Another case involving a disagreement in a blended family following a death.
Binding Death Benefit Nominations for clients: a court again asked "When is near enough good enough?"
As always there are winners and there are losers. Would any reasonable observer conclude that the wishes of Mr Munro were realised? Probably not, which leads inevitably to the conclusion that the winners ought not to have won, nor the losers lost. But the law in this area does not operate that way.
Aside from reinforcing the need for advisers to be precise, and to consider the trust deed and the SIS provisions, this case also throws up a challenge for the lawmakers: Has the time come for a move to some form of "substantial compliance" regime in the superannuation death benefit area?
Monday, March 30, 2015
Monday, May 19, 2014
Can a Legal Personal Representative seek payment of a death benefit as a dependant?
The case of McIntosh v McIntosh [2014] QSC 99 dealt with a question that has and will continue to be raised in the context of the payment of superannuation death benefits: can a person who is a potential beneficiary in their own right apply for the benefit and still discharge their fiduciary duties where they are also a legal personal representative of the deceased member?
The son died intestate. He was survived by his parents, who were equally entitled to his estate under the intestacy rules. The parents divorced in 1979, and continue to maintain an acrimonious relationship up to the present day.
Letters of administration were applied for and granted solely to the mother on the basis of the acrimonious relationship between the parents. In other circumstances the parents would have expected to have received a joint grant.
The mother made application to each of the superannuation funds for payment of the death benefit. Initially, at least, the mother appears to have held the view that the superannuation entitlement did not form part of the estate. Her applications were in her personal capacity on the basis that she was either dependent on her son, or in an interdependency relationship with him at the date of death. Although not clear, there is no direct suggestion that it was not open to the fund trustees to make a direct payment to the mother as either a dependant, or someone who was in an interdependency relationship with the son at the date of death. In each case she made it known to the fund that she had either applied for or been granted letters of administration, but in none of the cases did she make application for payment of the death benefit to herself as legal personal representative of the estate.
Once aware of the mother’s position, the father’s solicitors began to press the mother’s solicitors to advise what efforts had been made to ascertain the superannuation entitlements, and to also indicate whether steps had been taken to maximise the estate and to advise whether the mother intended to seek any payment of the death benefits to herself personally.
The mother’s solicitors responded by affirming their view that superannuation did not form part of the estate. They further went on to indicate that “[i]t is our understanding that there is no obligation upon our client as the personal representative to make an application to have the superannuation interests held by [the son] paid to the estate.” The father’s solicitor’s countered by saying “as personal representative, your client has a fiduciary obligation to maximise the return for the estate. Clearly your client is in breach of her obligation if she has actively sought payment to herself direct in lieu of the estate.”
Although the decision does not make specific comment on this issue, it would appear that given the exception in Mordecai v Mordecai did not apply, then it was not open for the mother having sought and accepted her appointment as administrator of the estate, to then apply in her personal capacity for payment of the superannuation benefit. Somewhat ironically, it would seem that the acrimony between the parents, and the clear intention of the mother to apply for the superannuation benefit directly should have meant that the more appropriate course would have been for the father to have sought letters of administration solely, for the father then to have applied to the funds for payment of the benefits to the estate, and for the mother to have separately applied for payment of the benefits to herself personally. It is conceivable if that course had been adopted, the superannuation funds may have decided to pay the benefits to the mother as a dependant or, more likely, as a person who was in an interdependency relationship with the deceased.
A husband and wife both prepare wills, nominating one another as executors of their respective estates, with each will establishing a testamentary discretionary trust on the death of the testator, in favour of the surviving spouse and the couples’ infant children (and there may be a wider class of potential beneficiaries of the testamentary discretionary trust). The spouses are members of public offer funds, and have not put in place binding death benefit nominations. If the assertions made by the father in the McIntosh case were correct, then the surviving spouse would need to take steps to have the entire death benefit paid to the estate. It may, however, be more appropriate and tax effective for the surviving spouse to press for payment of, and for the fund to pay that spouse, a death benefit directly, perhaps in the form of a pension. The testator made a testamentary choice to appoint their spouse as legal personal representative, and knew or ought to have known of the potential conflict for the surviving spouse, and has accepted the conflict. Consequently, the exception to the general rule applies, and it is open to the surviving spouse to seek a payment directly (albeit that it would be appropriate for the spouse to also apply for payment to the estate).
FACTS
The deceased son was a member of three public offer superannuation funds. The death benefits totalled just over $450,000. The estate assets otherwise were around $80,000.The son died intestate. He was survived by his parents, who were equally entitled to his estate under the intestacy rules. The parents divorced in 1979, and continue to maintain an acrimonious relationship up to the present day.
Letters of administration were applied for and granted solely to the mother on the basis of the acrimonious relationship between the parents. In other circumstances the parents would have expected to have received a joint grant.
The mother made application to each of the superannuation funds for payment of the death benefit. Initially, at least, the mother appears to have held the view that the superannuation entitlement did not form part of the estate. Her applications were in her personal capacity on the basis that she was either dependent on her son, or in an interdependency relationship with him at the date of death. Although not clear, there is no direct suggestion that it was not open to the fund trustees to make a direct payment to the mother as either a dependant, or someone who was in an interdependency relationship with the son at the date of death. In each case she made it known to the fund that she had either applied for or been granted letters of administration, but in none of the cases did she make application for payment of the death benefit to herself as legal personal representative of the estate.
Once aware of the mother’s position, the father’s solicitors began to press the mother’s solicitors to advise what efforts had been made to ascertain the superannuation entitlements, and to also indicate whether steps had been taken to maximise the estate and to advise whether the mother intended to seek any payment of the death benefits to herself personally.
The mother’s solicitors responded by affirming their view that superannuation did not form part of the estate. They further went on to indicate that “[i]t is our understanding that there is no obligation upon our client as the personal representative to make an application to have the superannuation interests held by [the son] paid to the estate.” The father’s solicitor’s countered by saying “as personal representative, your client has a fiduciary obligation to maximise the return for the estate. Clearly your client is in breach of her obligation if she has actively sought payment to herself direct in lieu of the estate.”
ISSUES
The Court considered what duties of an administrator were relevant to the case. The Court pointed out that the method of appointment of an administrator was important. It noted that the appointment of an executor involves a testator exercising testamentary choice. Accordingly, where a testator knows of a potential conflict – for example where the executor is also nominated as a beneficiary of the testator’s superannuation entitlement under a non-binding nomination – the testator is taken to accept that conflict. This is an exception to the general rule that “no one who has fiduciary duties is allowed to enter into engagements in which the fiduciary has or may have a personal interest conflicting with the interests of those whom the fiduciary is bound to protect.” The Court went on to quote the exception as described by Hope JA in Mordecai v Mordecai:That exception is where a testator or settlor, with knowledge of the facts, imposes on a trustee a duty which is inconsistent with a pre-existing interest or duty which he has in another capacity. In that situation the trustee is not thereby debarred from accepting the trust or from performing the duties which are imposed under it.The Court pointed out that in the present case the exception did not apply because the appointment of the administrator was by the Court. It went on to then set out the fiduciary duties the mother had as sole administrator of the estate. It concluded that:
In this case there was a clear conflict of duty and interest contrary to her fiduciary duties as administrator. When the applicant made application to each of the superannuation funds for the moneys to be paid to her personally rather than to the estate, she was preferring her own interest to her duty as legal personal representative to make an application for the funds to be paid to her as legal personal representative. She was in a situation of conflict which she resolved in favour of her own interests. As such she acted not only in breach of her fiduciary duty as administrator of the estate but also in breach of the duty which is given statutory expression s 52(1)(a) of the Succession Act 1981.The Court ordered that the mother account to the estate for the benefits she had personally received from the superannuation funds, with the upshot being that these benefits would then be shared equally between the parents as beneficiaries of the son’s intestate estate.
Although the decision does not make specific comment on this issue, it would appear that given the exception in Mordecai v Mordecai did not apply, then it was not open for the mother having sought and accepted her appointment as administrator of the estate, to then apply in her personal capacity for payment of the superannuation benefit. Somewhat ironically, it would seem that the acrimony between the parents, and the clear intention of the mother to apply for the superannuation benefit directly should have meant that the more appropriate course would have been for the father to have sought letters of administration solely, for the father then to have applied to the funds for payment of the benefits to the estate, and for the mother to have separately applied for payment of the benefits to herself personally. It is conceivable if that course had been adopted, the superannuation funds may have decided to pay the benefits to the mother as a dependant or, more likely, as a person who was in an interdependency relationship with the deceased.
IMPLICATIONS
Despite the decision, it would be wrong to assert that the father’s position here was fully vindicated. It must be remembered that the assertions made on behalf of the father were that the administrator (irrespective of their other interests) has a fiduciary obligation to maximise the value of the estate, with the implication being that a legal personal representative should do so irrespective of any other duties they may owe or other interests that they have which may conflict with their duties as legal personal representative. In other words, the suggestion seems to be that the duties owed as legal personal representative override all other duties and interests, and that the person must do all to ensure that the superannuation benefit is paid to the estate. Given the exception in Mordecai v Mordecai, that position is clearly not applicable in every case. Indeed, it becomes important when one considers a fairly common scenario which arises in this context.A husband and wife both prepare wills, nominating one another as executors of their respective estates, with each will establishing a testamentary discretionary trust on the death of the testator, in favour of the surviving spouse and the couples’ infant children (and there may be a wider class of potential beneficiaries of the testamentary discretionary trust). The spouses are members of public offer funds, and have not put in place binding death benefit nominations. If the assertions made by the father in the McIntosh case were correct, then the surviving spouse would need to take steps to have the entire death benefit paid to the estate. It may, however, be more appropriate and tax effective for the surviving spouse to press for payment of, and for the fund to pay that spouse, a death benefit directly, perhaps in the form of a pension. The testator made a testamentary choice to appoint their spouse as legal personal representative, and knew or ought to have known of the potential conflict for the surviving spouse, and has accepted the conflict. Consequently, the exception to the general rule applies, and it is open to the surviving spouse to seek a payment directly (albeit that it would be appropriate for the spouse to also apply for payment to the estate).
Monday, December 16, 2013
Removing the requirement to transfer asset to SMSF post-borrowing
The ATO has issued a draft legislative instrument that, if finalised, will remove the need to transfer an asset from a custodian trust to the SMSF once the limited recourse borrowing arrangements have concluded.
The ATO has held the view that the exception in section 71(8) SIS which exempts the investment by an SMSF in a related trust which holds the asset under an LRBA arrangement from being an in-house asset does not apply once the borrowing is paid down. This has meant that the asset must be transferred from the custodian trust to the SMSF at the conclusion of the borrowing.
The ATO has identified problems generally with these arrangements. For example, section 71(8) strictly doesn't apply initially when the trust is created if the asset which is the subject of the borrowing is not yet in the trust, or where the asset is in the trust but the borrowing hasn't been drawn down. Also, at the end of the borrowing, even if the trustee intends to transfer the asset to the SMSF, there will be a gap between the date when the borrowing is paid down, and the date when the asset is transferred out of the custodian trust. In each of these instances section 71(8) doesn't save the custodian trust from being treated as an in-house asset.
The draft legislative instrument will cure these problems. It will provide that the investment in the custodian trust is not an in house asset during the initial set up period provided it is reasonable to expect that the arrangement will satisfy the section 71(8) requirements. Moreover, the legislative instrument will remove completely the need to move the asset out of the custodian trust at the conclusion of the borrowing.
Interestingly the legislative instrument is intended to be back-dated to 24 September 2007 - when the original LRBA provisions came in.
The ATO has held the view that the exception in section 71(8) SIS which exempts the investment by an SMSF in a related trust which holds the asset under an LRBA arrangement from being an in-house asset does not apply once the borrowing is paid down. This has meant that the asset must be transferred from the custodian trust to the SMSF at the conclusion of the borrowing.
The ATO has identified problems generally with these arrangements. For example, section 71(8) strictly doesn't apply initially when the trust is created if the asset which is the subject of the borrowing is not yet in the trust, or where the asset is in the trust but the borrowing hasn't been drawn down. Also, at the end of the borrowing, even if the trustee intends to transfer the asset to the SMSF, there will be a gap between the date when the borrowing is paid down, and the date when the asset is transferred out of the custodian trust. In each of these instances section 71(8) doesn't save the custodian trust from being treated as an in-house asset.
The draft legislative instrument will cure these problems. It will provide that the investment in the custodian trust is not an in house asset during the initial set up period provided it is reasonable to expect that the arrangement will satisfy the section 71(8) requirements. Moreover, the legislative instrument will remove completely the need to move the asset out of the custodian trust at the conclusion of the borrowing.
Interestingly the legislative instrument is intended to be back-dated to 24 September 2007 - when the original LRBA provisions came in.
Friday, November 29, 2013
Don’t be reserved about double dipping
A recent announcement by the ATO has provided further certainty around a superannuation strategy commonly used to address either a potential excess contributions tax problem, or to bring forward deductions for superannuation contributions.
The strategy can be illustrated by the following example:
The upshot is:
When adopting this strategy it is important to bear in mind the following:
The strategy can be illustrated by the following example:
- 42 year old Harry makes a personal contribution of $50,000 to his self managed superannuation fund (SMSF) in the last few days of June 2014. The trustee of the fund applies $25,000 to Harry’s member account immediately, and the remaining $25,000 to an unallocated contributions account. Then on 2 July 2014 the trustee allocates the second $25,000 to Harry’s member account.
- Harry is able to give notice of his intention to deduct the full amount of the contribution ($50,000) in the 2013/14 financial year. The full amount of the contribution will be included in the SMSF’s assessable income in that same financial year.
- A $25,000 contribution is included in Harry’s concessional contributions for the 2013/14 financial year, and a further $25,000 contribution is included in his concessional contributions for the 2014/15 financial year.
The upshot is:
- Harry has claimed a deduction for 2 years’ worth of concessional contributions in the same year.
- The SMSF has included 2 years’ worth of contributions in its assessable income.
- Harry has not breached his concessional contribution cap in the 2013/14 financial year and, provided no further concessional contributions are made and allocated to Harry in the 2014/15 financial year, he will not breach his concessional contribution cap for that year.
When adopting this strategy it is important to bear in mind the following:
- The ATO announcement only applies from 1 July 2013.
- The ATO announcement does not expressly confirm that the approach will not cause a breach of the member’s concessional contribution cap, but this is the only conclusion that can be drawn from this and previous ATO announcements, and from the application of the relevant legislation and regulations.
- The relevant rules require an allocation to be made by a fund within 28 days from the end of the month in which the contribution was made, so the ability to allocate to a subsequent financial year only applies in respect of the contributions made in June of the preceding financial year.
- The trust deed for the fund needs to allow for the application of an amount to an unallocated contributions account – in other words, a reserve. It is important to check the deed and to have documentation evidencing the application to the unallocated contributions account and subsequent allocation to the member account. Also, where a reserve is created, the fund needs to implement a reserving strategy.
- There is some doubt (not resolved by the ATO announcement) whether this strategy is available for a single member SMSF. The concern is whether, if the fund has only one member, is it ever possible to say that an amount is held on an unallocated basis, or in a reserve.
- The amount allocated to the subsequent financial year counts against the member’s concessional contribution cap for that year. This reduces the capacity to otherwise receive concessional contributions by or in respect of the member in that year within the cap, although contributions made in June of that year could be applied to an unallocated contributions account, and then allocated before 28 July of the next financial year.
Thursday, August 1, 2013
Freeze on Super Changes - how solid is it?
Minister Bowen yesterday announced a "Five Year Freeze On Superannuation Changes". Whilst the headline might suggest a wider freeze, a close examination of the wording of the announcement indicates there are limitations.
Firstly the announcement states the government will make no "major" changes, leaving the way open for not-so-major changes.
Secondly, and perhaps most notably, the announcement refers only to a freeze on superannuation tax policy. Changes to tax policy which have an impact on superannuation funds haven't been taken off the table, nor have changes to superannuation compliance policy for example.
Thirdly, the announcement says that the moratorium will be "enshrined" in legislation, which gives the sense that these changes will somehow be entrenched, but in reality there is unlikely to be any impediment against the legislation being amended to remove the freeze in the future.
Finally, although the announcement is welcomed on the basis that adverse changes to superannuation tax policy will not be made, it also shuts down the possibility of positive changes also being made. For instance, there is now no prospect of concessional caps being increased over the next five years, other than as a consequence of statutory indexation.
Firstly the announcement states the government will make no "major" changes, leaving the way open for not-so-major changes.
Secondly, and perhaps most notably, the announcement refers only to a freeze on superannuation tax policy. Changes to tax policy which have an impact on superannuation funds haven't been taken off the table, nor have changes to superannuation compliance policy for example.
Thirdly, the announcement says that the moratorium will be "enshrined" in legislation, which gives the sense that these changes will somehow be entrenched, but in reality there is unlikely to be any impediment against the legislation being amended to remove the freeze in the future.
Finally, although the announcement is welcomed on the basis that adverse changes to superannuation tax policy will not be made, it also shuts down the possibility of positive changes also being made. For instance, there is now no prospect of concessional caps being increased over the next five years, other than as a consequence of statutory indexation.
Thursday, November 1, 2012
Special circumstances - unfairness and injustice may be enough
Although the Commissioner is more often than not successful when challenged in the AAT on the question of whether special circumstances exist in relation to an Excess Contributions Tax assessment, an emerging line in the decisions go against the Commissioner and suggest that 'special circumstances' can be established by showing that injustice or unfairness will arise without the need to find that the circumstances are out of the ordinary.
In a previous post I mentioned the matter of Bornstein. Since that case, 2 further AAT decisions have favoured the taxpayer. In Longcake v Commissioner of Taxation the Tribunal found that special circumstances existed where an employer failed to follow a salary sacrifice agreement, and instead made contributions in a subsequent financial year, which gave rise to excess contributions in that year.
In Hamad v Commissioner of Taxation special circumstances were found to exist where an employer did not remit salary sacrifice contributions until after the end of the relevant quarter to which they related, despite the employer showing the reduced salary in payment advices during the quarter. The finding of special circumstances arose notwithstanding that there was no formal agreement between the taxpayer and the employer.
More importantly in that case, Senior Member Allen was critical of earlier Tribunal decisions saying that "the members comprising the Tribunal seem to have adopted an unduly narrow interpretation of what may constitute special circumstances. In particular, the suggestion in Tran and Commissioner of Taxation [2012] AATA 123 that circumstances will not be special unless they are out of the ordinary is, in my respectful opinion, misconceived." He went on to quote extensively from his earlier decision in Jones and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2012] AATA 77 which examined the line of decisions in this area. The quote concludes: "It is but another way of putting the proposition that injustice or unfairness by the strict application of the Act cannot of itself amount to a special circumstance ... That is a proposition which, as I have noted, has been rejected by a number of decision of the courts..."
This decision indicates that where a taxpayer can demonstrate that injustice and unfairness would otherwise result from the strict application of the provisions, it will be open to the Commissioner to find that special circumstances exist, and to allocate contributions to another financial year or to disregard them in order to address the injustice or unfairness.
These cases also show an increasing emphasis on the need to have regard to the object of Division 292 - to ensure that the amount of concessionally taxed superannuation benefits that a person receives results from superannuation contributions that have been made gradually over the course of the person's life.
In a previous post I mentioned the matter of Bornstein. Since that case, 2 further AAT decisions have favoured the taxpayer. In Longcake v Commissioner of Taxation the Tribunal found that special circumstances existed where an employer failed to follow a salary sacrifice agreement, and instead made contributions in a subsequent financial year, which gave rise to excess contributions in that year.
In Hamad v Commissioner of Taxation special circumstances were found to exist where an employer did not remit salary sacrifice contributions until after the end of the relevant quarter to which they related, despite the employer showing the reduced salary in payment advices during the quarter. The finding of special circumstances arose notwithstanding that there was no formal agreement between the taxpayer and the employer.
More importantly in that case, Senior Member Allen was critical of earlier Tribunal decisions saying that "the members comprising the Tribunal seem to have adopted an unduly narrow interpretation of what may constitute special circumstances. In particular, the suggestion in Tran and Commissioner of Taxation [2012] AATA 123 that circumstances will not be special unless they are out of the ordinary is, in my respectful opinion, misconceived." He went on to quote extensively from his earlier decision in Jones and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2012] AATA 77 which examined the line of decisions in this area. The quote concludes: "It is but another way of putting the proposition that injustice or unfairness by the strict application of the Act cannot of itself amount to a special circumstance ... That is a proposition which, as I have noted, has been rejected by a number of decision of the courts..."
This decision indicates that where a taxpayer can demonstrate that injustice and unfairness would otherwise result from the strict application of the provisions, it will be open to the Commissioner to find that special circumstances exist, and to allocate contributions to another financial year or to disregard them in order to address the injustice or unfairness.
These cases also show an increasing emphasis on the need to have regard to the object of Division 292 - to ensure that the amount of concessionally taxed superannuation benefits that a person receives results from superannuation contributions that have been made gradually over the course of the person's life.
Monday, October 22, 2012
Positive news on pension ruling
Although its title doesn't provide any hint, in a press release issued today the Minister for Financial Services and Superannuation announced that the law would be amended to allow the pension earnings tax exemption to continue following the death of a pension recipient until the member's benefits have been paid our of the fund.
This announcement might explain the long delay in the finalisation of TR 2011/D3 which has been out since July 2011.
We will need to wait to see how the ATO proceeds, although it seems the most likely approach will be for the draft ruling to be withdrawn, and a new draft ruling issued addressing matters that will not be affected by the proposed amendments to the law.
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