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This paper presents some common misconceptions around superannuation as well as giving examples of the problems that can arise without proper advice and planning.
The definition of "dependent" for the purposes of your superannuation is different under the relevant superannuation and tax legislation.
Superannuation can be paid directly to your "dependents". In this regard generally your dependents include:
a) your spouse, whether married or de facto and can include a same sex partner,
b) your children, step children and adopted children,
c) a financial dependent or someone in an interdependency relationship with you at the date of your death, and
d) to your estate.
In respect to the tax provisions "dependent" for the purposes of a tax free entitlement on the payment of your superannuation funds has a different meaning.
A "dependent' who will receive your payments free of any tax will be:
e) your spouse, whether married or de facto and can include a same sex partner,
f) your children, step children and adopted children who are under the age of 18 years or are financially dependent upon you at the date of death,
g) a financial dependent or someone in an interdependency relationship with you at the date of your death, and
h) those beneficiaries of your estate who fall within the above categories.
The tax provisions are complex but put simply the tax rates payable if the funds are paid to someone outside this list is 16% on the contributions amounts made by the member and 30% on any life policy component.
A member of a fund would be required to make a nomination to the trustees at the time the superannuation is commenced. Most members do not understand the effect of the nomination. The general belief is that you can nominate anyone to be entitled to take your super entitlement and the Trustees of the fund are bound to follow the nomination. This is not the case.
There are two types of nominations that can be made.
1. General Nomination
Many members nominate a person they wish to be the beneficiary of the funds on their death. This is normally arranged at the time the member joins the fund. That nomination is simply a guide to the Superannuation Trustees and will not bind the Trustees in their decision. Only people that qualify as "Dependents" can be nominated.
2. Binding Nomination
With most Funds, there is provision to make a binding nomination that binds the Trustees to follow the nomination. Only those people who are "dependants" or can be nominated. If a person does not have any dependents then the funds will have to be paid to the estate. Great care needs to be taken when making a binding nomination as you need to make sure it is valid and should be updated regularly.
These issues are common misunderstanding that involved superannuation. Superannuation will be the biggest asset most people will have at retirement. It is therefore important that people are properly advised about the issues and controls of their funds when they consider their estate planning. I have given some examples below to show common problems and their solutions when dealing with superannuation.
Bob has three children who are all adults. One is working and financially independent of Bob. His youngest two children are still at university and living with Bob. Bob has super of about $300,000 together with a life policy within the super of about $100,000.00. Bob has a home and other assets in excess of $800,000.00. Bob wants everything to go equally to his children on his death. If the super is paid on Bob's death equally to the three children then one working child will have his payments taxed at 16% on the contributions made by Bob and 30% on the life policy component. The children who are students would receive their share tax free. This would not result in an equal distribution of Bob's super and his assets.
Bob should do a binding nomination on his super trustees directing them to pay the whole of the funds to his estate. In his will Bob directs that all the super funds go to the child or children that are a "dependent for the purposes of the relevant tax legislation at the date of his death". The remaining assets in his estate are then paid equally to his children with the provision that any child who receives any superannuation will have their entitlement reduced by the amount received from the super to ensure that they all receive an equal amount.
These provisions ensure that the funds from the super are paid without any tax liability and with all the children receiving an equal share. The provisions in the will are drawn so that if at the date of death one of the student children gains work and is not financially dependent on Bob then the funds will all go to the dependent child tax free. The balance of the estate would then be used to even up the shares to the other two children. The result is that if any of the children are entitle to receive the super tax free then it is paid to them and the other assets are distributed to ensure that all receive an equal share.
John on the first day of work completes his superannuation paperwork with his employer. John is single. On his nomination form for his super he puts down his nieces and nephews as the beneficiaries. Over the years John's super contributions increase and the fund also has an automatic life policy contribution of $50,000. John does a will and leave his estate (his car and personal items) to his parents but is happy for the super to go to the nieces and nephews. His parents are on part pensions and have said that they would loose their pension if they received the super. John dies in a car accident.
On John's death the Trustees of the fund cannot pay the proceeds to John's nephews and nieces as they are not "dependents". The whole of the funds are paid to his estate and distributed in accordance to this will. The funds therefore go to John's parents and they loose their pensions. The parents want to give the funds to the nephews and nieces but the gift would be treated in accordance with the deeming provisions in respect to their pension.
John needs to do a nomination to the trustees of his super fund to pay the whole of his funds to his estate. In his will he provides that all the super funds go to his nephews and nieces. The balance of his estate then is left to his parents. The nieces and nephews receive the funds on his death and the parents do not loose their pension.
John and Mary are married. They both have been married previously and each has two adult children by their first marriages. They both have super with about $100,000 in each fund and each has life policies in their super of about $50,000. John owns the home they live in and Mary has retained her home which she rents out. They do not have any other assets of any value.
John and Mary want to leave the super to their children and then the homes to the survivor but when both John and Mary dies then the homes go equally between all the children.
John and Mary nominate their children to receive their super funds and make a will leaving the residue of their estate to each other then to all the children equally.
The super going to the children will be taxed as indicated above. How do they avoid paying the tax but make sure that on the death of either party their children do receive a payment.
They need to do binding nominations on their super to leave the super to each other. The super payment going to the survivor will be tax free. They each do a will that provides that an amount equal to the super payment is to be made from the estate to the children. The homes are then left to the survivor but on condition that the payment to the children is made. The result is that as the survivor will be paid the super funds tax free then they will have sufficient funds to pay into the estate so the children are paid and they will then receive the home.
John is married a second time to Mary. John has a child by his first marriage. On his divorce his former wife received a large payment from John. John is satisfied that his first child will be looked after by his former wife if something happens to him. John has a child to his second wife. He has substantial super with a life policy. He has a house with a mortgage and does not have many other assets. Mary does not work and he leaves a will leaving everything to Mary and his second child. He does a general nomination to pay the whole of his super to Mary. John is worried that his first child will make a claim on the super and his estate.
A general nomination is not binding on the trustees of the fund. On John's death the trustees of the fund will invite the former wife and child to consider apply for the funds. The trustees of the fund have a general discretion to pay all or part of the funds to any person who falls within the definition of "dependent". It is common for trustees in these circumstances to pay part of the funds to the child of the first marriage. As a result of the rights of appeal to such a decision the payment of the funds could be delayed for up to twelve months. As John owns his house this will form part of his estate and be subject to a claim by the first child. Although she may not be successful with the claim it again is likely to delay the transfer of the house and cost the estate considerable expense. Mary is left living in a house that cannot be transferred to her and with a mortgage she cannot pay due to the delays. Even if all or part of the super funds are finally paid to her the delay will cause her considerable financial stress.
John does a binding nomination to pay the whole of the super funds to Mary. The trustees of the funds do not have a discretion in these circumstances and must pay the funds to Mary. There is no right to appeal by the child of the first marriage. The funds are paid without any delay to Mary.
John transfers the home into the joint names of himself and Mary. On John's death because this is a joint property it will transfer to Mary without going through John's estate. The child by the first marriage cannot claim against any joint property. The estate will not have any assets so that no claim can be made.
Mary receives the home and the super funds without any delay and without anyone having a right to claim against these assets.
This paper is a general description of the common problems that can arise in respect to the payment of superannuation funds. It is not intended as legal advice. If you have any queries or issues that you wish to discuss then please contact:
Wills and Estate Specialist
38 Lydiard Street South
BJT Legal are proud to support the Fiona Elsey Cancer Research Institute in the 2019 Ballarat Cycle Classic.