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Self Managed Super Fund (SMSF) Article
The Pros & Cons of Using Mum & Dad's Super
By Tony Negline.
This article may be out of date.
21st June 2007
It certainly doesn’t take too long before the more savvy financial planners work out how legislative arbitrage can provide benefits for a client.
The truth of this statement is shown in how some people are reacting to the imminent super changes. Some investors who are yet to retire want to give their money to a close relative, typically a parent. Other investors are even asking their retired friends or associates for a hand.
Their purpose is relatively simple – they want to get hold of four potential benefits.
Firstly the amount you can concessionally invest into superannuation is now quite restrictive. For example, from July 2007 only $150,000 can be put into super as an undeducted contributions each financial year. Contributions for someone else gives you more money in super. Secondly, retirees can keep assets in super for as long as they like. If those assets are simply accumulating away then the tax rate on those assets is 15%. This super fund tax-rate may be less than that which applies for investments held personally by an investor. Furthermore, as Reasonable Benefit Limits will soon be abolished retirees can have as much assets in super as they want without any tax penalty. Finally if access to these funds is required then the retiree can withdraw the funds tax-free assuming they are over 60.
Now for some people this will already seem like a great idea. As always however there is more to these strategies than meets the eye. There are many issues that need to be considered including:
- Would this strategy be considered tax evasion? In reality this is an impossible question to answer with certainty. Tax evasion or avoidance is outlawed and anyone found guilty of it will be subject to penalties. A taxpayer will only be found guilty of tax avoidance if a reasonable person believes their actions amount to tax evasion using a seven step test. One can only move through these seven steps by looking at all the specific facts of a particular situation. Over the previous 25 years the High Court has grappled with this and the ATO has produced a 100 page document – which has recently become out of date due to a Court case – discussing how these seven steps operate
- Do you trust the retiree? The success of this strategy very much depends upon an investor’s relationship with the retiree. The super laws would not allow the investor to claim the super assets even if the retiree acted dishonourably. At law the super assets are owned by the retiree and they are free to deal with these assets as they wish
- Do you trust the retiree’s relatives? If something happened to the retiree – death, mental incapacity, old age, infirmity and so on, then it may be possible that the retiree’s relatives seek to claim the investor’s assets. This can be ameliorated in the event of death via death benefit nominations and so on however the validity of these can be challenged. If you intend to use these nominations then you need to make sure you implement it correctly
- Estate planning – an associated issue is actually getting the funds paid to you. If your preferred retiree dies and they are not your parent then you may have trouble getting the money paid to you. Superannuation death benefits can only be paid to a deceased member’s dependants (spouse or children), those financially dependant on the deceased or anyone who was in an interdependency relationship with the deceased. Superannuation assets can be paid to a member’s estate however this opens up the potential for challenge
- Hiding assets from creditors – some may consider this strategy as providing a handy way to hide money from creditors. Recent amendments to the bankruptcy rules probably make this unviable because creditors are able to look at super contributions, examine their purpose and can more easily seek to unwind suspect transactions
- Ability to contribute to super – if any retiree over 65 is going to make superannuation contributions then they will have to satisfy a work test. Some pre-retiree investors might think about getting around this by personally employing the retiree. Such arrangements should always be bona-fide
- Age pension eligibility – the ability to receive the age pension revolves around the level of assets that a person has. Super assets not being used to provide pension are fully counted under the assets test and the income test deems the asset. Clearly additional superannuation assets could have a negative impact on a retirees age pension. Some pre-retiree investors will get around this by compensating the retiree for any lost pension
- Can you make superannuation contributions via salary sacrifice into another person’s superannuation fund or account? Some people may be tempted to think that they can sacrifice their salary into a super fund interest held in another person’s name. Such contributions are subject to Fringe Benefits Tax
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