Tara (00:50):
Thank you so much for tuning back into the podcast. It's Tara Lucke, your host, and today I want to talk to you about superannuation proceeds trusts at super proceeds trusts or SPT as we often abbreviate them to.
(01:09):
And I promised back in episode 57 when we were looking at what do you need in your testamentary trust precedent, I mentioned you need a superannuation proceeds trust in the precedent. And in that episode I promised to actually commit an entire episode to explaining what is a super proceeds trust and this is it. So buckle on in. We're going to find out exactly what a super proceeds trust is when you need to use one. And what are the benefits of using one? So in Australia it's commonly said that there are no death taxes except for the superannuation death tax. So unlike our overseas counterparts where there's often a tax on the inheritance, we don't really have that here, but when a member of a superfund dies, there could be tax on getting their superannuation death benefits to certain people. Now full disclosure, I'm actually looking at some of the flyers from our binding death benefit nomination precedent pack to refer to today because they have got so much fabulous concise information about how superannuation death benefits work and how they're taxed and also what is the superannuation proceeds trust.
(02:37):
So I'm looking at that right now and you probably are familiar that whether tax is payable on a superannuation death benefit depends on whether the superannuation balance represents a concessional contribution or a non-concessional or a taxable untaxed component. And also whether the recipient is a death benefit dependent for tax purposes or not a death benefit dependent for tax purposes. And then it can also be further complicated as to whether your death benefit is being paid as an income stream or a lump sum. Okay, it's confusing. It does actually grinds my gears so much that a compulsory superannuation system is so complex for everyday Australians who have no hope of getting their head around all of this. So that's obviously why we rely heavily on financial advisors. But yet if you're feeling like your head is spinning, that's completely normal because this is really complex. Now in our BDBN precedent pack, I actually have a 90 minute training where I go through it all.
(04:02):
So I'm not going to do that in this short podcast episode. But just as a really concise recap, if your super is being paid to someone who is a tax dependent or a death benefit dependent for tax purposes, then they will receive the super tax free. But if it's going to somebody who is a non-dependent, then if it's a concessional contribution or the part of the member balance that represents the concessional contributions that were contributed into the fund, then it will be taxed at either 15% or 17% depending on whether the recipient receives it through the estate or directly from the super fund. And if the component of the superannuation death benefit balance represents a non-concessional contribution, then even if it's going to a person who is not a dependent for tax purposes, then it will be tax free. And then lastly, if it's a taxable untaxed component and the member balance is passing to a tax non-dependent, it will be taxed at either 30% or 32%.
(05:23):
So in case you need a refresher, a concessional contribution is money that is contributed into the fund. So it hasn't paid tax on it yet and you actually get a deduction or you claim a deduction as the member when you're contributing it into your fund. So that's why there's that 15 or 17% tax payable because tax wasn't captured when it was going into the super fund for the non-concessional, those are tax free even if they're paid to a non-dependent because you're using after tax money. So you are paying tax at your marginal rate on that money, it's then think about it going into your savings account and then you're deciding to put that money that you've already paid tax on into the super fund. So they are recognising that to charge tax on that would be double taxation. So in terms of who is a dependent and a non-dependent for tax purposes when it comes to receiving superannuation briefly, a person who is a tax dependent is a spouse, a child under 18, a dependent child who is under 25 and financially dependent any other person who is in an interdependent relationship with the member or financially dependent on them.
(07:03):
And I should say when we're talking about spouses, it also includes former spouses. Now anyone else is a non-tax dependent for super purposes and the most glaring example is adult children over 25. That's probably where it's coming up in practise as being the most problematic from a tax purpose is our adult children over 25. So if you've got an adult child under or 18 at 18 or a teenage child under 18, that's clear cut. They are financially dependent. If they're between 18 and 25 but they are like at uni and still living at home, then you should be able to claim that they are still a tax dependent because they're financially dependent on the member. Other examples of people who are not financial dependents, I mean it's sort of like you work out who is a dependent and then everyone else is a non-dependent. But in terms of what comes up in our practise, common examples might be siblings, parents, grandparents, great grandchildren or grandchildren.
(08:19):
They're all going to be non-dependent. I also just want to clarify because you might be going, hold on, I didn't think siblings could get the super. So that is true in the sense that they can't be nominated to receive the super directly in a binding death benefit nomination and frustratingly, we actually have two parallel and different definitions about who is a death dependent that we have to work with. So number one is who is a death benefit dependent? The CIS legislation and those death benefit dependent under the CIS legislation are the people who are entitled to be nominated in the binding death benefit nomination or to receive a payment from the fund at the election of the trustee directly from the fund. So siblings is a perfect example. They are not death benefit dependents under the CIS legislation, so they can't be named in the BDBN, but you can still get the superannuation to them by nominating the legal personal representative and then gifting the super in the will so that the legal personal representative when they receive the super from the fund then have to pay it to the siblings pursuant to the will.
(09:45):
So for tax purposes, we also have our death benefit dependent definition and that's under the income tax legislation and it is broader. So another example is how spouses are treated under the two definitions. So the starting point is to think, well who's even eligible to receive the superannuation? I'm going to refer to the death benefit dependent definition under the CIS legislation. And then when I think about what the tax treatment of that will be, I'm going to overlay the death benefit dependent definition under the tax legislation. Whoa, okay. It's tricky but hopefully that makes sense. So this feels like a bit of a tangent perhaps, but the reason I'm explaining it is the reason we have a superannuation proceeds trust is all driven by the tax treatment of super. So a super proceeds trust is basically a tax mechanism to make sure we're not paying any unnecessary tax on the super death benefit.
(11:00):
So you don't actually need one, but your clients will be penalised if they're using a testamentary trust and not using the superannuation proceeds trust. So a superannuation proceeds trust is only necessary for the testamentary trust will. So you don't need it for a basic or simple will. So that's first thing to get clear and the reason why we need it for a testamentary trust, if you remember back to when we talked about what is a trust. So episode 59 we talked about the fact that discretionary trusts and discretionary testamentary trusts will have a really broad range of beneficiaries. So they'll normally have a spouse or children as the primary beneficiaries and then we'll have broad secondary and tertiary beneficiary classes which include nieces, nephews, aunts, uncles, cousins, grandparents, companies that they're all connected with including the primary beneficiaries trusts that any of those beneficiaries are included in charities.
(12:11):
So obviously when we refer back to our death benefit dependent for tax purpose, we've only got a very narrow range of those people from the beneficiaries who actually satisfy the death definition of death benefit dependents for tax purposes. So spouse, former spouse, child under 18, dependent child under 25, and anyone who is financially dependent or in an interdependent relationship with the member. So what happens if the BDBN says the super death benefit is going paid to the legal personal representative for distribution under the will and then the will distributes the superannuation death benefits into the testamentary trust? The A TO looks at this and goes, alright, well I get the vibe that you want this testamentary trust to benefit like the immediate family, but the people who could potentially receive a benefit from this trust is enormous and it includes a combination or a mix of people who can receive the super tax-free and people who would have to pay tax on the super.
(13:25):
So I don't know who the trustee is going to decide will benefit from the superannuation. It's entirely at the trustee's discretion and the tax office does not know how the trustee is going to exercise their discretion so they tax the super death benefit as if it is being paid to people who are non-tax death benefit dependent. So you're up for your 15 or 17 and 30 or 32% tax on the concessional contribution amounts. So the superannuation death benefits is a way to avoid paying that tax. Now I should say most people's member balance does actually comprise you'll find of the concessional contributions. So those pre-tax contributions that either their employer has made or they've made, but it is worthwhile finding this out. I'll talk about it in a moment, but a lot of the time we are looking at the concessional contributions comprising a large part of the balance.
(14:35):
So usually there would be a tax bill payable. So the super proceeds trust is a mechanism where we can prove to the A TO that the only people who could possibly ever benefit from super death benefits when it comes into the trust are people who satisfy the death benefit dependent definition in the tax act. And therefore the A TO will say, okay, well there's no one who's not a death benefit dependent who could possibly benefit. So we'll give you the same tax treatment on those super death benefits as if those death benefit dependents had received the super directly from the super fund. We will tax it as if it had gone wholly to tax dependents and therefore it will be tax free. So to achieve that, what you actually have to do is have a special purpose testamentary trust in addition to your main or normal testamentary trust where the beneficiary classes are limited to only people who are death benefit dependents for tax purposes.
(15:53):
So only the people who could have received the super tax free. So it's a smaller range of beneficiaries. We're excluding anyone who is not a death benefit dependent tax beneficiary. Now there's some nuance to this. You can set it up as an additional trust or you can set it up as a sub fund of the main testamentary trust. Now in our online course testamentary trust, the Essential Guide for Australian lawyers, we have an extensive module on superannuation proceeds trust. And in that course I talk about the pros and cons of setting up the separate fund and also the SubT trusts method. And I also talk you through, show you on the screen clauses which set up both options so that you as the practitioner when you're reading a will can recognise which strategy is being adopted firstly so you can even identify if the will does include a super proceeds trust.
(16:57):
And then secondly so you can understand whether it is a sub fund or a trust in its own right and then the differences in terms of tax file numbers and bank accounts and risks and pros and cons. So I'm not going to go into that here, but that is in our course testamentary trust, the essential guide for Australian lawyers. If you want to find out more now you might have your brain spinning a million miles an hour and going, okay, so just let me think. Spouses and minor children are death benefit dependent. Adult children are not death benefit dependents unless they're financially dependent. So when do we need the super proceeds trust all the time. And the answer is no. The super proceeds trust really shines and comes into its own when we are talking about an estate plan for a spouse with minor children.
(17:54):
So when there's a young couple with minor children, one of the members dies and they are leaving a spouse with minor kids because then the main people, our main primary beneficiaries of our normal testamentary trust will also be death benefit dependence for tax purposes and the beneficiaries of the super proceeds trust. So the people who we want to get the money will be able to get the money through a super proceeds trust and by setting up the super proceeds trust they can receive it tax free even though we're using a testamentary trust because the only people who can benefit from the super proceeds trust are people who can receive the super tax free had they received it directly from the fund. So it's really a strategy that we use where you've got a young couple with minor kids and you're using a testamentary trust in the will.
(18:50):
So remember it's irrelevant when there is a basic will because there's no discretion. We know who's receiving the super. It's really the discretionary component of a testamentary trust that causes the drive for the super proceeds trust. Now usually what happens is you've just got a super proceeds trust which receives the superannuation and any life insurance within the super fund, the spouse might be the trustee and they administer that super proceeds trust as a discretionary trust for themselves and the children just how they would with the main or usual testamentary trust. But we don't have those broader classes of beneficiaries and then you might have any other assets going into the main testamentary trust. So usually what we would probably say because there is a narrower range of beneficiaries, for instance the children of the test data children and yes, so the test data's grandchildren are not beneficiaries of that.
(19:53):
So it's not going to have that big intergenerational wealth impact necessarily, but it is going to be incredible for the surviving spouse and their children because of the tax-free income. So you still get all the tax-free income, whereas if you'd used a basic will, those super and life insurance amounts would've had to go directly to the surviving spouse and then be taxed in their personal tax return with no tax amounts. The 22,000 per minor beneficiary, none of that would've been available without the testamentary trust and super proceeds trust if you just use the basic will. So it is really useful for that, but we don't necessarily have that long-term additional beneficiaries. By the way, if you want to go back and refresh on the tax-free income for minors episode 45 is where we dive into that in detail in terms of the longevity of the super proceeds trust, there are some commentators out there who talk about varying the super proceeds trust deed down the track or in the future to expand the beneficiary classes beyond people who are simply death benefit dependents for tax purposes.
(21:13):
And that has particularly gained some traction after the Clark decision where we don't really have trust resettlement problems anymore from a CGT perspective in terms of that strategy, I'm not really going to comment on that. We talk about it a fair bit in our TT Precedents club, but I will say it is a singular point in time test when the ATO assesses the tax payable on the super proceeds trust. So in theory, once the super proceeds are distributed from the estate to the super proceeds trust, that's the taxing event to look at who the beneficiaries are. So if in 20 years time grandchildren and future lineal descendants are added into that testamentary trust, you do wonder what is the risk from a tax perspective and an anti-avoidance perspective. That said, usually what we would suggest is where you've got assets in a bulk testamentary trust or when I say bulk testamentary trust, I'm just, that's my lazy shorthand to sort of say our full range of beneficiary testamentary trust where you've got assets in there and assets in the super proceeds trust, I'd probably advise the surviving spouse to, if you're going to spend any of the inheritance, spend it from the super proceeds trust first and use up the assets in that trust if you're going to.
(22:44):
And then so eventually, once those children are having children of their own and want to stream out to their children, maybe there's nothing left in that trust and we've really preserved up the main full range of beneficiary testamentary trust when the super proceeds trust ends. It's also really important from a drafting perspective that you direct where the capital goes. So in the art of estate planning precedents, we've spent a lot of time drafting them, manipulating, massaging, working on that default clause so that any balance remaining on the vesting date of the super proceeds trust goes back to the main full range beneficiary testamentary trust. So there's a bit to think about there, but way more than we can cover in a podcast episode. So if you want to find out more about it, I definitely recommend looking at the course testamentary trust, the essential guide for Australian.
(23:46):
Now what about our older clients where there's a surviving spouse but all the children are adults? Do you need a super proceeds trust then generally I would say no. You are better at looking at a reversionary pension strategy or maybe just the super and life insurance in the fund going straight to the surviving spouse, but there's a couple of factors I'll just mention. So if you do really want a testamentary trust for the surviving spouse, so that reminds me in episode 61 we discussed when should the testamentary trust start. And in that episode I spoke a lot about delaying the testamentary trust until both of our baby boomer clients have died. So the testamentary trusts are only really benefiting the adult children. So again, if that's the strategy you're going to go with, you don't need a super proceeds trust because we've only got one death benefit dependent for tax purpose.
(24:51):
That's the surviving spouse. Our adult children will not be death benefit dependent for tax purposes and if they are receiving the super and life insurance, they just have to pay the tax. But that's fine. They were going to pay the tax whether they received a super directly from the fund or in the testamentary trust. So I just want to clarify the super proceeds trust doesn't make death benefits that were taxable, not taxable. It doesn't do that. It doesn't change the tax nature or consequence of a death benefit payment or death proceeds from a super fund. What it does is preserves the tax-free treatment on death benefits and make sure that the testamentary trust does not jeopardise or convert death proceeds that were non-taxable into taxable. So we're just trying to make sure we're not at disadvantage from using a testamentary trust from a tax purpose where part of those funds are super proceeds and life insurance proceeds.
(25:59):
So back to our baby boomer generation clients with adult children, those adult children are paying tax on the taxable super balance regardless of whether they receive it straight from the super fund or through the testamentary trust. Now where you've got a surviving spouse who we really do want to set up a trust for, so perhaps the estate is large enough and justified to justify a testamentary trust or they've got a high risk profile or were really worried about a repartnering risk or something like that. If you are going to put the super into a trust and you don't want the spouse to have to pay tax unnecessarily on the super proceeds, you can use a super proceeds trust, but this is what it's going to look like. You are going to only have one beneficiary of that trust and to make sure that you actually do have a trust.
(27:00):
Remember the key feature of a trust is that we separate control from the right to benefit. So we're separating the legal and the equitable interests. You need to have two trustees or a trustee of the trust who is not the surviving spouse. You cannot have the surviving spouse as the only beneficiary and the surviving spouse as the sole trustee because we don't have a separation of legal and equitable titles. So you've either got to have the surviving spouse and another person or someone else like a totally independent and then you've only got one beneficiary of your trust. So they are absolutely entitled, which means you can't stream any, all the income generated has to come to them, you can't stream, you've got no one to stream to from an income tax perspective and from an asset protection point of view, you've got one absolutely entitled beneficiary.
(27:56):
So that inheritance is going to be their property. So we are really not achieving anything by a super proceeds trust. If the only thing you want to do is put brakes on and bumpers around the expenditure of the super, then perhaps the super proceeds trust might work then. But then even then you've got an absolutely entitled spouse. So if they're really keen, they could apply for Saunders and Vort tier application, invest the trust. So generally speaking it is very, very limited use case on when you would use a super proceeds trust for a family who has a surviving spouse and adult children, you're probably going to be much better off looking at a reversionary pension instead. Now what happens if you do want the surviving spouse to have the inheritance of super and life insurance in a testamentary trust? Well, if we go back to our first principles, remember the reason you might consider a super proceeds trust is because we don't want tax to be payable on the member balance.
(29:13):
And remember, a spouse is a tax dependent for tax purposes, so they will always receive it tax free. But if it goes into a testamentary trust that includes people who are tax and non-tax dependents, then the tax will be payable as if it had gone solely to non-dependent. But if it's a non-concessional contribution, if the super proceeds represent non-concessional contributions, it is tax free even if it goes to a tax. So one strategy you could consider with a financial advisor is what is called the withdrawal and re-contribution strategy. So if the entire super balance represents nonconcessional contributions that can be received by anybody tax free, then you can put that death benefit payment into the normal testamentary trust because it's tax free no matter what. It's not loaded with tax. But so the withdrawal and contribution strategy, it's basically where you withdraw the part of the member balance that represents concessional contributions and then re-contribute that into a super fund so it becomes a non-concessional contribution.
(30:32):
So you're basically cleaning out or converting the member balance from concessional contributions that are taxed to contributing them to non-concessional contributions. Now this only works for people who are between 60 and 75 years old and you can only do it for certain sums based on the contribution caps. So it's complex. The audience of this podcast is mostly lawyers, so do not do this on your own. If you're a lawyer, you have to get a financial advisor to do it. They have to give the advice, they have to follow all the caps and it's wrought with messing it up if you don't know what you're doing. I think it's actually like financial advice. So we are not insured, so you refer this on to a financial advisor, but if you are looking at the estate planning strategy of this and just wondering, oh, we do want the super for the surviving spouse in testamentary trust, the questions I'd be asking one, find out what mix of taxable taxed and tax-free components are in the fund.
(31:40):
And then secondly, if they're sort of between that 60 to 75 year age, maybe talk to them about working with a financial advisor to try to build up the tax-free component of the fund. And sometimes I think you might even have separate funds where because you have to be careful about streaming and you can't really stream out the non-concessional contribution component or tax-free component into the testamentary trust and then the taxable tax component, not in the testamentary trust if it's one big death benefit dependent, it's sort of like a proportionate approach adopted. So you might even need two separate funds. One housing the tax-free component member balance, and one housing the taxable tax and different strategies like a reversionary pension for the fund that has the taxable tax component and then the BDBN to the estate, which gives it to the testamentary trust for the tax-free component for example.
(32:42):
Now this is not financial advice, this is not even legal advice, it's just educational information. And this is just to demonstrate why a financial advisor can bring a lot of value long-term to the tax management strategy when it comes to super. So the main sort of message is where you've got a spouse with minor children using a testamentary trust in their will. The super proceeds trust shines. That's the best not most optimal use case for the super proceeds trust to just make sure that because those spouse and minor children can receive the super tax free, had they received it directly from the fund, that they will still receive it tax free even though we're putting it through testamentary trust structures, especially for that generation as well. Their super and life insurance and super might actually represent the largest part of their estate. So we really don't want the estate paying any unnecessary tax.
(33:42):
I really hope I've cleared that up and not left it clear as mud. If you do want to dive into it further, our resources for you, firstly our BDBN precedent pack, our online course testamentary Trust, the Essential Guide for Australian Lawyers, and we also have our TT precedents club. So you can bring your specific scenario to me every Thursday we will do a live Zoom and I will talk it through with you the pros and the cons and we'll be able to nut it out together. So thank you for listening. I really hope that's helped and I will see you next week.
