer allowed people to contribute up to $1M to super and there was a lot of in specie stuff going down. However, as far as I know they do not charge on a buy/sell basis but at one price. However, it is for each shareholding plus GST. So if you hold say 20 different shares, you could be up for say between $550 to $1,100: depends on the broker. And a new HIN is allocated - at least it was in my case.

Avoiding capital gains tax seems the highest objective, I'm thinking SMSF, there isn't a problem looming until one member dies
(assuming 2 members), so it would be wise to consider any cgt obligations, and cash in those assets.

Last resort would be winding up the fund, particularly if there were still quality assets earning good income.

The guess work is in the timing?

Another thought:

Who can I nominate?

You can nominate any of your dependants as defined under the Super law – i.e. your current spouse (including your defacto) or your child of any age (including adopted children), or a person financially dependant on you at the time of your death (your Mother-in-Law that is living with you). You can also nominate your Estate (your assets in your Will). Nominating your Estate, is the most tax effective method of distributing your assets (see our Manual on Estate Planning).

link:http://www.civiclegal.com.au/Publications/Supernomination.aspx

Are binding nominations effective forever?

No. Binding nominations are only valid for 3 years

If you have Self Managed Superannuation Fund then you can go even further. You can get your tax lawyers to amend the actual trust deed to say where you want your superannuation to go if you die. This doesn’t need to be updated. It remains in your trust deed until you change it.

A document link:
https://www.superfacts.com/superfacts/f ... or9635.pdf

This subject is of interest, as a close relative died, with her ex as a co trustee of young children. As executor of the will, I was powerless to
divert the super proceeds to the kids, which were paid to the ex to do with as he saw fit. (it was squandered)