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Week 1 Question 1 MAA317 – Superannuation Planning Seminar solutions Source - Productivity Commission: Superannuation Policy for Post-Retirement, July 2015, (p. 3) The policy levers available to Australia’s government can be depicted by the following diagram: And classified under the following 3 pillars:
Age pension o Eligibilityage o Meanstesting o Payment rates
Compulsory superannuation o SGC rate o Tax treatment o Preservation and drawdown rules
Voluntary superannuation o Age limits
o Tax treatment
o Caps on contributions
o Access to superannuation and drawdown rules Students need to explain which of the policy levers they believe the government is likely to concentrate on over the next decade. It is likely that all three pillars are likely to be impacted upon to some extent:
Making it more difficult for retirees to access the aged pension, through means testing
Increasing the age at which a retiree can access the aged pension
However, significantly amending the rules and payments around the Age Pension is not a vote winner for the government , particularly given Australia’s ageing population Increasing preservation age – the age at which a retiree can access their superannuation
Retaining caps on both entry and exit in order to minimise the loss of tax revenue Increasing SG rate, but only slowly.
Reducing the ability to make a lump sum upon retirement, spending the funds and then asking for an aged pension
Increasing tax rates/ reducing tax concessions that relate to superannuation Will all
their wealth outside of superannuation? of these possible changes seek to move people to accumulate more of Question 2 The changing Australian landscape The retirement income system’s ability to support Australians in retirement over time is impacted by broader demographic, economic, and workforce trends. It is important to understand changes in the way Australians work and live to evaluate the system’s ability to deliver now and in the future. Home ownership Over the past 20 years, rates of home ownership have declined across all age groups. For households aged 35-44, the home ownership rate has fallen from around 73 per cent in 1995-96 to 62 per cent in 2017-18. While older households continue to have high levels of home ownership, they are increasingly approaching retirement with mortgage debt – up from 13 per cent of households aged 55-64 in 1995-96 to 40 per cent in 2017-18 If this trend
continues, a growing number of households may enter retirement as renters or while still servicing a mortgage on their home. The following comments from the article “
Why falling home ownership will change how Australians retire” from the Australian Financial Review puts the issue of home ownership
into perspective: “If you own your own home in retirement, you have a very good chance of living a very comfortable retirement. If you are a renter, then given the current structure of our income support system, then you are in, potentially, quite a lot of trouble,” Mr Coates said.
“Anyone who doesn’t own their own home by the time they are around 45, given the current settings, is probably looking at potentially quite a big drop in their living standards when they hit retirement.” https://www.afr.com/property/residential/why-falling-homeownership-will-change-how- australians-retire-20211117-p599nc Life expectancy and demographic trends Life expectancy has increased significantly since the introduction of the Age Pension over 100 years ago. On average, both men and women are expected to live into their 80s rather than their 50s, which was the case when the Age Pension was introduced The age profile of the population has also changed. Australians aged over 65 currently make up around 16 per cent of the population, compared to around 8 per cent in 1971. Changing age profiles have implications for the size of the population relying on retirement incomes and the length of time retirement savings need to last. Labour market participation The composition of Australia’s workforce has changed over time. The trend has been towards more working age Australians participating in the labour market. The profile of working life has also shifted. The average Australian is now taking longer to commence full time work and is expecting to retire later in life. These trends are reflected in
an increase in the participation rate among over 65s and a decline in the proportion of Australians in their early 20s who have commenced full time work. The changing pattern of work affects individuals’ ability to save for retirement, for example, by delaying when they start accumulating savings for retirement. However, the increase in older Australians participating in the workforce also provides a greater opportunity for those workers to boost their retirement incomes. Nevertheless, some older workers report being unable to retain or find employment, despite a willingness to remain in the workforce.
There are also ramifications of the changing nature of work affecting people’s access to super and ability to save – shift to contracting, more part-time or casual work, people in and
out of the workforce. Question 3 The superannuation system is currently based on a Superannuation Guarantee contribution of 10% payable by the employer into a nominated superannuation fund (increasing to 12% over the next few years). Obviously people with extended periods of unemployment and lower levels of income will accumulate less. Also, not all segments of the working population
are covered by SG contributions as discussed in class.
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Also compulsory super has only been in existence since 1992 when it commenced at a payment rate of 3% so many older workers will not have had that much time to accumulate that much funds. There is also the argument that even the current and proposed increased rate of 12% may still not generate sufficient wealth to fund the level of retirement that most Australians would expect or would want. Question 4 Public sector fund
is a super fund for the payment of super, retirement or death benefits which is established under a Commonwealth, State or territory law or under the authority of such a law.
public sector schemes are not subject to SIS regulations. Rather they are subject to Commonwealth, State or Territory government supervision.
the fund may be: funded, unfunded, or partly funded Public offer fund
is a super fund which deals with and accepts contributions from the general public – retail funds, industry funds etc
generally issues a product disclosure statement (prospectus)
the trustee of a public offer fund must satisfy certain capital adequacy requirements and be approved by APRA. Retail fund
offered by financial institutions and similar to the above for a public offer fund . Accepts contributions from the general public
the fund has a profit making motive. Industry fund
originally developed by the trade unions and industry bodies to provide a retirement income scheme to their members
originally open only to members within a particular industry (eg. health, retail, construction etc), most industry funds now accept contributions from the general public
industry funds are not-for-profit
MySuper
since 1 January 2014, if an employee does not choose a super fund, their employer must pay their super to a super fund that offers MySuper. If the employee is already in an existing default fund (a fund the employer has chosen) the super fund has until 1 July 2017 to transfer the employee’s balance into a MySuper account.
MySuper accounts offer: o
Lower fees (and restrictions on the type of fees you can be charged) o
Simple features so you don't pay for services you don't need o
A single diversified investment option or a lifecycle investment option Question 5 In most defined benefit schemes the investment risk is borne by the employer. By encouraging new employees into accumulation style schemes the employer is able to shift the investment risk to the employee. Defined benefit schemes are also better suited to employees who stay with the one employer for a number of years – as employees become more ‘mobile’ the attractiveness of defined benefit schemes decreases. Question 6 This is a difficult issue to resolve given Australian’s general lack of financial literacy and interest in their superannuation accounts.
Many super members make poor investment decisions regarding their super balances: -
investment decisions in accumulation phase -investment decisions in retirement phase
Typically investing too conservatively and generating low returns but also investing in risky investments which experience significant losses But also consider the following as well:
not contributing any voluntary contributions to boost the final accumulated sum at retirement and to take advantage of tax concessions
taking out super funds at retirement as a lump sum and spending the funds
investing in funds that charge high fees and/or underperform the market Potential solutions:
Training and education
Take investment decisions away from individuals and have a mandatory universal system for everyone where there is minimal decision making required Question 7
To be discussed by students based on their situation Question 8 Determining the balance between Australia’s 3 pillar approach to retirement planning is difficult (mandated super system v aged pension) and will depend in part on the relative effectiveness, including cost-effectiveness, of the Age Pension and the other pillars in achieving the system’s objective. For example, is it more cost-effective to help lower-to- middle-income earners maintain their standard of living in retirement through the Age Pension supplementing their savings? Or is it more cost-effective to increase the rate of compulsory superannuation and/or provide more generous superannuation tax concessions? Overall, superannuation tax concessions increase inequity in the retirement income system, while the Age Pension helps offset inequity in retirement. One of the suggested elements of the retirement income system’s objective is that Government support should be targeted to
those in need. This would appear to be the case for the Age Pension. However, the combination of a system where people on higher incomes achieve the largest superannuation balances, combined with tax concessions on superannuation contributions and earnings, means that higher-income earners receive more Government support than other income groups over their lifetime. Its worth noting that as the superannuation system matures, the cost of superannuation tax concessions is projected to grow as a proportion of GDP such that by around 2050 it will exceed the cost of Age Pension expenditure as a per cent of GDP. This is the result of growth
in the cost of earnings tax concessions. Accordingly, would we have an overall cheaper and more equitable system by scrapping the SG system and paying everyone an aged pension? Question 9 Arguments for access to superannuation prior to retirement:
assist those presently unable to afford appropriate housing/education/health etc.
assist those that are experiencing financial problems due to high debt, increasing interest rates
would provide some flexibility within the system to allow for emergencies and unexpected circumstances within the family such as unemployment. Arguments against access to superannuation prior to retirement
will lead to reduced self-funding in retirement
will result in the need for greater government support for retirees because of
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lower fund balances
people may make bad finance/ investment decisions leading to loss of capital
should tax incentives be continued to be offered for super contributions where the funds are used for purposes other than retirement
will access to super lead to increase in house prices as a result of the greater funding available MAA317 - Superannuation and Retirement Planning Seminar solutions - Week 2 Question 1 Based on decision of the SCT - Determination Number : d13-14\144 http://www.sct.gov.au/dreamcms/app/webroot/uploads/determinations/
D13-14-144.pdf Issues considered:
if a member nominates a person as their dependent under a Binding
Nomination, must that be accepted by the trustee?
if the trustee accepts the name of the person in the Binding Nomination by the Deceased Member, are they required to pay death benefits to the nominated beneficiary?
was the claimant a dependant under the SIS Act?
was the decision of the trustee fair and reasonable in the circumstances? The Tribunal was required to determine whether the decision of the Trustee to invalidate the Deceased Member’s Binding Nomination and pay the death benefit to the LPR as required by the Trust Deed was fair and reasonable in its operation in relation to the Complainant and the Joined Parties in the circumstances. For a beneficiary to be accepted in a binding nomination, there are a
number of requirements. The beneficiary must be a:
-spouse (same sex and de-facto)
-child -someone in an interdependency relationship with the deceased ( This will be discussed further in a later topic Based on the information provided by all the parties the Tribunal was satisfied that the parties lived in different States and thus did not live together at the time of the Deceased Member’s death or at any other time. Similarly, the Tribunal was satisfied that there was no evidence of financial dependence by the Complainant on the Deceased Member, even if she assisted him financially from time to time. It is clear to the Tribunal that the relationship of the Complainant and the Deceased Member cannot be said to satisfy the interdependency requirements of the SIS Act. In these circumstances it is satisfied that the Trustee’s decision to invalidate the Deceased Member’s Binding Nomination was fair and reasonable and indeed it was required to do so, both under the terms of the Trust Deed and the provisions of the SIS Act. The Tribunal affirmed the decision of the Trustee. Question 2 The four conditions that must be met to receive concessional tax treatment include the following: 1.
1 The entity is a superannuation fund. 2.
2 The fund is a resident regulated fund. 3.
3 The fund must comply with SISA at all times during the year of income. 4.
4 The trustee has received notice that it is a complying fund. The following tax benefits are derived by a complying super fund:
the fund is taxed at 15% (compared to 47% if non-complying)
eligible for a one-third discount on capital gains (no discount if non-
complying)
income derived whilst in the pension phase is exempt
can claim a refund of excess franking credits in an income year (no excess can be claimed if non-complying) For a non-complying fund – in addition:
employer contributions are not tax deductible
member contributions do not qualify for a tax deduction, tax rebate or government contribution
employer contributions do not satisfy the employer’s obligations under the SGC Question 3 (a) The main issue to be determined is to what extent central management and control of the fund remains ordinarily in Australia during
the period of the couple’s absence and whether the couple’s absence was temporary. Normally an absence of greater than 2 years would be considered to be a loss of Australian residency. (b) Need to review the facts as to whether the couple actually planned to return to Australia at the end of the 2 year period – what was their actual intention? Things to consider:
did they establish a home outside Australia or keep their Australian residence
did they keep their bank accounts in Australia
did they keep health insurance in place As their intention was to return to Australia at the end of the 2 year period, it is likely that the ATO would consider that control ordinarily
remained within Australia. Alternative arrangements to operating their SMSF include:
moving funds to a retail / industry super fund
consider changing to become a small APRA-regulated (SAF) funds. This will be
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covered in a latter week. SAF’s trustees can only be those organisations that hold a Registrable Super Entity Licence issued by APRA.
appointing a power of attorney (POA) providing a resident party with
control over the decision-making of the SMSF and act as trustee. However, need to be comfortable with control of the fund being given to another party. Question 4 Before 1 July 2016 accountants were able to provide advice about the set up and closure of SMSFs without the need to hold an Australian Financial Services Licence (AFSL). Since 1 July 2016 accountants need to hold a limited AFSL if they are to provide their clients with advice on their current superannuation arrangements including setting up and the investing within SMSFs. Question 5 • Susan aged 58 (born in February 1964) and has just permanently retired
from the workforce Preservation age is 59 which is the earliest time Susan would be able to access her super based on her date of birth • Jimmy aged 62 (born in April 1960) has worked with his current employer for the past 6 years and expects to continue until his retirement at aged 65
For a member aged between 60 and 64, they are only able to access their super only if an arrangement with an employer has ended where the member was gainfully employed. As Jimmy is continuing to work with current employer, he has not satisfied a condition of release • Brooke aged 66 (born in March 1956) is still working on a full-time basis and doesn’t expect to retire until aged 70
Reaching the age of 65+ satisfies a condition for release and provides automatic access to super funds • Joe aged 45 (born in May 1977) has become totally and permanently disabled and is unable to return to the workforce. He does not have any disability insurance through his super fund. Total and permanent disability is a condition of release and therefore Joe may be eligible to access his super funds. Taxation may be payable however. The fact that he has or doesn’t have insurance is not relevant to accessing his super monies. Question 6 1.
(a) To access his superannuation, Asher needs to satisfy a condition
of release. The earliest point would be permanent retirement after preservation age (determined based on date of birth). A range of other condition of release points exist such as turning 65 years of age, terminating current employment after age 60 etc. 2.
(b) Asher would need to satisfy a condition of release. He may be able to access his funds under the permanent disability condition. That is: Trustee is reasonably satisfied that the member is unlikely, because of ill health, to engage in gainful employment for which the member
is reasonably qualified by education, training or experience. To release funds, the trustee of the super fund would need to determine if Asher was able to undertake any other work for which he was reasonably able to perform – teaching carpentry, office duties etc.?? 3.
(c) Upon retirement, a member generally has 4 options with their accumulated super:
Take a retirement income stream (pension)
Take a lump sum (all or part)
Take a combination of both pension and lump sum
Leve funds within the superannuation account if not required 1.
(d) Preserved amount $300,000 Unrestricted non-preserved amount $50,000
The preserved funds are unable to be accessed until Asher has satisfied a condition of release.
The unrestricted non-preserved funds can generally be accessed at any time. However, tax may be payable.
The tax implications of super withdrawals will be covered in greater detail in a later topic. 2.
(e) Once a pension account is commenced (ie a member transfers across their super funds into a pension account) they cannot add to that fund. If the member is able to make further super contributions,
they would need to be able to commence a new super account. 3.
(f) Asher would need to ensure that the investment would satisfy the investment rules outlined within the SISA. There are a number of
investment rules that govern the ability of a super fund to acquire investments from members. Under the sole purpose test, the business could not be transferred across to the SMSF. The purpose of a super fund is to provide retirement benefits for members, not to
run a business. The building from which the business operates possibly could be transferred into the super fund. Week 3 Question 1 Most employees have choice as to the particular super fund that they want to set up to receive SG contributions from their employer. There are some exceptions as referred to in the lecture slides (eg. certain workplace
enterprise agreements). If a member doesn’t select their own fund, the employer must establish a default fund in which to pay the SG contributions into – this would need to be a MySuper account through any public offer (eg retail or industry) super fund. Yes a SMSF can be selected by an employee to have their super contributions paid into under Choice of Fund legislation, as long as the SMSF is a regulated super fund. If the member doesn’t select their own super fund, SG payments will be paid into the employer’s nominated default fund. However, an employer cannot force a member to join the employers default fund, except as stated above, in situations where there is an enterprise agreement or Australian Workplace Agreement in place with the members employment. Question 2
(a) Luke– employer paid no contributions. Notional quarterly shortfall SG shortfall Choice liability Total liability
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10% x $11,800 10% x $11,800 25% x A-B B +C =$1,180 A =$1,180 B =0C =$1,180 (b) Karen – paid 9% contribution ($1,620 / $18,000) instead of 10%. Shortfall of 1%. Also paid into incorrect super account. Notional quarterly shortfall SG shortfall Choice liability Total liability 10% x $20,000 1% x $20,000 25% x A-B
B +C =$2,000 A =$200 B =$450 C =$650 Question 3
All are included within salary and wages. In terms of OTE -overtime
(No)
-reimbursement of motor vehicle expenses (No)
-annual leave payments (Yes)
-performance bonus (Yes)
-fringe benefits (No)
Question 4 See following table from ATO for treatment of overtime based on different scenarios: Awards and agreements Salary or wages Payment Ordinary time earnings (OTE) Overtime hours – award stipulates ordinary hours
to be worked and employee works additional hours for which they are paid overtime rates Yes No Overtime hours – agreement prevails over award Yes No Agreement supplanting award removes distinction between ordinary hours and other hours Yes – all hours worked Yes – all hours worked No ordinary hours of work stipulated Yes – all hours worked Yes – all hours worked Casual employee:
shift loadings
overtime payments Yes Yes Yes No Casual employee whose hours are paid at overtime rates due to a 'bandwidth' clause Yes No Question 5 The term ‘contractor’ can be misleading and employers who do not understand the rules can be liable to significant penalties under state and federal laws. Employers may incur non-tax deductible charges, including administration and interest penalties if less than the required super guarantee amount is not paid for workers who qualify as employees but are treated as contractors. Under the SGAA, the classification of a person as an employee is not solely dependent on the definition of an employment relationship under common law. It is a question of fact and is determined by a number of factors, terms and conditions. This means that a contractor (the party to the contract) can be considered to be an employee under the superannuation guarantee legislation. Also, just because someone might call themselves a contractor or be told that they’re working under a contract situation, doesn’t mean that they may not be an employee for SG
purposes.
Superannuation support is required for employees where the terms of the contract and the subsequent conduct of the parties indicate that:
the organisation has control over the activities of the worker (control test)
the person is renumerated (either wholly or principally) for their personal labour and skills
the person must perform the contractual work personally (there is no right of delegation), and
the person is not paid to achieve a result. The following factors have been considered by the courts as key indicators of whether an individual is an employee or independent contractor:
Terms and conditions of the formation of the contract
Control test
Does the worker operate on his or her own account
Results contracts
Whether the work can be delegated or subcontracted
Risk Jack’s case
Jack is unlikely to be classified as an employee because he has the ability to delegate work to others which is not consistent with the provisions of an employee, even if the school’s business manager has the ability to approve a replacement worker. Roy Morgan
The fact that the contract stipulates that the interviewers are independent
contractors does not necessarily make it so under law. Must take into account the effect of the underlying relationships to see if an employment situation exists (ability to delegate, control, remunerated for their skills).
In this case, the true nature of the relationship would tend to indicate an employment relationship: o
if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.
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o
Control – Roy Morgan had the right to control and exercised that right as was necessary to effectuate the provision of interviewing in accordance with its standards and practices. o
Representation of the user’s business - the activities engaged in by interviewers were represented and portrayed as the activities of Roy
Morgan, and not the activity of the businesses of the interviewers. o
Delegation – there was no evidence of the ability of interviewers to delegate
However see Q6 below for a new interpretation of the issue of employee v contractor decided by the High Court. Question 6 The High Court has discarded the previous approach that courts and tribunals have taken to distinguish employment relationships from independent contracting arrangements in favour of a narrow construction of the terms of the parties’ written agreement. These decisions will have a significant effect on employment law and industrial relations in Australia and will reduce businesses’ exposure to claims from contractors that they were, at law, employees In ZG Operations v Jamsek Kiefel CJ and Keane and Edelman JJ, and Gordon and Steward
JJ, found that truck drivers making deliveries for a company did so as partners in a partnership that contracted with the company, not as employees of the company. Significantly, the truck drivers were previously employees of the company. After the truck drivers asked for a pay rise, the company offered them the opportunity to become contractors, which would involve them purchasing their old trucks. The company told the truck drivers if they did not agree to become contactors, it could not guarantee them a job going forward. The truck drivers then set up partnerships with each of their respective wives and executed new contracts with the company on behalf of the partnerships in 1986, and again in 1998 and 2001. The judges concluded: they were circumstances known to both parties at the time that the parties entered into
the contracts in 1983, 1986, 1998 and 2001. Their Honours commented that in light of that history “
it is difficult to see how there could be any doubt that the [drivers] were no longer employees of the company.
” Question 7
1. Can the couple transfer the office used to run their business into the SMSF? Yes, business real property for small super funds is permitted. The property must be used wholly and exclusively in one or more businesses. The office would be permitted as an exception under the “No acquisition of assets from a “related party” rule. Would their business be able to rent the office back from the SMSF and are there any restrictions on the amount of the rental charge?
Yes the office could be rented / leased back from the SMSF to the couple’s
business. All transactions between super fund and members must be at arm’s length 2) Can the couple transfer listed and unlisted shares into their SMSF? Yes, listed shares is permitted but unlisted shares would not be permitted. The listed shares would be permitted as an exception under the “No acquisition of assets from a “related party” rule. 3) Can the couple transfer office furniture into the SMSF No, not permitted under the “No acquisition of assets from a “related party” rule Would their business be able to rent the office furniture back from the SMSF? No, not permitted. Leasing / rental is only permitted on real business property. 4) Can their SMSF purchase an investment property from a 3
rd party? Yes, there are no restrictions on acquisitions from 3
rd parties. Question 8
Investment in wife’s travel agency:
o
breach of the “sole-purpose” test which states that the sole purpose of the super account should be the provision of providing
retirement benefits - and not running a business as in this case.
o
Is also a breach of the in-house asset rules – no investments in, and loans to, related parties. Except if it accounts for less than 5% of the market value of the super fund’s assets. In this case - $50,000 / $600,000 = 8.3%. Therefore not permitted.
Buy a residential investment property through an arm’s length transaction. He is intending to use the spare cash of $200,000 and borrow the balance. o
Purchase of the investment property is permitted. However, generally super funds are not permitted to borrow. However, there is an exception to this. Super funds are permitted to borrow to acquire property and shares under a limited recourse loan – to be discussed further in a later topic.
Buy a residential property from his brother
o
a super fund is not permitted to acquire assets from a related party other than for a small number of exceptions (main ones being listed securities, managed funds and business real property). Residential property is not permitted o there are also restrictions on borrowing MAA317 – Superannuation Planning T1, 2022 Seminar solutions – Week 4 Question 1 Concessional contribution:
Member – is a pre-tax super contribution where the member is claiming a tax deduction Super fund – upon receipt of a concessional contribution, the fund is required to withhold 15% contributions tax and send to ATO Non-concessional contribution:
Member – is a super contribution where the member is not claiming a tax deduction Super fund – upon receipt of a non-concessional contribution, the fund is not required to withhold 15% contributions Question 2 (a)
Fred – yes, no work test required under the age of 67
Joan – yes, no work test required under the age of 67
Michael – yes is likely to satisfy work test.
Irene – unless satisfying the work test, will not be eligible to contribute
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(b) Question 3 (a) Given that he is retired, is Ed still able to contribute the funds into a super account or add to his existing pension account? Yes, under the age of 67, there are no restrictions on the ability to contribute to a new super fund regardless of whether he is working or not.
However, once a super pension has commenced, a member cannot add to
it. (b) Advise Ed how on how the funds should best be contributed into his super account Ed needs to consider how the amount of $320,000 would best be invested
- $27,500 concessional and $292,500 non-concessional?; or $300,000 non-concessional and $20,000 concessional? Normally a taxpayer would seek to maximise their eligible tax deduction. (c) Would there be an issue if Ed’s pension account had a balance of $1.7m? Once a member reaches a Total Super Balance of $1.7m, they are unable to make any further non-concessional contributions. However, concessional contributions can continue. Question 4 Melissa can make concessional super contributions for a total amount of $27,500. Given her employer SG contribution of $17,000 ($170,000 x 10%), Melissa can make further personal concessional contributions of up to $10,500. This should be her first priority as the tax deduction will assist in reducing her taxable income. Melissa should then consider contributing the balance of the $180,000 (ie $169,500 after the $10,500 is paid) as a non-concessional contribution. However, would need to ensure that the contribution does not result in the Total Super Balance cap of $1.7m being exceeded. Given that her TSB
already amounts to $1.6m, she would only be able to contribute a maximum of $110,000. Non-concessional contributions will not provide tax benefits. Question 5 If Sally is seeking to maximize the transfer of funds into her super fund, she needs to be aware of the age rules relating to contributions.
Once she turns 67, she can no longer contribute unless she satisfies the work test.
Her concessional contribution cap is $27,500 p.a. In terms of making a non-concessional contribution, a member under the age of 67 is able to contribute $110,000 p.a. or under bring forward rules can claim up to $330,000 in one lump sum. From 67 and over, a member is restricted to a maximum of $110,000 as long as they satisfy the work test. In terms of making a super contribution, normally the first priority should be to see if the member can claim a tax deduction for the contribution (ie.
concessional contribution). The balance would therefore be non-
concessional. Given Sally’s age and the fact that she is looking to sell the property, it would be worth selling the property prior to reaching 67 so that she can maximize her non-concessional contributions and also claim a tax deduction up to $27,500 as a concessional contribution. It would also be worth selling the property in the year following retirement
as the CGT will be assessed at a lower MTR. Question 6 What tax deductions will John’s employer be entitled to?
• the employer will be able to claim tax deductions for the full amount of concessional contributions paid $40,500 – the SG contribution plus the salary sacrificed amount What tax deductions will John be entitled to? • Nil. No tax deduction to John personally. How will the contributions be taxed upon payment into John’s super fund?
• The employer SG contribution plus salary sacrificed amount will be both taxed at a 15% contributions tax by super fund. However, John will have excess concessional contributions for amounts over $27,500 – covered in question 7. If John retires at the end of this financial year, is he able to make further super contributions next year? Would there be any restrictions? Discuss. • There are no restrictions on the ability to make a super contribution prior to age 67. However, he will be subject to contribution caps
Question 7 The excess concessional contribution of $7,500 will be subject to penalties
as per solution to question 3. Taxable income
Add excess concessional contribution Amended taxable income Gross tax payable
Less 15% tax offset ($7,500 x 15%)* Add medicare levy
Net tax payable $280,000 $7,500 $287,500 $100,042 ($1,125) $5,750 $104,667 * Note – Normally because of the high taxable income of the member, concessional contributions received by the super fund would have been taxed at an additional 15% contributions tax under Division 293 of the Taxation Act.
However, when the ATO works out a members Division 293 super contributions, they do not include amounts taxed as excess concessional contributions. In these circumstances, the additional 15% Division 293 tax is not applied to the amount of excess concessional contribution paid to the super fund. As John contributed >$110,000 in NC contribution last financial year he would have triggered the 3-year rule and therefore able to contribute up to $330,000 over a 3 year period. As he already contributed $150,000, he can only contribute a further $180,000.
However
, the excess concessional contribution amount is added to John’s
non-concessional cap for the year effectively reducing the non-
concessional contribution able to be contributed to $172,500 ($180,000 less $7,500).
Any excess above this will be treated as an excess NC contribution and subject to penalties. Question 8 A range of strategies might be considered including:
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Carolyn commencing a salary sacrifice arrangement with her employer with surplus income
Paul making a personal concessional contribution for the year with surplus income
Either / both of the couple making a non-concessional contribution with surplus income
Paul changing to an investment option that better matches his risk profile
Either / both contributing the $50,000 into their super fund to maximise retirement benefits. Preferably as a concessional contribution up to cap to obtain tax deduction. Strategy framework Strategy 1 Who Who is this strategy aimed at? Paul Client goal to be satisfied:
Minimise tax
Maximise funds held in super for retirement What What exactly are you advising the client to do? Each year, Paul to withdraw funds held in his XXX Bank account, arising from the family’s annual cash
surplus, and pay the amount into his XXX Industry Superannuation fund in the form of a concessional contribution. A concessional contribution is a contribution that entitles you to claim a tax deduction and therefore will reduce income tax payable.for the year.
For the 2021/2022 financial year, there is a cap of $27,500 on the total amount of concessional contributions able to be claimed.
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The family’s surplus funds to be monitored over time to ensure there is adequate funds available. How much How much funds are involved? Contribution of $10,000. When When is the strategy to commence? Commencing in the 2021/2022 financial year. Why and why not What are the potential: 1.
(i) benefits of the strategy? 2.
(ii) drawbacks of the strategy? Potential benefits:
Maximise funds held in superannuation to provide for your retirement
Provides Paul with a tax deduction for the 2021/22 year to reduce income tax
Assists in equalizing super benefits with Carolyn Potential risks / drawbacks
Amounts contributed to super are preserved until a condition of release is satisfied
The super fund is required to withhold 15% tax on all concessional contributions received and forward to the Australian Taxation office
Amounts held in super are subject to investment risk
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Strategy 2 Client goal to be satisfied: Ensure that our super funds are invested appropriately in accordance with our needs
Who is this strategy aimed at: Paul
What What exactly are you advising the client to do? Paul to transfer all of his superannuation funds currently held in a conservative investment option into a balanced investment option with the XXX Industry Super fund in order to better suit his risk profile which has been determined as Balanced. A balanced investment option invests across a range of different asset classes including growth type investments, such as shares and property, and defensive asset classes that include cash and fixed interest. How much How much funds are involved? Total balance of super fund When When is the strategy to commence? As soon as possible. Why and why not What are the potential:
(iii) benefits of the strategy? (iv) drawbacks of the strategy? Potential benefits:
Has the potential to result in higher long-term returns which will assist in maximizing wealth and retirement benefits. The balanced investment option’s 5 year average annual return is 6.2% p.a.
The investment option will better suit Paul’s risk profile which has been determined as
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Balanced Potential risks / drawbacks
The transfer of funds into the Balanced investment option involves greater degree of risk and therefore the potential for capital losses
The fees are slightly higher in the balanced investment option - annual fees of .8% p.a. compared to .6% p.a. in the conservative investment option
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MAA317: Superannuation Planning T1, 2022 Seminar solutions – week 6 Question 1 A SMSF in one that satisfies all of the following basic conditions:
there are 6 members or less
if the trustees are individuals, all members are trustees and all trustees are members
if the trustee is a corporation, all members are directors of that body
and all directors are members
no member of the fund is an employee of another member, unless the members concerned are relatives; and
no trustee of the fund receives any remuneration in respect of duties or services performed as trustee of the fund The fund will not qualify as a SMSF because Sarah is an employee of
another member (ie. both Mr and Mrs Buttercup) and is not a relative of either. The fund will need to appoint an APRA appointed trustee to meet the SAF requirements or move funds to a public offer super fund structure.
Jack is OK as he is a relative. Question 2
So sánh Individual trustee và Corporate Trustee
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Can Frank be the sole individual trustee of their super fund?
No. Every member must be a trustee (individual or corporate) and every trustee must be a member. Question 3 Two basic conditions must be satisfied before a SMSF is able to acquire property from a related party: • it must be business real property; and
• the underlying property must satisfy the business use test in the definition, which requires the
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real property to be 'used wholly and exclusively in one or more businesses' carried on by an entity. In satisfying the business usage test, the underlying character of the real property's use is vital. This will depend on questions of fact and degree. Over the years, case law has considered a range of factors that need to be
considered in indicating the existence of a business activity, including:
o the keeping of business records separate to personal records; the size of
the operation and the extent of capital investment involved; whether activities are conducted continuously and systematically rather than on an ad hoc basis; a purpose
and intention to carry on business; a level of repetition and regularity of activities constituting the business; whether activities are planned, organised and carried on in businesslike manner; the scale and permanency of operations; In the situation of Alf and Karen, the elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on. However, the scale of the operation is such that it would not be considered to be a business. As there is no business conducted in respect of the premises, the property is unlikely to be classified as business real property. On the other hand, a case that went before the courts some years back concluded that a couple that owned and managed 20 residential units were deemed to be carrying on a business. The scale of the operation together with the elements of repetition and purpose indicated that the couple was carrying on a property investment business. Question 4 (a) The SMSF can own real business property, as long as the fund’s investment strategy allows for it, but cannot operate the business. Accordingly, real business property can be either: • sold to the SMSF; or
• contributed to the SMSF. The tax consequences of the super fund acquiring the property is that Roger will either need to sell the property to the fund, (however, the SMSF
has limited cash available), or will need to make an in-specie contribution at current market value. In both situations: • the transfer will be deemed a sale and CGT may be payable by Roger
• if the contribution is treated as a concessional contribution, it will be levied with the
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15% contribution tax
• Roger may be entitled to a tax deduction for the transfer of property into the super fund in the form of a concessional contribution
The business is not permitted under the “sole purpose test”. 1.
(b) Yes, Roger’s business could now lease the property from the SMSF and pay a leasing / rental expense which would be tax deductible to the business and treated as assessable income by the SMSF. The leasing cost would need to be made on a “commercial basis”. 2.
(c) The transfer of plant and machinery from Roger’s business to the SMSF would not be permitted under the “No Acquisition of assets from related parties” rule. Plant and machinery is not an exception. The transfer of the property or investment by the SMSF to the business could only be undertaken under the “in-house asset”
rules where loans to or investments in a related party are allowed as
long as they constitute less than 5% of the market value of the fund’s assets. 3.
(d) The acquisition of artwork would need to fit within the fund’s investment strategy and satisfy the sole purpose test. Would need to ensure that Roger did not obtain “personal benefit” through the acquisition of the artwork. Question 5 What are the options available to Ann to raise additional finance? Borrow: is this feasible or desired? What security is available? Get the property into her SMSF. Options to consider include: • Transfer the property into her SMSF as a contribution – however doesn’t provide any funds • Sell property to SMSF – does the SMSF have sufficient cash on hand? CGT implications? • Is the SMSF able to lend Ann the funds if it has the available cash? – no!
• Enter into a tenancy in common arrangement where Ann sells a 50% interest in the existing property to the SMSF and both entities then own a 50% share. Over time as the SMSF accumulates cash, it could acquire additional shares of the property. Anne would receive proceeds for the 50% sold.
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• The SMSF could look to acquire the property from Ann through an instalment warrant arrangement (non-recourse loan). ie. SMSF borrows funds to buy the property from Ann. Question 6 1.
What are the benefits of a SMSF entering into a non-recourse loan arrangement?
allows the property to be held in a tax-effective structure
allows the SMSF to acquire assets that it couldn’t otherwise afford due to lack of funds
tax benefits arise in selling the asset to the SMSF and then leasing it back
allows for the greater accumulation of wealth 2.
In whose name is the property acquired in – ie who has legal ownership? • The property is acquired in the name of a separate trust which has legal ownership. The SMSF has beneficial interest in the property – ie the entitlement to receive
benefits generated from the property
3. In whose name is the borrowing undertaken in and what security does the borrower get? • The borrowing is undertaken in the name of the SMSF. The lender receives a mortgage over the legal estate owned by the separate trust (the property). The lender's recourse against the SMSF must be limited to the underlying asset held in the trust. The lender must not have a right of recourse against other assets of the fund. 4. Can the SMSF get into a negative gearing position – ie total expenses are greater than rental income received? • Yes, the property can be negatively geared and the SMSF can claim a tax deduction. 5. Can the property be leased back to the couple during the period of the borrowing?
• Yes, the property could be leased back to any party, including the members of the SMSF. Leasing business real property to members is an exception to the in-house asset rules. 6. Once established, is the SMSF then able to acquire a second property under the borrowing
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arrangement? • Where an SMSF trustee wishes to borrow to purchase multiple assets, a separate bare trust will need to be established for the acquisition of each single acquirable asset. Question 7 There are two parts to the overall strategy. Others alternatives are possible. Part 1 Who Paul and Fiona Who is this strategy aimed at?
Client goal to be satisfied:
Minimise tax
Maximise funds for retirement within their SMSF What What exactly are you advising the client to do? Contribute $100,000 each into your SMSF from available cash. Of the $100,000, $27,500 to be contributed as a concessional contribution and the balance as a non- concessional contribution. A concessional contribution is a tax deductible contribution into your super fund that will provide you with a tax deduction against assessable income.
A non-concessional contribution is a personal contribution into your super fund that does not provide you with any tax deduction but will boost retirement sums. How much How much funds are
involved? $100,000 each When When is the strategy
to commence? May 2022 Why and why not What are the Potential benefits:
Maximise funds held in superannuation to
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potential:
(i) benefits of the strategy? (ii) drawbacks of the strategy? provide for your retirement
Provides each of you with a tax deduction for the 2021/22 year to reduce income tax Potential risks / drawbacks o
Amounts contributed to super are preserved until a condition of release is satisfied
The super fund is required to withhold 15% tax on all concessional contributions received and forward amounts to the Australian Taxation office o
Amounts held in super are subject to investment risk Part 2 o
Either:
• SMSF to use existing funds to acquire the new property directly
• Sell exiting property to SMSF and use proceeds to buy the new propert
Strategy Who Paul and Fiona Who is this strategy aimed at? Client goal to be satisfied: • Minimise tax
• Source funding to be able to acquire the property next door which will enable them to expand and grow their business
• Maximise funds for retirement within their SMSF What What exactly are you advising the client to do? Sell the property from which the bakery business runs
to your SMSF for market value of $700,000.
Funds from SMSF to be paid to the couple.
Your SMSF had liquid assets of $550,000 at start of year plus an additional $200,000 contributed this year. Couple to pay annual rent to SMSF for lease of shop at market rates Funds of $700,000 now held by couple enable shop
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next door to be acquired. How much How much funds are involved? Market value of existing shop When When is the strategy to commence? Asset sale to be completed after $200,000 contributions made to SMSF Why and why not
What are the potential:
(iii) benefits of the strategy? (iv) drawbacks of the strategy? Benefits
Existing property now held in SMSF in a tax friendly environment
Rental income paid from couple only taxed at 15% tax rate in SMSF
Couple can claim rent paid as a business expense and claim a tax deduction at their MTR
Funds from sale can now be used to acquire shop next door
Boost funds for retirement
Potential capital gain paid at an effective tax rate of 10% if sold in accumulation phase but completely free of capital gains tax if sold during pension phase Drawbacks
Sale of property to SMSF will result in a capital gain of $700,000 - $480,000 = $220,000 or $110,000 each. Individuals are entitled to a 50% discount on capital gains made so the assessable capital gain = $55,000 each which will form part of the couple’s assessable income.
Each of the couple are entitled to a $27,500 tax deduction from the concessional contribution made. Net amount subject to tax = $27,500 each. This will be taxed at your MTR of 37% plus
medicare = $10,175
Funds held within SMSF are preserved until
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retirement MAA317 – Superannuation Planning T1, 2022 Seminar solutions - Topic 7 Question 1 The full amount is received as an eligible termination payment and taxed as follows:
First $225,000 – taxed at 17% Balance of $15,000 – taxed at 47% Total tax payable Question 2 Tax free amount = $80,000
Tax free proportion = $80,000 / $340,000 = 23.53% Taxable proportion =
76.47% $ 38,250.00 7,050.00 45,300.00 Tax-free cap / taxable proportion = formula used to determine the
amount able to be withdrawn tax-free
$225,000 / .7647 = $294,233 Proof
Tax-free amount = $294,233 x 23.53% = $69,233
Taxable amount = $294,233 - $69,233 = $225,000 (tax-free cap) Question 3 Tax on annual leave:
$6,500 taxed at a maximum of 32% $2,080.00 Tax on redundancy payment:
Tax-free component
A fixed amount of $11,341, plus $5,672 for each completed year of service. $11,341 + ($5,672 x 11 years) = $73,733 all tax free
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The balance of the redundancy payment (up to $90,000) is classified as an employment termination payment and taxed at a rate of 32% (first $225,000). She is below preservation age. Question 4 (a) Calculate Ian’s total tax-free amount at retirement Made up of: Crystallised segment
Contributions segment (N.C. contributions) Total 60,000 20,000 80,000 (b) Calculate the amount of tax payable if Ian withdraws a lump sum of $280,000 from his super fund upon retirement. Tax-free amount $80,000
Tax free proportion $80,000 / $480,000 = 16.67% For a withdrawal of $280,000:
Tax-free amount is $280,000 x 16.67% = $46,676 Taxable amount is $233,324 Tax payable on taxable component: Tax on first $225,000
Tax on balance of $18,324 (17%) Question 5 (c) Would normally advise to accumulate as much funds as possible within
the super environment due to the tax concessions available. Preservation for Joe is no longer an issue as he has satisfied a condition of release.
He would need to consider CGT implications if the managed funds were sold to pay for expenses. Should also consider the merits of retaining wealth outside of super due to
possible legislative risk of superannuation. Question 6 Taxing of life insurance benefit:
• Amount paid to spouse – classified as a tax-dependant
• Amount paid to adult daughter – classified as a non tax-dependent -taxed as a taxable component: untaxed element at 30% plus medicare Tax free
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Question 7
Strategy framework
Issue to consider:
Priority is to pay off loan. Funds are available within super. However, Andy
is aged 59 (under 60). Would he be liable to pay any tax on the withdrawal, or would it be better to wait until he turns 60 when all amounts withdrawn are tax-free? Due to the tax provisions, there will be no tax payable on the withdrawal of $90,000 Tax-free component = $50,000
Taxable component = $490,000 - $50,000 = $440,000
Tax free proportion is $50,000 / $490,000 = 10.20% On a withdrawal of $90,000:
$90,000 x 10.2% = $9,180
Taxable amount = $90,000 - $9,180 = $80,820 Below low rate cap of $225,000 Client goal to be satisfied: • Eliminate debt
• Minimise tax
• Minimise risk Who Andy Who is this strategy aimed at? What What exactly are you advising the client to do? Andy to make a lump sum withdrawal from his super fund to pay outstanding mortgage. The balance of the superannuation account to be rolled across into an account-based pension. Based on the $90,000 to be withdrawn from your superannuation account, we have determined that no tax will be payable. We have determined that of the $90,000, an amount of $9,180 will be tax free and whilst the balance of $80,820 is taxable, the government provides a low rate cap which will effectively wipe out any tax payable on the withdrawal.
Please note that I am not a tax-agent and you should consult with your accountant to confirm your tax situation. The balance of superannuation account ($490,000 - $90,000 = $400,000) to be rolled across to commence an account based pension. An account-based pension is a flexible pension account that will provide you with access to a regular income payment to support your retirement and the ability to make withdraws if
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required at any time. After the age of 60, all payments made from your account-based pension will be completely tax-free. When When is the strategy to commence? Lump sum to be done immediately
Balance of superannuation account to be then rolled across into an account-based pension with XYZ Super. Why and why not What are the potential:
(i) benefits of the strategy? (ii) drawbacks of the strategy? Potential benefits
Lump sum withdrawal will wipe out all debt saving you interest payments
No tax will be payable on the lump sum withdrawal from your super fund
Amount rolled across into an account-based pension will provide you with a regular income
Account-based pension has a range of investment options to suit your risk profile
You have the ability to make withdrawals from your account-based pension at any time Potential drawbacks
The withdrawal of the $90,000 will reduce accumulated super and lead to a reduced retirement sum
All investments held within your account-based pension, such as superannuation, involve a
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degree of risk Seminar solutions - Topic 8 Question 1 MAA317 – Superannuation Planning T1, 2022 Question 1:
Upon retirement, a members options would include:
• Leaving funds in superannuation account
• Taking a lump sum
• Rolling over super into a pension product (retirement income stream) • Combination of all or any of the above Withdrawal options to minimise tax.
Make a lump sum withdrawal from superannuation to the point where the taxable component is less than the low cap rate of $225,000
Withdraw the required amount of income from an account-based pension
Withdraw the minimum income from an account-based pension and top up the balance as required with a lump sum (tax-free cap of $225,000). Question 2 A lifetime annuity would provide some level of guaranteed income for the lifetime of a person. Issues to be discussed include:
should we try and regulate how members support themselves in retirement or should we leave it up to members to best manage their individual finances based on their circumstances
lifetime products are generally non-commutable and inflexible in terms of income payments
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whether the market can develop more innovative retirement products that do provide lifetime returns but also provide some flexibility – access to capital, funds available for estate
to what extent should the withdrawal of lump sum withdrawals be stopped altogether or capped at a certain amount to ensure that retirement income lasts as long as possible Question 3 Account based income streams are the most popular form of income stream in the market place because of their flexibility in terms of:
-ability to vary income payments from year to year
-access to capital at any time -able to select investment options to suit risk profile -capital is not lost on death So sánh Lifetime pension and Account-based pension
Questio
Question 6 (a) No – you cannot add to an existing income stream product once commenced
(b) Would need to be able to contribute the amount into a superannuation
account before commencing a pension account (client is aged 63 so can be done up to contribution caps) and then either:
• commence a second account-based pension with the $200,000; or
• stop the existing pension, roll the $420,000 back into the super account and with the
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new contribution of $200,000, commence a brand new account-based pension with the total proceeds of $620,000. One of the major disadvantages in having 2 account-based pension accounts is having 2 sets of fees and the time managing 2 accounts. However, there may be benefits in having 2 pension accounts in certain circumstances. For example, in situations where there is only adult tax beneficiaries that would inherit the super upon the death of Gerald. Adult children pay tax on the taxable proportion of any super they inherit (covered in further detail in topic 9). One strategy in having 2 separate pension accounts might be to use up (maximise the pension withdrawals) from the pension with the higher taxable proportion and minimise the pension payments from the pension with the lower taxable proportion to preserve for the adult child upon his death. (c) Funds held within super account incur a 15% tax on earnings. However, funds can be retained indefinitely Within pension phase, the fund does not pay any income tax and if the member > 60 years of age, any income the member receives will also be tax free.
If the member < 60, the income from the pension will be taxed at MTR but
there will be an entitlement to the 15% tax offset. However, with an account-based pension, a minimum pension must be paid out whether the member needs it or not. If the funds are not needed,
the member has to then invest outside super and perhaps incur tax. Question 7 (a) Stopping an account-based pension
No, an income must be paid at least annually from an account-based pension based on prescribed minimums. (b)
o Reduce pension income down to the minimum permitted (with 50% reduction for virus years)
o Withdraw an income only once-a-year (eg. at end of financial year) to keep retirement funds intact for as long as possible to maximise earnings
o Roll funds from pension account back into superannuation account (c) Based on Colleen’s age, the inheritance could be contributed into her super account – no age restrictions < 67 years of age. Funds held within
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the super environment are tax effective compared to being held outside super and taxed at MTR’s. However, need to consider CGT of selling managed funds and shares. She could make a concessional contribution up to the cap of $27,500. This
tax deduction could be used to minimise or partially eliminate the CGT on disposal of the shares and managed funds. Question 8 Re-contribution strategy.
10% tax-free component = $55,000
Formula for determining the maximum amount of contribution: Low rate cap / (1- tax-free proportion) i Age 63
$225,000 / .9 = $250,000
$250,000 x 10% = $25,000 (tax-free component); $225,000 is the balance (taxable component). No tax payable
$250,000 can be withdrawn tax free and re-contributed back into super as
a non-concessional contribution up to $330,000 (3 year bring forward rule)
Tax free amount now = $55,000 - $25,000 withdrawn + $250,000 contributed back = $280,000 / $550,000 = 50.91% tax free ii Age 68 and satisfied work test
As Peter is aged over 67, his non-concessional cap is limited to $110,000 (bring forward rule ceases at age 67)
Thus can only withdraw and re-contribute $110,000. No tax would be payable. Question 9 i.
May is required to withdraw the minimum income required from her account-based pension. Excess income could be used to: a. Transfer back into super as a contribution if possible b. Invested outside of super ii.
May will need to transfer $200,000 out of her pension account and into her super account or invested outside of super so as to ensure the $1.7m balance transfer cap is not breached. iii.
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iv. Any subsequent increase in a retirement balance due to earnings, or drops in the balance due
to pension payment withdrawals, are not counted towards (or deducted from) the $1.7 million transfer balance cap.
They have no impact. A member’s transfer balance account is debited when they commute (partially or fully) the capital of a pension. This would allow a member to top up to the amount of the transfer balance cap at a later time (2021/22 $1.7m indexed). Seminar solutions - Topic 9 Question 1 Under the SISA, a dependant includes a person who is:
• a spouse – (including de facto and same sex spouses)
• a child
• any person with whom the deceased member had an interdependency relationship.
Other kinds of dependency, such as financial dependency, are also able to
be considered. Important to note that the test as to the actual relationship
occurs at date of death of the deceased member. Under the ITAA, a tax dependant generally includes:
• a spouse or former spouse - (including de facto and same sex spouses)
• a child aged less than 18 years
• any other person with whom the deceased person had an interdependency relationship just before he or she died; or
• any other person who was a dependant of the deceased person just before he or she died. The main difference between a SIS and tax dependent is that under tax law, a child must be a minor. If the child is above 18 years of age, they will be taxed as a non-dependant unless they can be classified under one of the other categories. Question 2 No, normally superannuation is not an estate asset. On death it does not automatically flow to the estate of the deceased. The trustee of the super fund will generally pay a death benefit in accordance with the governing rules of the fund and relevant law.
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Normally super funds of a deceased are distributed directly to a beneficiary based on a death benefit nomination that the deceased should
have completed within their super fund. This provides the trustee with direction as to who the super death benefits are to be paid to.
It would only form part of a deceased’s estate if the deceased specifically directed the funds to be distributed to their estate within their death benefit nomination. See question 4. Question 3
Non-binding death benefit nomination - upon death, the preferred beneficiary is considered by the trustee. Question 4 Where a binding death benefit nomination is made out to the “legal personal representative”, the super proceeds will be paid directly into the Estate of the deceased. This will then be distributed to beneficiaries according to the provisions of the Will and, if provided within the Will, paid
into a “testamentary trust”. The benefits of having proceeds paid into a testamentary trust include: o income splitting between family members
o ability to distribute income to minors where they are taxed at normal adult MTR’s
o may afford some protection of funds from bankruptcy or marriage breakdowns or protection of beneficiaries under a disability (depending on how the trust is established). Illustration – $800,000 super proceeds with earnings rate of 6%. Paying super proceeds directly to children - would only want to distribute a minimal amount of funds directly to children under 18 as any unearned
income received above $416 would be taxed in their hands under penalty rates of tax
Paying super proceeds directly to the spouse would involve them generating additional income of $48,000 ($800,000 x 6%). Together with her other income, the total income of $68,000 would push them into the 32.5% MTR plus medicare levy
. As an alternative, if super proceeds were paid to the member’s estate and
the Will allowed for the establishment of a testamentary trust, the $48,000 of income could be distributed equally between the 3 children - $16,000 p. to each child. As a result of this, neither the spouse nor any
child would be liable to any tax (income <$18,200 with low income tax offset). Question 5
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As Andrew’s beneficiaries are adult children, they will be treated as non-
tax dependants. The children will be taxed on the taxable component of the super benefit at a tax rate of 15% plus medicare. ie. $400,000 x 17% = $68,000 If Andrew had been in receipt of an income stream:
• an income stream cannot be paid to a non-tax dependent upon the death of the member and must be converted to a lump sum. This would then be taxed as above. Question 6 The taxing of the receipt of funds to dependants is provided in the following table. Taxation of superannuation death benefits – payments to dependents The death benefits can be paid out as a lump sum or potentially continue as a super pension. If being paid out, in the time between the fund member’s death and payment of the death benefits, the earnings on those pension assets remain tax exempt. The major condition of this continuing tax exemption, however, is that the death benefits must be paid out as soon as is practicable. Accordingly, the sale of the SMSF’s assets during the pension phase will continue to be tax-free. The taxing of the receipt of funds to dependants is provided in the following table.
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1.
(i) The super funds are to be paid to Daniella’s spouse
o As Daniella is aged over 60, the income stream would continue to be paid to the spouse tax-free 2.
(ii) The super funds are to be paid to Daniella’s adult child o A non-tax dependant cannot receive an income stream. It must be
paid out as a lump sum and taxed as a non-tax dependant where the rate is 15% plus medicare o $720,000 x 80% (taxable component) x 17% = $97,920 Question 7 The aim of a re-contribution strategy is to increase the tax-free proportion of any superannuation account so that in the event that the super is paid out as a death benefit to non-dependants, the non- dependants will pay less tax. Tax-free components received by a non-tax dependant will always be tax free whereas the taxable component will be subject to a tax
rate of 17% tax.
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(a)
As Tim is aged over 60, all lump sum withdrawals and income payments from a super fund are all tax-free so a re-contribution strategy would not have an impact personally on Tim’s tax situation. (b)
Currently, if no strategy was implemented and Tim was to die, any non-
dependents would pay tax as follows:
Tax-free proportion is $600,000 x 18% = $108,000
Taxable proportion is 82% = $492,000
Tax payable: $492,000 x 17% = $83,640 Based on re-contribution strategy being implemented Given his age, Tim would not pay any tax on lump sum withdrawals, so could withdraw and recontribute up to caps without any tax implications.
Thus could withdraw and re-contribute up to NCC cap of $330,000
$330,000 x 18% = tax free $59,400 $330,000 x 82% = taxable $270,600 When funds are contributed back into a super fund, the combined
situation is as follows:
Tax free component will now be calculated as:
[$108,000 (the existing amount) - $59,400 (the tax-free amount withdrawn) +$330,000 (amount re-contributed)] = $378,600
Taxable component will now be calculated as:
[$492,000 (the existing amount) - $270,600 (taxable component withdrawn)] = $221,400 Taxable proportion now is:
$221,400 / $600,000 = 36.9% Tax payable by non-tax dependants - $600,000 x 36.9% x 17% = $37,638 Tax saving of $83,640 - $37,638 = $46,002!! What if Tim was aged under 60
He would be required to pay tax on the taxable amount withdrawn over $225,000.
How much is Tim able to withdraw tax-free and then re-contribute back into his super fund?
-Tim will need to withdraw $274,390 from his super fund to access the maximum tax free threshold ($225,000/taxable component of .82):
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$ 49,390 tax-free ($274,390 x 18%) $225,000 taxable ($274,390 x 82%) $274,390 Withdrawing an amount where the taxable amount is no greater than $225,000 means that no tax is payable on the withdrawal. When funds are contributed back into a super fund, the combined
situation is as follows:
Tax free component will now be calculated as:
[$108,000 (the existing amount) - $49,390 (the tax-free amount withdrawn) +$274,390 (amount re-contributed)] = $333,000
Taxable component will now be calculated as:
[$492,000 (the existing amount) - $225,000 (taxable component withdrawn)] = $267,000 Taxable proportion now is:
$267,000 / $600,000 = 44.5%
Tax payable by non-tax dependants - $600,000 x 44.5% x 17% =
$45,390 Tax saving of $83,640 - $45,390 = $38,250!! (c) Undertaking a re-contribution strategy from within pension phase?
can funds be removed from pension? – yes, full commutation
can funds be re-contributed directly back into another pension? – no.
can funds be re-contributed back into a super account? – yes, based on satisfying certain rules (age, contribution limits). Funds could then be rolled across into a new pension with an increased tax-free proportion Question 8
Strategies that Quinn could consider: • Re-contribution strategy to increase tax-free proportion
• Making additional non-concessional contributions if available to increase
tax-free proportion –need to be aware of transfer balance cap
• Withdrawing funds and paying funds to children prior to death, or investing funds outside of super – any withdrawal by Quinn would be tax free and distributions to children would be tax-free
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• Have binding death benefit nomination to “legal personal representative” so that super is paid to Estate. Could then establish a testamentary trust(s) for his children as there may be tax benefits in distributing trust income between Aiden’s and Grace’s family. Question 9 Inclusion within super account of life insurance proceeds – these proceeds
are classified as a taxable component (untaxed element) and subject to a higher rate of tax largely due to the fact that the super fund receives a tax
deduction on life insurance premiums paid. Formula to determine untaxed element (life insurance benefit) = Super death benefit less taxed element less any tax-free component Formula to determine taxed element: (Super lump sum benefit x (Service days / Service days + days to retirement)) Less tax free component
Where:
service days = number of days from when individual joined super fund to date of death days to retirement = number of days from date of death to normal retirement date Tax implications:
• If tax dependant – all is tax free • If non-tax dependant o Taxable component (taxed element) – 15% plus medicare
o Taxable component (untaxed element) – 30% plus medicare Solution: Service days = 28.5 years (10,403 days) Days to retirement = 17.5 years (6,388 days) Taxable benefit = $750,000;
Taxable component = $710,000; $750,000 x 10,403 10,403 + 6,388 less $40,000 = $424,669 Components:
Tax-free component
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Taxable component (taxed element)
Taxable component (untaxed element: $710,000-$424,669) Total benefit Tax payable if paid to spouse – all tax free
Tax payable if paid to the non-tax dependent child – Joanne (50%) 50% x (($424,669 x 17%) + ($285,331 x 32%))
= 50% x ($72,194 + $91,306)
=$81,750 $40,000 $424,669 $285,331 $750,000 tax-free
taxed at 17% taxed at 32% MAA317 – Superannuation Planning T1, 2022
Seminar solutions Week 10 – Social Security Question 1 The purpose of the age pension is to provide assistance to alleviate financial hardship for the unemployed elderly. The entitlement for the age
pension is not whether a person has paid taxes all their working life but whether he/she suffers financial hardship when they are in the retirement phase. A system where the age pension entitlement based on working life or taxes paid would tend to benefit those who are financially independent and such a scheme would not meet the purposes and objectives of the age pension support system. Question 2 There are competing arguments.
On the one hand, a case could be given that those receiving an aged pension should be permitted / encouraged to work longer.
This would assist labour shortages and workforce participation, provide retirees with a more comfortable standard of living, assist in preserving their savings for a longer period of time and therefore requiring less government support, and finally pensioners would be paying taxes on their wages to the government therefore negating the financial impost of paying an aged pension The counter argument is that the age pension has been designed purely as a safety net to provide those who are unable to adequately support themselves financially with an income in retirement. The aged pension
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should only be paid to those in need of financial support and not as an automatic and universal as-of-right payment. Should we get rid of the income means test altogether? Should we also allow aged-pensioners to also receive greater investment income? Question 3 Currently there is no exemption on the value of the family home that is exempted under the social security asset test. However, there have been calls from time to time to provide a cap on the exemption up to a certain threshold, such as $1m (probably $2m is now more realistic given the average price of a home in capital cities). Arguments in support of placing a cap are based on governments only providing financial support to those in financial need. Arguments against the placing of the cap point out that there is not always a positive correlation between the value of a family home and the financial resources that a person has. For example, a couple may have acquired the family home many years ago in an area that has shown significant increases in value over time. Whilst the home may now be worth a considerable amount, this does not necessarily mean that the couple has financial wealth. Indeed, the couple may be struggling to support the upkeep and ongoing running costs of the home. Should an aged couple be
forced to sell their family home in order to be able to financially support themselves in old age? This is unlikely to be politically acceptable to many
Australians. Question 4 Under the assets test:
Pension entitlement = Maximum aged pension less reduction factor =$987.60 – [($580,000 - $270,500) = $309,500 / $1,000 x $3.00)] = $59.10 p.f Under the income test:
Deemed income = $53,600 x .25% + ($260,000-$53,600) x 2.25% = $4,778 p.a. Plus salary = $19,000 p.a.
Total income = $23,778 or $914.54 p.f.
less $300 p.f. work bonus = $614.54 p.f. Pension entitlement = Maximum aged pension less reduction factor =$987.60 – ($614.54 - $180.00) x 0.50)
=$770.33 p.f. Pensioner entitlement is based on the test that provides the lower benefit.
Bert receives $59.10 p.f. under the asset test.
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Note: Government Work Bonus Question 5 The couple are able to give away $10 000 annually for 3 years without breaching the gifting rules. After that, they would then need to wait a further two years before they were able to make further gifts. The gifting rules would not have applied if the couple had made the gift to Roberto prior to 5 years before the initial application for the aged pension. The Work Bonus provides an incentive for eligible pensioners over Age Pension age to continue to participate in the workforce. The first $300 of fortnightly employment income is not assessed for an eligible pensioner and is not counted under the pension income test. Question 6 (b) Age pension entitlement
Total assessable assets = $1,065,000 (includes super and account-based pension); Total financial investments = $570,000. Under the Assets Test:
Excess assets over threshold is $1,065,000 - $621,500 = $443,500 Age Pension entitlement per person:
$744.40 – ($443,500 / $1,000 x $1.50)
=$79.15 p.f. ($158.30 p.f. combined) (c) Impact of inheriting $255,000 Total assessable assets now = $1,320,000. Total financial investments now = $825,000. Under the revised Assets Test:
The couple’s assessable assets are now greater than the upper threshold of $1,118,000 and therefore the couple will lose all of their pension entitlement as well as their pension card entitlement. A question that needs to be determined and worked on by the financial planner is to what extent could their affairs be structured so that they might still qualify for some aged pension? Gifting $10,000 p.a. (will not make a substantial difference)
Spending funds on home renovations (home is exempt asset), holidays etc.
Transfer funds into Julie’s superannuation fund up to non-concessional limits as her super is not assessed under either the asset or income test.
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The amount transferred will depend upon how much income the couple require to live on over and above Julie’s salary, if any. i.
Transferring all or part of Arthur’s account based pension – no tax upon withdrawal. Julie can take advantage of 2 year bring forward rule for
non- concessional contributions ii.
Selling and transferring other financial investments assets into Julie’s superannuation account (may be subject to CGT upon sale). Is it worth it? Can they still live on the reduced income? An example of a strategy:
• Gift $10,000 to children from term deposit (treat as concessional contribution)
• Sell shares for $180,000 plus managed funds for $150,000 and transfer $330,000 into Julie’s superannuation account (non-concessional contribution) CGT payable on sale of shares and managed funds: $35,000 capital gain less 50% discount = assessable capital gain of $17,500. Included in Arthur’s assessable income but given his taxable income situation, the majority of the CGT will be tax-free.
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U.S. Metallurgical Inc. reported the following balances in its financial statements and disclosure notes at December 31, 2020.
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O $945000.
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Question 4 of 19
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Current Attempt in Progress
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Amortization of net gain
Amortization of prior service cost due to increase in benefits
Expected return on plan assets
Interest on projected benefit obligation
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Pension expense for 2021 is
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DATE:
1.
A fixed amount added to the premium of a given policy
regardless of policy size is known as
O a) policy fee
O b) policy reserves
O c) policy values
O d) extra premium
2.
To able to calculate the required premiums for a given
policy, the agent must know the applicant's
Oa) age
O b) choice of plan
O c) face amount desired
O d) all of the above
3.
To calculate premium for the other modes of premium
payment, the annual premium is
O a) divided by the desired number of premium b) divided by a conversion factor
mode of payment desired
payments
O c) multiplied by a conversion factor for the
mode of payment desired
O d) multiplied by a constant conver
4.
Life insurance is
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O a) luxury afforded by the rich
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The following table provides actuarial assumptions disclosed by three automobile
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Pension Actuarial assumptions used for pensions in 20x1
Ford
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Goodyear
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average
7.20%
4.50%
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Rate of future salary
growth
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7.25%
5.20%
7.25%
5.00%
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4.00%
9.00%
10.00%
10.00%
9.10%
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Question 9 of 20
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Actual return on plan assets
Amortization of net gain
Amortization of prior service cost due to increase in benefits
Expected return on plan assets
Interest on projected benefit obligation
Service cost
Pension expense for 2022 is
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O $1891900.
O $1168600.
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241400
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580100
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Assume the below information about a firm’s defined benefit pension plan: Pension Fund Beginning Balance Cash Funding by the Firm Actual Investment Income Payments to Retirees Ending Balance 2 + 5 - 15 42 Pension Obligation Beginning Balance Service Interest Payments to Retirees Changes in Assumptions Ending Balance 9 5 0 49 Expected investment income was greater than actual investment income by $5. What was the funded status of the pension plan at the beginning of the year? Select one: a. Underfunded by $15 b. Overfunded by $10 c. Fully funded d. Underfunded by $10
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Question 18 of 20
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The settlement rate is 9%. Other data related to the pension plan for 2026 are:
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Amortization of net gain
$4100000
O $4469000.
O $4548000.
O $4544000.
O $4781000.
3600000
Amortization of prior service costs due to increase in benefits
Contributions
$312000
112000
512000
237000
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Question 19 of 20
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Amortization of net gain
$2850000
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O $2850000.
O $3180000.
O $2955000.
2350000
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The following is an incomplete pension spreadsheet for the current year for Sparky Corporation.
Required:
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2. Prepare the journal entries to record pension expense and funding of plan assets for the year.
3. Prepare the journal entry(ies) to record any gains or losses for the year.
Complete this question by entering your answers in the tabs below.
Required 1 Required 2 Required 3
Complete the pension spreadsheet.
($ in millions) debit (credit)
PBO
Plan Assets
Prior Service
Cost
Net(Gain)Los8
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Cash
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450
60
55
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Origin Energy
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23.08
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Current Attempt in Progress
On January 1, 2022, Wildhorse Co. has the following balances:
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Fair value of plan assets
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Amortization of unrecognized prior service
costs
Benefits paid
Actual return on plan assets
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O $3091400.
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O $3521800.
O $3131100.
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2363000
$236300
77900
390700
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* We assume the estimated return was based on the actual return on similar investments at the inception of the plan and that, since the
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Calculate each of the following amounts as of both December 31, 2021, and December 31, 2022: (Enter your answers In…
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* We assume the estimated return was based on the actual return on similar investments at the inception of the plan and that, since the
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what give rises to the changes in PBO balance?
A- service cost and interest cost
B- prior service cost that is caused by a change in pension formula
C- changes in life expectancy estimates
D- all of the above
O A
O C
OD
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Answer:
А.
S100,000
В.
O $113,700
S125,000
D.
O 142,800
C.
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Current Attempt in Progress
The computation of pension expense includes all the following except
O service cost component measured using current salary levels.
O expected/actual return on plan assets.
O interest on projected benefit obligation.
O amortization of prior service cost.
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Please Introduction and show work no plagiarism please
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$3.45mn
$4.3mn
$5.7mn
What is the amount of the pension liability that should be shown on Kerr's December 31, 2005 balance sheet?
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- Find The internal rate of return (IRR) and The pay-back period.arrow_forwardnku.3arrow_forwardProblem 17-9 (Static) Determine pension expense; PBO; plan assets; net pension asset or liability; journal entries [LO17-3, 17-4, 17-5, 17-6 ,17-7 ,17-8] Check my work U.S. Metallurgical Inc. reported the following balances in its financial statements and disclosure notes at December 31, 2020. Plan assets $400,000 320,000 Projected benefit obligation U.S.M's actuary determined that 2021 service cost is $60,000. Both the expected and actual rate of return on plan assets are 9%. The interest (discount) rate is 5%. U.S.M. contributed $120,000 to the pension fund at the end of 2021, and retirees were paid $44,000 from plan assets. (Enter your answers in thousands (L.e., 10,000 should be entered as 10).) Required: 1. What is the pension expense at the end of 2021? 2. What is the projected benefit obligation at the end of 2021? 3. What is the plan assets balance at the end of 2021? 4. What is the net pension asset or net pension liability at the end of 2021? 5. Prepare journal entries to…arrow_forward
- Question 13 of 20 View Policies Service cost Interest on projected benefit obligation Interest on vested benefits Amortization of prior service cost due to increase in benefits Actual return on plan assets O $945000. O $850000. O $660000. O $725000. $460000 295000 125000 65000 95000 -/1 If the actual return equals the expected return on plan assets, the amount of pension expense to be reported for 2026 isarrow_forwardQuestion 4 of 19 View Policies < Current Attempt in Progress The following information is related to the pension plan of Wildhorse, Inc. for 2021. Actual return on plan assets Amortization of net gain Amortization of prior service cost due to increase in benefits Expected return on plan assets Interest on projected benefit obligation Service cost Pension expense for 2021 is $3075000. O $2691000. O $2604000. O $3024000. $490000 210000 390000 541000 815000 2150000arrow_forward93 Questions DATE: 1. A fixed amount added to the premium of a given policy regardless of policy size is known as O a) policy fee O b) policy reserves O c) policy values O d) extra premium 2. To able to calculate the required premiums for a given policy, the agent must know the applicant's Oa) age O b) choice of plan O c) face amount desired O d) all of the above 3. To calculate premium for the other modes of premium payment, the annual premium is O a) divided by the desired number of premium b) divided by a conversion factor mode of payment desired payments O c) multiplied by a conversion factor for the mode of payment desired O d) multiplied by a constant conver 4. Life insurance is Ob) only available to a specific group O a) luxury afforded by the rich O d) a speculative risk O c) a cooperative risk-sharing planarrow_forward
- Q3. The following table provides actuarial assumptions disclosed by three automobile companies with defined benefit plans in the United States in 20x1. Pension Actuarial assumptions used for pensions in 20x1 Ford GM Goodyear Industry average 7.20% 4.50% Discount rate Rate of future salary growth Expected rate of return 7.25% 5.20% 7.25% 5.00% 7.75% 4.00% 9.00% 10.00% 10.00% 9.10% REQUIRED Compare these rates to those used by the average of 88 companies in the same industry and discuss which company is the most conservative in its estimates, and which is the most aggressive. Give your reasons.arrow_forwardQuestion 9 of 20 View Policies Actual return on plan assets Amortization of net gain Amortization of prior service cost due to increase in benefits Expected return on plan assets Interest on projected benefit obligation Service cost Pension expense for 2022 is O $1923200. O $1891900. O $1168600. O $1614000. $336900 134700 241400 368200 580100 1295400arrow_forwardMa1. Assume the below information about a firm’s defined benefit pension plan: Pension Fund Beginning Balance Cash Funding by the Firm Actual Investment Income Payments to Retirees Ending Balance 2 + 5 - 15 42 Pension Obligation Beginning Balance Service Interest Payments to Retirees Changes in Assumptions Ending Balance 9 5 0 49 Expected investment income was greater than actual investment income by $5. What was the funded status of the pension plan at the beginning of the year? Select one: a. Underfunded by $15 b. Overfunded by $10 c. Fully funded d. Underfunded by $10arrow_forward
- 2. Describe in 1-2 sentences One of the Covid Relief acts that was passed in 2020/2021 and how it helped our economy.arrow_forwardQuestion 18 of 20 View Policies The settlement rate is 9%. Other data related to the pension plan for 2026 are: Benefits paid Actual return on plan assets Amortization of net gain $4100000 O $4469000. O $4548000. O $4544000. O $4781000. 3600000 Amortization of prior service costs due to increase in benefits Contributions $312000 112000 512000 237000 The balance of the projected benefit obligation at December 31, 2026 is 407000 31200arrow_forwardPLS HELP ASAParrow_forward
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