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In Australia, every third marriage ends in divorce and de facto relationships are breaking down every day. As Financial Advisers we are often asked to assist our clients in working through the separation of their assets, including their superannuation. Superannuation is, for many, the largest asset outside of the family home. In fact, the average Self Managed Superannuation balance as at 31 December 2012 was $956,426.
Family Law states that superannuation breakdown laws apply to:
married people who divorce
married people who separate
couples in both heterosexual and same sex de facto relationships (excluding Western Australian residents)
Broadly, couples will be in a de facto relationship where they have a relationship as a couple living together on a genuine domestic basis. It is important to note that someone can in fact be in a de facto relationship with a person, even if they are concurrently still legally married to someone else.
How is superannuation dealt with?
Experience shows that nearly 95% of superannuation splitting is resolved without the involvement of the family court. When couples are willing to negotiate and agree between themselves they have two options regarding the split; an interest split and a payment split.
An interest split is where a member’s superannuation balance is divided by specifying an amount to be paid to their spouse. If the spouse has not reached a condition of release allowing them to access their superannuation benefit, the entire split amount must be rolled into their own superannuation account.
*Alternatively, if a condition of release if met the amount can be paid out in cash.
A payment split occurs where the member has satisfied a condition of release and as such has commenced receiving a pension. In this instance, the member continues to hold their entire superannuation balance in their name rather than splitting it. The spouse receives their share of the superannuation benefit by being allocated a portion of every pension payment.
Member’s Superannuation Pension
Member’s Pension Payment per fortnight
Spouse’s Pension Payment per fortnight
Is all superannuation divided?
A superannuation benefit can only be split if it is a ‘splittable’ interest. Generally, most superannuation interests are splittable, provided they are over $5,000 in value. Certain interests are ‘unsplittable’, such as payments on compassionate grounds and disability payments.
What if an agreement cannot be reached?
It an agreement cannot be reached regarding the splitting of a superannuation benefit, a court order may be imposed. A court can make two types of orders in respect to a superannuation benefit; a splitting order and a flagging order.
A splitting order specifies the manner in which the superannuation interest is to be divided. Two modes of a splitting order exist: a base amount split which designates a specific monetary amount and a percentage split which allocated a specific percentage.
A flagging order essentially freezes the superannuation funds until the time that the court deems fit or the parties agree on.
Binding Financial Agreements
A binding financial agreement allows parties to agree on how their assets (including superannuation) are to be split in the event of a relationship breakdown. This type of agreement can be drafted before, during or after marriage or a de facto relationship and can range from simple (major assets only) to complex (all assets).
Binding financial agreements provide many benefits including:
certainty as to how assets will be distributed in the event of a relationship breakdown
significant reduction of the risk that the parties will have to resort to court proceedings
more ease in resolving differences rather than trying to agree at a very emotional time
ability to quarantine assets owned prior to the relationship or assets that have been inherited
Divorce and relationship breakdowns are generally an emotional and stressful time. At Wakefield Partners we aim to provide assistance to our client in their time of need. If you are currently facing a marriage or relationship breakdown and would like to discuss your options please feel free to contact us.
Samara Farnsworth B.Com, Adv. Dip. FP.
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Are you aged 55 – 59?
Are you receiving a Super Income Stream?
Are you taking advantage of the tax benefits of receiving lump sums instead of regular payments?
Over the years I have noticed that a lot of clients are unaware of the possibility of receiving a super pension completely tax free when aged between 55 and 60. That’s right! Receiving an annual pension completely tax free.
There are two ways in which you may receive an income stream; a regular payment or lump sum withdrawals.
As you would be aware, there is a requirement to withdraw a minimum amount when receiving an income stream. The great news is that these lump sum withdrawals count toward meeting that minimum pension.
Lets compare the two methods
For individuals aged 55 to 59 the tax treatment of receiving a regular pension differs vastly to that of making lump sum pension withdrawals. Regular pension payments are taxed at your marginal tax rate less a 15% offset whereas lump sum withdrawals are received completely tax free.
The one condition surrounding the lump sum method is the lifetime cap limit. This is a $180,000 (indexed annually) cap for receiving funds tax free over your lifetime. Once you have withdrawn $180,000 all additional lump sum payments are taxed at 15%.
So what does all this mean?
If you were planning on taking an annual pension from your super of $15,000 and had no other taxable income your marginal tax rate would thus be 0%. Therefore tax wise, there is no benefit between the two methods.
If however, you were planning on taking an annual pension from your super of $15,000 and had other taxable income totalling $50,000 your marginal tax rate would be 32.5%. If you were to utilise the regular income method you would essentially be paying tax of $2,625 on the $15,000 benefit. On the other hand, if you were to use the lump sum method you pay no tax on the $15,000.
As another example, assume you have already made lump sum withdrawals totalling $180,000. If you wanted to take an annual pension the best method tax wise will depend upon your marginal tax rate. As mentioned before, regular payments are taxed at your marginal tax rate less a 15% offset while in this case the lump sum would be taxed at 15%. Basically, if your marginal tax rate is over 30% (taxable income over $37,000) you would be better off tax wise taking lump sum withdrawals.
As you can see the tax benefits of these methods depend upon your marginal tax rate and the level of cap you have withdrawn.
Other advantages/disadvantages to be aware of
You annual super pension taken as a regular income stream can only be paid out in cash. On the other hand, choosing to receive your pension in lump sum form allows you to receive payment in cash, in-specie (distribution of an asset) or a combination of the two.
If you are receiving a Centrelink Benefit such as Newstart Allowance, the two methods of paying your super pension are treated differently under the income assessment test. Put simply, lump sum withdrawals are not counted toward your income test whereas all regular payments are assessed but, at discounted rate. On the flip side however, every lump sum you withdraw reduces the discount factor that is applied to your regular payments. Therefore is it important to carefully consider any Centrelink benefits to ensure you do not disadvantage yourself in this sense.
As you can see, there are many benefits that may be achieved by receiving your super income stream in lump sum form over a regular pension.
This particular superannuation strategy is usually simpler when undertaken within a Self-Managed Super Fund than a retail fund and often a retail fund will not allow for a pension to be taken as a lump sum at all.
There are also many other advantageous strategies can that be implemented within a Self Managed Super Fund that cannot within retail super. For more information on this particular strategy or the use of Self Managed Super Funds please contact our office and have a chat to one of our specialised advisers.
Samara Farnsworth Adv Dip FP
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It is never too soon to begin the Estate Planning process. It is much more than simply making a Will. Estate Planning is all about ensuring your assets are distributed to your chosen beneficiaries, distributed according to your wishes in the most financially efficient and tax effective way.
Inadequate Estate Planning comes at a cost. The worst case might see the “wrong” people inheriting your estate. Or the cost might be expensive legal or trustee company fees or perhaps heartache for your family and friends.
Surprisingly, 60% of Australians do not have a Will.
For those who don’t, the law determines who inherits their belongings. Their spouse and children may not automatically be the main beneficiaries. That is why it is so important to regularly review an Estate Plan, particularly if personal circumstances change. If you re-marry, become divorced, commence living in a de-facto relationship, have a blended family (consisting your own children and step children), or have new members in the family..... you should review your Estate Plan.
A well constructed Estate Plan can help to avoid unexpected taxes and protect assets from claims and challenges. Our advice is to consider choosing someone to be your Power of Attorney, name someone in your Will to become your children’s legal guardian, list your beneficiaries in your insurance policies and nominate binding beneficiaries in your super fund.
Make your Estate Plan easy to administer for your executors. Talk to us to arrange for an Estate Planning Information Kit to identify and organise your estate planning needs.
To contactus on(08) 8333 2488 oremail any queries or comments to us.
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Whether it is to reduce Aged Care Fees, or to increase Centrelink/DVA Pension payments, inevitably gifting will be considered. With a real lack of other asset minimisation strategies available now (since rule changes in the last decade relating to private companies, family trusts and annuities), gifting is one of a few that is occasionally considered (along with funeral bonds - perhaps a story for another day!).
"I am only allowed to give away $10,000 per year" is a statement I hear regularly. It alludes to the Centrelink rule that exempts the first $10,000 per financial year gifted from the Assets Test (for both pension and Aged Care Fee purposes). The other limit that is placed on this is "Up to a maximum of $30,000 in a 5 year period". Centrelink websites and various others explain the ins and outs of the gifting rules, so I'm not going to restate them here.
It is important to understand that you can give away however much you like. Your assets, built up over significant time, are yours to choose what you do with them. Often misinterpretation of the Centrelink rules result in people believing that they are "only allowed to give away $10,000 per year". This is not the case! You can give away as much as you like....
You need to carefully consider the implications. Gifting is unlikely to significantly improve your Centrelink/DVA and Aged Care Fee situation. In some cases, it can make it worse. Gifts above the $10,000 limit are assessed by Centrelink/DVA as if you still hold those assets for 5 years. As an example, a gift of $100,000 to a family member in one lump sum will result in $90,000 continuing to be assessed as an asset for 5 years. Furthermore, the assessed gift amount (in the example, $90,000) is deemedto earn interest at the current applicable deeming rates.
Keeping all of this in mind, there are a few important points to consider:
The $10,000 gifting rule is only applicable where Centrelink, DVA or Aged Care Fees are involved. There is no such thing as a "Gift Tax" anymore, meaning that if a person does not have any reliance on Centrelink/DVA, then there is no limit to gifting. However, if gifting, please consider the impact on the recipient. If they rely on Centrelink payments, or have children who receive Austudy/Youth Allowance, there can be unintended consequences.
Gifting non-income producing assets can worsen your financial position. The beach house/shack, or vacant block of land, may already have it's value being assessed by Centrelink/DVA for pension payments. However, if no income is derived from this asset, then Centrelink/DVA will be assessing no income. Remember that assessed gifts (above $10,000) are deemed to earn income, which may reduce pensions and/or increase Aged Care Fees! Transfering the title of your home can have a similar impact.
Gifting may seem good in theory, but often even smaller gifts of $10,000 may only improve your income from Centrelink/DVA by a few hundred dollars per year, or reduce your Aged Care Fees by a few hundred dollars per year. Given overall cashflow is of paramount importance, is it really worth it? I certainly understand however,that there are non-financial benefits to making gifts.
There are special rules if a person making a gift received a right to reside in the recipient's house in return for the gift.
It is important to get advice if you are considering gifting as part of a Centrelink or DVAmaximisation/Aged Care Fee minimisation strategy. Gifting can make sense in some situations, but it is important to understand all of the consequences.
With over 12 years working at Centrelink, and 5 years as a Financial Planner, I can assist you with all of your enquiries. Please contact me on (08) 8333 2488.
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What is an Investment Strategy?
An investment strategy provides you and other trustees with a framework for making investment decisions. When preparing an investment strategy, you as Trustee must consider many factors that will affect its ability to meet the Sole Purpose Test of generating retirement benefits for the members of the fund, or death benefits for their dependents.
The trustees must determine, evaluate and record the following factors:
the objectives of the fund
the investment methods by which the investment objectives will be achieved
the members tolerance to risk
the members’ needs and circumstances
the risk and likely return from investment
the diversification of the funds’ assets
the liquidity of the funds’ assets
the funds’ ability to pay benefits
the funds’ ability to meet other liabilities
the funds’ use of reserves and derivatives
the consideration of insurance for all members
Recent Legislative Changes
Many SMSF investment strategies will need to be replaced following legislative changes which occurred in 2012. Failure to do so may result in the fund becoming non-compliant and as a result face severe tax consequences.
One of the changes to the legislation is the addition of the words ‘review regularly’. There was no prior legislative requirement that, once the investment strategy was in place, it be reviewed on any sort of regular basis. The other major change to the legislation is the requirement that the trustees consider and recorded whether the fund should hold insurance cover for members.
In the past, administrators and auditors have generally assumed that trustees have in place an adequate investment strategy and have not requested to view the document. Our experience is that auditors are now asking to view the investment strategy as an audit requirement.
What should you do?
The issue for trustees is that they are ultimately responsible to ensure that an investment strategy is in place. If your fund already has an investment strategy in place it may need updating to ensure that it complies with the current legislation.
At Wakefield Partners we have established an Investment Strategy Service. Our service involves gathering a small amount of information about the SMSF’s assets and the members’ personal details. We then provide an investment strategy that includes a set of trustee minutes to record the adoption of the strategy. We provide our service either directly to SMSF Trustees or to SMSF Accountants.
If you are interested in discussing our service further please contact us or visit our Investment Strategy Service page.
Samara Farnsworth Adv Dip FP
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