Has the 2016 Budget Killed Off Family SMSFs for Estate Planning

One of the things that the pollies were targeting before the 2016 Budget night was the “inappropriate” use of SMSFs for estate planning.

Given that SMSFs actually do pay out benefits on the death of a member, it seems to us that at least in this respect using a SMSF for “estate planning” is unavoidable. Hmmm.

Plus, section 62 of the Superannuation Industry (Supervision) Act 1993 sets out the “Sole purpose test” of a regulated superannuation fund which includes as one of the fund’s core purposes being “the provision of benefits in respect of each member of the fund on or after the member's death, if: (A)  the death occurred before the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; and (B)  the benefits are provided to the member's legal personal representative, to any or all of the member's dependants, or to both”. Double Hmmm.

On the other hand, another way to use a SMSF (particularly a “family SMSF”, where the members include parents and their children) is to effectively transfer the benefit of a parent’s member account (or the assets underlying it) to their children who are also members of the same fund. This is particularly so where the fund’s assets include the family business premises, and where it is desired to keep the business premises within the family from one generation to the next.

Such “intergenerational” use of a SMSF is possible because, unlike ordinary trusts that (except in South Australia) have a maximum lifetime or “perpetuity period” of 80 years, SMSFs can live on forever (see for example section 13 of the NSW Perpetuities Act 1984).

Plus, at only 15% tax on fund earnings (or 0% in pension phase), it is a highly tax effective structure in which to house and maintain the family business premises from generation to generation.

Consider the following scenario:

1.  A couple in their 60’s with two children run a farm, and their children work on the farm with them.
    The couple would like to pass the farm down to the children after they die, so the children can keep
    the business going. They would also like the farm to stay in the family for future generations.
    The family farm / business premises are held in a SMSF, of which the couple are the two members.
    The couple have started to wind down their own involvement in the farm and are getting ready 
    for retirement. The children are now in their early 40’s.

2. In order to implement their wishes, the family is advised as follows (assuming a pre-2016 Budget
    world):

    (a)    The two children who work the farm could become members of the fund;

    (b)    The parents could assist their children to make contributions into the fund, for instance:

             (i)    they could help their children to make their own contributions via SGC and concessional
                    contributions up to $30,000 per annum; and or

             (ii)   they could help their children to make non-concessional contributions of up to $180,000 per
                    year or $540,000 per 3 years – this could be funded by the parents re-contributing any
                    excess tax free superannuation pension income and / or by withdrawing and  
                    re-contributing lump sums to the children’s member accounts.

3. Eventually the respective account balances and ownership of underlying assets would shift away
    from the couple and in favour of their children. Mission accomplished!

Perhaps this is the sort of “estate planning” which the pollies are railing against and wish to curb. Has the 2016 Budget achieved this? Consider these Proposed Measures from Budget Paper No. 2:

• Introduction of a $500,000 lifetime non-concessional contributions cap in place of the current regime and retrospectively taking into account all non-concessional contributions since 1 July 2007;
• From 1 July 2017, imposing a $1.6m cap on accumulated superannuation that an individual can transfer into the tax-free retirement phase (whilst any excess can be kept in or transferred to an accumulation account at a 15% earnings tax);
• From 1 July 2017, reducing concessional caps to $25,000 per annum;
• From 1 July 2017, abolishing the anti-detriment provision;
• From 1 July 2017, removing the tax-free status of earnings of assets supporting transition to retirement pensions.

How have these proposed measures affected the use of family SMSFs for estate planning purposes? Well, we can certainly say that:

1. The abolition of anti-detriment payments means that death benefits can no longer be increased by
    the anti-detriment amount, which depending on the tax components and the calculation formula used
    could have been up to an extra 17.647% of the death benefit (nor a corresponding tax deduction
    become available to the fund for making the payment);

2. The ability to facilitate in-fund asset transfers to children by way of parents taking monies out of the
    SMSF and re-contributing it into their children’s member accounts in the same fund has been severely
    curtailed; and

3. It’s now simply harder overall to build a large death benefit within super for the benefit of your
   dependants or other persons via the payment of a death benefit to your estate.

But whether one can go so far as to say that the 2016 Budget has “killed off” family SMSFs for estate planning purposes is another matter.

For one thing, the ability to help children to fund at least up to the $500,000 non-concessional contribution cap is still material, especially where there are more than two children and “parallel SMSFs” are utilised.

And for another, there are still other methods to get large amounts in to super to enhance an ultimate death benefit (such as life insurance held within the fund, applying the small business exemptions to make further non-concessional contributions, and using strategies such as limited recourse borrowing arrangements to leverage fund returns).

In any event, there is still uncertainty as to whether the Budget proposals are going to make it into law. The Coalition is still to be returned at the election and have already started talking about ‘consultation’ which may be code for ‘substantial amendment’. There is also the issue of the final make-up of both Houses of Parliament and what the various independents and smaller parties may think about these changes.