Dear Member

Welcome to our April newsletter for 2008. Please take the time to read this newsletter as there is some news about a pricing restructure for NTAA Corporate.

NEW CONTACT DETAILS
We have a new website address: www.ntaacorporate.com.au. Please have a look at it as it has plenty of helpful information on there, including Frequently Asked Questions. You can also download our most up-to-date order forms from this website.

For those of you who prefer not to send handwritten forms, as they can sometimes be unclear, thus slowing the process down if we need to clarify anything, you might like to try typing on the word documents or ordering online. We want to make ordering as easy as possible for you!

Our new email address is info@ntaacorporate.com.au, if you email any queries to this address, we'll try to respond to you as soon as we can.

We also have a new toll free number for you to call: 1800 799 666. This will be great for those of you who are outside Victoria!

ACCOUNTS
When making bank deposits, please ensure you include invoice numbers/and or member numbers so we can mark your payments off against the correct products. This saves any confusion over payments.

Bank details are as follows:
NTAA Corporate
BSB: 633 000
A/C: 1211 42848

NEW PRICING STRUCTURE
Be sure to have a look at our price list which is also on our website. There have been a few prices changes so please make sure you're aware of these. We are including new brochures with all current orders at this time.

SMSF succession planning: super interests
Editor: For your interest, we have provided the following article from DBA Butler Lawyers. It speaks about the term "super interest" and how understanding the concept and planning correctly can save you and your clients $000's. Our thanks go to DBAs but we must admit, it is a little hard going. But it's important, so we hope it's of assistance.

Introduction
The concept of an interest in a superannuation fund is not new. Since, the simpler super reforms changed all that. Now, in order to achieve the best SMSF succession plans for clients, advisers must properly understand a super interest. The new proportioning rule must also be understood.

What is a super interest?
A super interest includes ‘an interest in a superannuation fund’.(1)

Tax law expressly treats a super interest in an SMSF differently to a super interest in other types of super funds.

Broadly, every amount, benefit or entitlement that a member holds in an SMSF is treated as one super interest.(2) This is subject to a very important exception: If a pension commences, an amount that supports the pension is always to be treated as a separate super interest.(3)

Example 1
Jack has five different accumulation accounts in an SMSF for accounting purposes. However, for tax law purposes, all those accumulation accounts would be considered one super interest. Jack also receives two different pensions from the SMSF. Each pension is considered a separate super interest. Accordingly, Jack has three super interests in the SMSF: the one accumulation super interest and the two pension super interests.

Why care? The proportioning rule
At this stage, the distinction between one super interest and multiple super interests might not seem problematic. However, when the proportioning rule is considered, the distinction becomes crucial.

The proportioning rule was introduced generally with effect from 1 July 2007. It is a tax law rule aimed at precluding tax planning. It provides that almost all super benefits are ‘taken to be paid in a way such that each of those components of the benefit bears the same proportion to the amount of the benefit that the corresponding component of the superannuation interest bears to the value of the superannuation interest.’(4) This rule is best explained with a simple example.

Example 2
‘The amount of a superannuation lump sum is $100. Just before the benefit is paid, the value of the superannuation interest was $1000 (of which $200 was the tax free component and $800 was the taxable component). For the lump sum, the tax free component is $20 and the taxable component is $80.’(5)

It is vital to note that the proportioning rule operates in respect of a benefit paid from an individual super interest. It does not operate across multiple super interests.

Example 3
Joe has $550,000 in one SMSF that is funding two pensions. The first pension is supported by $450,000 of assets, comprised entirely of the tax free component. The second pension is supported by $100,000 of assets comprised entirely of the taxable component. (Naturally Joe has two super interests.) Joe receives a $10,000 payment from the first pension. Due to the proportioning rule, the payment is comprised entirely of the tax free component. Joe then receives a $10,000 payment from the second pension. The payment is comprised entirely of the taxable component.

The trustee then ‘turns off’ (ie, commutes) both of Joe’s pensions. The trustee internally roll-overs the resulting lump sums ($440,000 and $90,000) to accumulation in the SMSF. For accounting purposes the trustee treats each of the two lump sums as being kept in separate accumulation accounts. Joe receives a $10,000 payment from the first accumulation account. Nevertheless, the tax components of the payment are $8,302 of tax free component (=$440,000/($440,000+$90,000)) and $1,698 of taxable component.

How is growth treated? Accumulation versus pension
When a super interest is in accumulation mode, every dollar of growth forms part of the taxable component.(6) However, when a super interest is in pension mode, every dollar of growth is split in proportion to the tax components of the super interests when the pension started.(7)

Example 4
As at 1 July 2007, Mary had $1 million of tax free component in an SMSF, all in accumulation. The $1 million is then immediately used to commence a pension and the assets grow by $100,000. The $100,000 forms part of the tax free component. However, if the money was left in accumulation, the $100,000 growth forms part of the taxable component.

Obviously, this makes a huge difference upon death. The deceased’s estate and adult independent children can receive the tax free component tax free.(8) However, the taxable component is generally taxable at a maximum of 15% plus Medicare levy when received by adult independent children or the estate.(9)

Assume Mary then died and the super death benefit was paid to an adult independent child. If Mary had commenced a pension, the child would have received the super death benefits tax free. If Mary had left the money in accumulation, the child would have to pay up to $16,500 tax.

Practical application
These rules can have significant implications in real life circumstances as shown in the case studies below.

Case study 1
Boris and his wife Laura each receive two $1 million pensions from their SMSF (ie, four $1 million pensions in total). This structure related to pre-simpler super planning. Boris and Laura each have one pension that is funded entirely by the tax free component. Boris and Laura each have one pension that is funded entirely by the taxable component. Boris consolidates his two $1 million pensions into one $2 million pension for administrative simplicity. Laura believes that the paperwork to consolidate is too much hassle and leaves her two $1 million pensions as is. Boris and Laura both die.

Half of Boris’ one consolidated pension super interest is paid to their financially dependant child (received tax free). The other half is paid to Boris’ independent adult child. The independent adult child pays $82,500 tax (=$2 million x 50% taxable x 50% to independent adult child x 16.5% marginal tax rate plus Medicare levy).

Laura’s taxable pension is paid to their financially dependant child (received tax free). Laura’s tax free pension is paid their independent adult child (received tax free).

Laura’s beneficiaries have paid no tax, whereas Boris’ beneficiaries have paid $82,500 tax.

Case study 2
Bill has $1 million in accumulation comprised entirely of the tax free component in his SMSF as at 1 July 2007. Bill commences a pension. The assets supporting the pension are well invested and return 30% that year. Bill is so happy with this return that he re-contributes his pension payments back into the SMSF as a non-concessional contribution. Bill then dies. The $1.3 million in his SMSF is paid to Bill’s adult independent child who receives it tax free.

Bill’s twin sister, Belinda, also had $1 million in accumulation comprised entirely of the tax free component in her SMSF as at 1 July 2007. Belinda did not commence a pension. Her SMSF assets also returned 30%. Belinda also died. The $1.3 million in Belinda’s SMSF is paid to her adult independent child who pays $49,500 tax ($300,000 x 16.5%).(10)

Accordingly, Bill’s beneficiary pays $49,500 less tax than Belinda’s beneficiary because Bill started a pension.

Conclusion
Super interests and the proportioning rule play a critical role in calculating the net amount of super death benefits received by beneficiaries. Adviser need to properly understand these new rules to ensure they can optimise their clients’ affairs before paying a benefit or restructuring a pension. By properly understanding these roles, no unintended consequences arise upon death.

Bryce Figot is a lawyer with a leading SMSF law firm DBA Butler. This article contains general information for educational purposes only and is no substitute for specific advice.

Footnotes
(1) Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997) s 995-1.
(2) Income Tax Assessment Regulations 1997 (Cth) (‘ITAR 1997’) reg 307-200.02.
(3) ITAR reg 307-200.05.
(4) ITAA 1997 s 307-125(2).
(5) Ibid.
(6) ITAA 1997 s 307-215.
(7) Although this statement is correct from a practical point of view, technically there is a bit more ‘science’ to this statement. Consider ITAA 1997 s 307-125 (3) in conjunction with ITAA 1997 s 307-215.
(8) ITAA 1997 s 302-140.
(9) ITAA 1997 s 302-145.
(10) For simplicity, I have made a number of simplifying assumptions in this case study. For example, I have ignored any possible tax within the SMSF on the 30% growth of Belinda’s super interest.

Please contact us on 1800 799 666 if you have any queries or visit www.ntaacorporate.com.au.

Yours sincerely

Brent Jones
General Manager

C/- InterPrac Limited
NTAA Corporate
Level 3, 29-33 Palmerston Crescent
South Melbourne, VIC 3205
Phone: 03 9209 9799, OR Free Phone: 1800 799 666
Fax: 1300 361 816
(NB: this fax number will safely direct your order straight to NTAA Corporate's email - the best option)
Email: ntaacorporate@interprac.com.au 
Web: www.ntaacorporate.com.au

NTAA Corporate is a service provided by InterPrac Ltd
InterPrac also offers the following services

• Leasing & Finance

• Mortgage Lending

• Financial Planning