ATO ruling could affect SMSF succession and estate planning

Date: Nov 08, 2011

A draft ruling by the ATO about reversionary aspects of self managed super funds (SMSF) could have an impact on the estate planning process of many individuals involved in this type of wealth creation strategy.

The Australian Taxation Office (ATO) has indicated that over the last few years the use of SMSFs has grown at a rate of around 7,000 a year - with over 423,000 currently active.

These funds hold approximately 40 per cent of the total wealth in the superannuation industry - that's nearly $20 billion in assets.

Their popularity is being fuelled by recent shifts in financial markets and stock exchanges around the world that have highlighted one of the major issues with larger firms when it comes to individual super accounts.

Simply put, these bigger companies are unable to customise an account on an individual basis in the same way that a SMSF can - as they are set up as a trust for up to four people, with one of the members acting as a trustee.

This gives the fund a certain level of flexibility that is hard to match, with considerable savings in terms of running costs coming at the price of increased involvement in the wealth creation process.

A trust deed is put in place that governs the actions of the trustee in maintaining a SMSF, including the types of assets to be included and the degree of investment borrowing it is able to participate in, if any.

However, as with any other superannuation product it is important to note that there are strict rules in place that ensure that the property, shares, stocks and other wealth creation tools held by the fund are separate from those of the participating parties.

These legal guidelines mean that it is important for the members of a SMSF to ensure that the trustee deed allows for further instructions to be put in place to govern the division of assets in certain situations.

Documents such as wills, enduring powers of attorney and Binding Death Benefits Nomination need to be consistent and compliant with the legislation that governs the core of these wealth management tools.

In other words, whilst allowing members of SMSFs to have greater control over their funds in the event of their death, the fund must comply with the technical rules, including the rules about what happens to a pension upon the death of a member.

If it is to continue for the benefit of another member - such as a surviving spouse - strict rules need to be complied with or the SMSF may lose its tax exemption.

The importance of getting these documents correct and enabling the trustee to act on the behalf of the deceased is pivotal to providing loved ones with the support they need and potentially avoiding an estate dispute.