what smsf accountants need to know about insurance and death
TRANSCRIPT
November 2014Greg Einfeld
WHAT SMSF ACCOUNTANTS NEED TO KNOW ABOUT INSURANCE AND DEATH
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“The only certainties in lifeare death and taxes”
Establishing a fund – insurance issues
Buying property in super – insurance issues
Death of a member – tax issues
Death of a member – payment of benefit
Conclusion
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Agenda
Establishing a fund
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Establishing a fund
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Establishing a fund
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Which super fund
has the most members?
Establishing a fund
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2 million members$75 billion assets
200,000 employers
Establishing a fund
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CONCLUSIONS
1. Your client will lose their insurance when they commence an SMSF
2. Your client will blame you if they lose their insurance
1. Your client may lose their insurance when they commence an SMSF
Establishing a fund – insurance issues
Buying property in super – insurance issues
Death of a member – tax issues
Death of a member – payment of benefit
Conclusion
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Agenda
Buying property in super
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ASSETS LIABILITIES
Property 600,000 John 100,000
Mary 100,000
Loan 400,000
Total 600,000 Total 600,000
What happens if John dies?
Policy # Owner Life Insured Sum Insured Premiums deducted from
1 SMSF John 1,000,000 John’s A/C
2 SMSF Mary 1,000,000 Mary’s A/C
The SMSF owned insurance policies
Buying property in super
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ASSETS LIABILITIES
Property 600,000 John 1,100,000
Cash 1,000,000 Mary 100,000
Loan 400,000
Total 1,600,000 Total 1,600,000
Houghston, we still have a problem
$100K + $1m
So what is the alternative?
Policy # Owner Life Insured Sum Insured Premiums deducted from
1 SMSF John 1,000,000 John’s A/C
2 SMSF Mary 1,000,000 Mary’s A/C
3 SMSF John 100,000 Mary’s A/C
4 SMSF Mary 100,000 John’s A/C
Buying property in super
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ASSETS LIABILITIES
Property 600,000 John 1,100,000
Cash 1,100,000 Mary 200,000
Loan 400,000
Total 1,700,000 Total 1,700,000
Note: premium not deductible
$100K + $100K
Buying property in super
IMPLICATIONS
1. Accountants should work closely with financial advisers
2. Carefully consider which account premiums are deducted from.
3. Record minutes as further supporting evidence.
What if the property is leasedto a business operatedby Mary and/or John?
CONCLUSIONS
1. Your client may need to sell their SMSF property if one member dies
2. Normal insurance structures don’t solve the problem
3. Your client will blame you if they lose their property
Establishing a fund – insurance issues
Buying property in super – insurance issues
Death of a member – tax issues
Death of a member – payment of benefit
Conclusion
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Agenda
Tax Components
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Tax components – insurance claim
Premiums paid from reversionary pension
Pension components remain fixed
Premiums paid from non-reversionary pension
Premiums paid from accumulation
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Insurance claim goes into taxable
component
Tax components
Taxable (taxed) = Death x past service - tax freeComponent benefit past service + future service component
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Taxable (untaxed) = Death - tax free - Taxable (taxed)Component benefit component component
Tax on lump sum death benefit
Note: excludes Medicare Levy
Recipient Tax Free Taxable - taxed Taxable - untaxed
Spouse(tax dependants)
Nil Nil Nil
Adult child(tax non-dependants)
Nil 15% 30%
Note: excludes Medicare Levy, lump sum withdrawal is a lifetime limit
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Taxation of income stream benefit
Withdrawal type Tax Free Taxable - taxed
Age <60 Age 60+
Lump Sum withdrawal Nil1st $185K: NilBalance: 15%
Nil
Regular Pension withdrawal Nil MTR – 15% Nil
Note: Excludes Medicare Levy, lump sum withdrawal is a lifetime limit.This is a simplification and represents the most common scenarios only.
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CONCLUSIONS
1. Ensure tax and components are calculated correctly upon death –both at a fund and member level
2. Your client can’t blame you once they are dead. But they might smile at you from heaven
Establishing a fund – insurance issues
Buying property in super – insurance issues
Death of a member – tax issues
Death of a member – payment of benefit
Conclusion
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Agenda
Payment of death benefit
Who controls the fund?Is there a valid binding nomination?Is there a reversionary pension?Can a pension be commenced?Should a pension be commenced?
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Payment of death benefit
Who controls the fund?Is there a valid binding nomination?
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Control
Will
Trust Deed
Constitution
Share
Certificate
Signed
2 witnesses
3 year shelf life
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Binding nomination
Binding nomination
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Mr Katz
Linda GrossmanDaughter
Daniel KatzSon
Mrs KatzX
Binding nomination
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Mr KatzTrustee (individual)
Member$1m in super
Non-binding nomination: 50/50 split
Linda GrossmanDaughter
Trustee (individual)
Daniel KatzSon
Payment of death benefit - questions
Who controls the fund?Is there a valid binding nomination?Is there a reversionary pension?Can a pension benefit be commenced?
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What type of benefit can be paid?
Lump Sum(SIS dependant)
Pension(Tax dependant)
Spouse (incl. de facto) Yes Yes
Former spouse No Yes
Child (<18) Yes Yes
Child (>18) Yes No
Disabled child (any age) Yes Yes
Financially dependent Yes Yes
Estate Yes No
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Payment of death benefit - questions
Who controls the fund?Is there a valid binding nomination?Is there a reversionary pension?Can a pension benefit be commenced?Should a pension be commenced?
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Payment of death benefit
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Is the beneficiary
> 60?
Do theyneed
the cash?
Yes
No
Pension
No
YesLump Sum
Pension
Death Benefit – administrative issues
Payment of lump sum death benefitAs soon as practicableMaximum 2 instalments
Notify ASIC and ATORemove deceased as director/trusteeRemove deceased as member
Possibly wind up fund
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CONCLUSIONS
1. Make sure you consider all the issues outlined
2. Your client will blame you if they receive a penalty from the ATO
Establishing a fund – insurance issues
Buying property in super – insurance issues
Death of a member – tax issues
Death of a member – payment of benefit
Concluding comments
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Agenda
Getting things right is important.
If you don’t get it right then you risk being blamed by your clients or having
a penalty imposed by the ATO.
Date: Tuesday 25 November
Time: 10:30 am
Topic: 5 simple tips to savelots of tax using pensions
Register at www.limeactuarial.com.au/content/2/webinar
UPCOMING WEBINAR
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Valid until 31 January 2015. Limit 1 per business.44
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