Will the Tax Office seize half of your SMSF when you die?
What will happen to your superannuation fund if you die, or lose the capacity to make decisions for yourself because of age, sickness or accident?
Most people believe that their “legal personal representative” – that is, the executor of their estate – will run the fund for them, but this assumption could result in the fund being considered non-compliant by the Australian Taxation Office.
The problem lies in the definition of a self-managed superannuation fund (SMSF): all members must be trustees and all trustees must be members. Your legal personal representative will usually not be either a member or a trustee – so your superannuation fund will fail the definition and could be non-compliant.
The superannuation legislation allows a six-month grace period after the death or loss of mental capacity of a member/trustee – that is, the fund does not stop being an SMSF for six months. However, that may not be sufficient time get legal arrangements in place to look after the fund, or to go through the court system to have a legal personal representative appointed if you are rendered mentally incapable.
The penalty for being a non-compliant fund is severe: a potential tax of 46.5% of the fund’s assets.
When you review your fund as part of your estate planning, there are a few simple precautions that you could put in place to ensure that your fund can continue to operate and – if necessary – be wound up in an orderly fashion with as little tax impact as possible.
The first thing is that all members and trustees should have enduring powers of attorney in place, which come into effect after any member’s loss of capacity. Although it may seem sensible to appoint your spouse as your power of attorney, this does not work if both of you are injured or killed at the same time. You should consider who else you would like to have act on your behalf and make sure that you have given clear instructions to this person about how the fund is to be run. It is important that you provide a copy of these documents to the fund administrator and the fund auditor, as well as to your lawyer.
If the trustee is a company – particularly if you are the only member of the fund – you should issue an “appointor” share to someone you trust. An appointor share entitles the shareholder to appoint someone to carry out the functions of director if a director of the company has lost capacity. Have a good look at the constitution of your trustee company and see whether you can issue such a share – if not, change the constitution. The person who set the company up for you should be able to assist.
Careful planning and coordinating a few simple pieces of documentation now can save a great deal of money and reduce stress at a later stage.
Please contact us for more information.