Taxation & Deceased Estates

When a person dies, generally the responsibility for administering the deceased estate falls to the legal personal representative. This person may be an executor or administrator who has been granted a court’s probate or letters of administration. It is important to note that while there are no inheritance or estate taxes in Australia, the legal personal representative is likely to have important tax and superannuation issues to attend to.

It is important to notify the ATO and the deceased person’s super fund of the death as early as possible. The ATO will determine whether a tax return is required for the deceased person and the super fund will commence a process for the release of any superannuation entitlement. A formal death certificate will be required to fulfil an official notification of death.

Accessing information from a deceased person can sometimes be tricky. You’ll need to have probate granted or a letter of administration. In the past, tax agents, BAS agents or legal practitioners engaged by a legal personal representative were unable to access this information directly. However, effective from 15 May 2020, the legislation has been modified to allow information from a deceased person to be provided to these agents directly, given the complications associated with the tax affairs of deceased estates. A deceased estate data package will also be provided by the ATO, which includes;

Individual tax return information for the last three income years.
An extract of income and investment data for the last three income years.
An extract of notices of assessment issued for the last three income years.
Copy of the most recent statement of account.
Any outstanding ATO debts.
Any superannuation accounts identified.
Payroll data received for the current year.

From here, an assessment is made as to whether an individual tax return or trust tax return is required for the deceased person and their estate. All outstanding tax implications involving employment income, investment earnings and superannuation distributions will be assessed and any tax payable or refunds are applied to the deceased’s assets.

As a beneficiary of a deceased estate, there may be some tax obligations depending on the following factors;

Receiving super benefits – if the deceased person had super, the super fund’s trustee will work out who to pay the benefit to and how it will be paid (lump sum or income stream). If a Binding Death Nomination is in Place, the superannuation trustee will follow those instructions. Whether tax is payable depends on whether the beneficiary is a dependant under taxation law, whether it is paid as a lump sum or income stream, the breakdown of the tax-free and taxable components of the fund, the ages of the beneficiaries and the age of the member when they died. For most funds, there will be some tax payable unless you are a spouse or financial dependant of the deceased.
Receiving investment assets – Capital Gains Tax (CGT) will apply to the disposal of an asset, however, if you receive an asset, you will not be affected by CGT. If you later sell that asset, CGT may apply.
Receiving/earning income – income is deemed assessable from the date of entitlement rather than the date of payment. Beneficiaries need to be conscious of reporting such income in the year of entitlement.

There is no one size fits all approach regarding deceased estates and it is usually a long-drawn process. It is highly recommended that you engage the accountant or financial adviser of the deceased and employ a legal practitioner to assist with the process.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

Government superannuation reforms

In what seems to be the ever changing world of superannuation, the Commonwealth Government has recently passed the following reforms:

Increasing the number of members for a Self Managed Superannuation Fund (SMSF) to six from 1 July 2021.

This is useful for a family business that wants the SMSF to own the commercial property out of which the business trades, thereby ‘keeping the wealth within the family’ rather than contributing rent into the wealth accumulation strategy of an external landlord.

Increasing the number of members in a SMSF will allow for the asset pool to increase thereby opening up investment options and strategies available to the fund in order to meet wealth accumulation objectives.

Extending bring forward rules for Non-Concessional Contributions (NCC) to those 65-66 years old from 1 July 2021.

From the 2020/21 financial year, people aged 65-66 were permitted to make a voluntary contribution into superannuation without having to satisfy the work test. This allows for a NCC to be made up to the now increased $110K maximum limit, per annum from 1 July 2021.

At the time of this introduction to allow those aged 65-66 to make a NCC, the ‘bring forward’ of two future years was not permitted, which of course was inconsistent with the spirit of superannuation. However, it was hotly anticipated that the restriction would eventually be removed, which it has now been. Two future years of NCCs can now be brought forward resulting in a maximum of $330K that can be voluntarily contributed into superannuation for those aged 65 and 66.

Extend pension drawdown relief by 50% over the 2021/22 financial year.

For the last two financial years, the minimum pension payment required to be taken by superannuants from their pension accounts was reduced by 50%.

This was a measure introduced to alleviate the pressure on pension accounts being drawn down unnecessarily, resulting in ‘forced’ asset sales to shore up available cash at a time when financial markets were depressed. In essence, the concept was aimed at increasing the ‘longevity’ of pension accounts.

This measure has been extended into the current 2021/22 financial year. This no doubt will be well received by those in pension mode that don’t require the otherwise ‘normal’ minimum withdrawal.

Superannuation guarantee increase to 10% on 1 July 2021.

This refers to the amount employers are required to ‘compulsory’ contribute into superannuation on behalf of an employee. Previously the rate was set at 9.5% of gross salary, it is now 10%.

Another change to be aware of is the increase in contribution caps for the two different types of contributions. As mentioned above, the ‘NCC’ cap has been increased to $110K per annum. Similarly, the ‘concessional’ or taxable contribution cap has been increased by 10% to $27,500 per annum.

There is further scope and incentive for those in accumulation mode to increase the amount that can be contributed into their retirement asset of superannuation. These are positive steps to alleviate gaps in the retirement system, which will make it fairer for everyone.

Time in market, or timing the market?

In hindsight, looking at a chart of a company’s share price, it would be perfectly easy to make money any day of the week, by buying at the bottom and selling at the top.

In practice, it is not easy at all.

It is often the opposite that occurs, with the result that buyers enter near the top of the market, and when the market falls, they decide they don’t want to lose any more money, and they sell out, often near the bottom of that dip. These times are often recognisable because everyone has a stock market tip for you in a topping market, and again at the bottom when all and sundry have decided that they can’t bear it anymore and will put their money in the bank. They have realised a loss, which is difficult to recover.

Our investment team constantly researches markets and companies, before recommending a purchase. We are looking for solid companies, with good management, good cash flow, a solid performance history, preferably a franked dividend, and something where we see some value so far as price is concerned. Fair value of a company sometimes equates to its current share price but may be much more or less than the current market price. We don’t buy if we consider a company over-priced, but we like the underpriced gems that sometimes show up.

At The Investment Collective, we like to utilize a ‘buy and hold’ strategy, populated by the companies where we see value. We may wait to purchase a stock if we think the market price is a bit high compared with what we see as its fair value, and we may also add to an out of favour stock, again, because we see value. We don’t try to find the bottom to buy, and we also don’t try to find the top at which to sell or reduce. Sometimes we are lucky and a trade is executed on one of these days, but our investment philosophy is to hold assets for the long term.

We don’t think that it’s possible to time the market such that our trades are executed exactly at one of the extremes of price, because the movement of the market in the future can’t be known until after the event. Our philosophy is to buy at close to fair value and to hold onto that company for as long as it continues to meet our investment criteria, time in the market. If it fails this test, then it’s out.

Our focus in choosing our investments is not based so much on the present, but on what the company can deliver to us as investors in the future. This means that it may take some time for a company to begin to deliver a very positive impact in a portfolio, again, time in the market.

Investing requires patience and some courage to remain invested if the current market isn’t so rosy. Time in the market – we don’t try to time it.

Temporary minimum pension drawdown relief

Government support comes in all shapes and sizes and the temporary minimum pension drawdown relief was one key measure designed to support retirees at the onset of COVID-19. Superannuation pensions and annuities are subject to rules that determine the minimum and maximum amounts to be paid in a financial year. The legislation allowed superannuation accounts that are currently in drawdown/pension mode to effectively halve their annual drawdown limits and preserve superannuation balances during the COVID-19 market sell-offs.

These rules were initially legislated for the 2019/20 and 2020/21 Financial Year’s (FY):

Referencing the above table, a retiree aged between 65-74 would normally need to draw a 5% minimum amount per annum from their pension accounts. The drawdown relief legislation allows this individual to draw only 2.5%. This preserves the superannuation balance and avoids the need to sell down investments during the height of the market sell-offs.

An example would be a retiree aged 65 with an $800,000 pension balance. Under normal circumstances, 5% must be drawn per annum, which is $40,000. However, with the drawdown relief in place, only 2.5% is required to meet the annual legislated drawdown requirements, which is $20,000.

Benefits of this temporary measure to retirees

Preservation of superannuation balance (tax-free nest egg).
Avoids crystallising losses (from the volatile COVID-19 sell-offs).
Flexibility on where to draw income (access taxable sources before superannuation).

On Saturday 29 May 2021, the government announced that a further extension to this measure is being considered for the 2021/22 FY.

The proposed minimum pension drawdown for 2021/22 FY:

Key takeaways from the May announcement

This proposal is not yet law and still needs to be tabled.
This measure is not compulsory. Individuals need to review their situation to assess whether the pension halving/reduction will benefit their unique circumstances.
The measure will apply to account-based, transition to retirement and term allocated superannuation pensions.

Please keep in mind that there are no guarantees that the temporary minimum pension drawdown relief will be extended into the 2021/22 FY. This is something that we are keeping a close eye on for the benefit of our clients.

If this is something you’d like to take advantage of, please reach out to your Financial Adviser.

Asset rich and cash flow poor

The cost of retirement in Australia continues to rise and I have noticed increased cost pressure on retirees everyday expenses.

I am often asked the question “how much do we need to save for retirement?” There is no simple answer to this question as everyone has different living standards and one could go without what you might consider essential.

According to the Association of Superannuation Funds of Australia, to live a comfortable retirement at age 65 a couple will need $640,000 saved or funds of $62,562 per year. For a couple aged around 85, the funds needed per year falls to $58,871.

Some older Australians who are homeowners that I have spoken to feel anxious about their retirement and being able to meet their income needs. Being asset rich and cash flow poor is not an unusual dilemma.

One option to consider is downsizing your family home.

Selling the family home may allow eligible individuals to make a downsizer contribution from the capital proceeds into their superannuation of up to $300,000. A couple can contribute up to $600,000.

A downsizer contribution is not treated as a non-concessional contribution and will not count towards an individual’s contribution caps.

Eligibility criteria

Homeowners aged 65 years or over. The 2021-22 budget proposed reducing the eligibility age down to 60.
Owned an Australian property for at least 10 years and it must be your primary residence within this period to qualify for the capital gains tax exemption.
- A houseboat, caravan or mobile home are not included.
Must not have previously made a downsizer contribution using the proceeds from the sale of another home.
The contribution must be made within 90 days of when the change of ownership occurs.
You must provide your superannuation fund with the downsizer contribution into super form.

There is no requirement to purchase another home, for example, you may rent or go into aged care.

Things you should consider

Age Pension implication
- Currently, your primary residence is exempt as an asset from assessment of entitlement to the Age Pension. Your superannuation is assessed and the downsizer contribution may affect your Age Pension entitlement.
Contributing to a self-managed super fund.
- It is essential for trustees or members of a self-managed super fund to ensure that a downsizer contribution into the fund is permitted by the trust deed.

This is just one option older Australian’s have to top up their super for a more comfortable retirement.

Investment lessons from a 40 year veteran

David Booth is a US businessman, investor and philanthropist who has been involved in financial markets for 40 years. Below are five lessons from his decades in the trenches which serve as a timely reminder.

Lesson 1: Gambling is not investing and investing is not gambling

A short-term bet is a punt on chance, nothing new here, however, if one treats the stock market like a casino and tries to time the market, then you need to be right twice in the game of buying low and selling high. It’s very difficult to pick the right stock at the right time once let alone twice.

Investing on the other hand is a long-term game and while all investments carry risk, a long-term investor can manage those risks and be prepared. Investing is buying a good quality business at the right price and holding it for a long time. The bet you’re making is on human ingenuity to find productive solutions to the world’s problems.

Lesson 2: Embrace uncertainty

Over the past 100 years, the S&P 500, an index of the 500 largest companies listed on the US exchange has returned a little over 10% on average per year but hardly ever close to 10% in any given year.

Like most things in our lives, stock market behaviour is uncertain and whilst none of us can make uncertainty disappear altogether, dealing with it thoughtfully can make a huge difference to our investment returns and perhaps, more importantly, our quality of life.

Uncertainty can be dealt with by preparing for it. It was Benjamin Disraeli, former Prime Minister of the United Kingdom who was quoted as saying; “I am prepared for the worst, but hope for the best.”

If you’re prepared for uncertainty you can benefit from it when it comes along. The recent ‘COVID’ crash presented some wonderful buying opportunities. Without this level of uncertainty or risk, there would be no opportunity to do better than a relatively riskless return like that from a money market fund.

Lesson 3: Implementation is the art of financial science

All the research completed over the years into understanding markets and returns tell us there’s general agreement on what ‘financial science’ tells us, however, so much can be gained or lost in application.

Whilst it does help if you have one or two genuine superstars, successful sports teams execute their strategies with a greater level of consistency and discipline than the opposition. Investing is no different. Great implementation requires paying attention to detail, applying sound judgement and maintaining discipline through all stages of the cycle.

Lesson 4: Tune out the noise

If you’ve lived long enough you should know one thing, if an investment sounds too good to be true, it probably is. Fads come and go and unicorns are not real.

There are a plethora of websites and pundits willing to hand out stock tips or predictions and there’s always that ‘friend’ or family member, a self-proclaimed completely fearless guru, who is happy to tell you what the next big thing will be.

Bottom line is if you don’t understand it or the person who is imparting their ‘wisdom’ can’t explain it to a sixth grader, don’t invest in it.

Lesson 5: Have a philosophy you can stick with

This one is an extension of those above.

During periods of extreme market volatility, you need to call on your levels of intestinal fortitude to avoid the trap of making poor decisions based on emotion.

We will remember the year 2020 for the rest of our lives. It’s an example of how important it is to maintain discipline and to stick to your plan when things don’t go as planned.

By embracing uncertainty, you can focus on what you can control. Whilst you can have some effect on how much you earn, you most definitely can control how much you spend, how much you invest and the risk level you are prepared to accept. A professional you can trust can help here.

Discipline applied over a lifetime can have a powerful impact. Look at those you know who are not and decide for yourself which path you would like to follow.

Risk profiling in financial plans

Clients often wonder why as advisers we explore client’s risk profiles, and what does it really do? Risk profiling is a process for determining appropriate investment asset allocations for each investor. There is no right or wrong answers, only what suits you.

The key components for establishing a risk profile are:

What is the level of risk the client is comfortable taking?
How much financial risk can a client afford to take?
How much risk is required to achieve the goals with the financial assets at the client’s disposal?

What risk is a client willing to take?

At some point you will have encountered the classic risk vs return curve, that is to get the most return you must take the most risk. The lure of the high prize must be traded off against the risk of significant loss. Like at a casino, the odds are not always in your favour and a high-risk strategy can see high volatility and sharp rises and falls in a client’s portfolio. This may appeal to some clients but to others, this is a nightmare, it could mean an extension of your working career rather than early retirement or vice versa. Generally speaking, age is often a key factor associated with risk tolerance, the younger we are the more risk we are willing to accept and as we age, we slide back along the risk curve to a less risky asset allocation. This is often termed as reducing “sequencing risk”.

How much financial risk can a client afford to take?

This component will often consider two items, stage of life and the number of assets available. The younger we are, we have greater time to recover and rebuild from a financial setback. Similarly, if we have a higher amount of financial assets at our disposal, we may choose to allocate a higher percentage of these targeting greater returns knowing we still have a sound financial base to fall back on.

How much risk do my goals need?

Something that many people ignore is that to achieve their goals, they simply do not need to take excessive levels of risk. The ability to recognize and discuss this is something to work through with your financial adviser. Similarly, sometimes goals require a level of risky investment that is inappropriate to a client. Discussion over conflicting goals and risk is very important to ensure you get the right investment plan for you.

Through each of these components of risk profiling, there are some common factors and gaining an understanding of these factors for each client is critical in the development of financial plans:

Goals – what is it, how much, and what is the priority?
Timeframe – what is the timeline for each of your goals?
Investment capital – how much do you have to build wealth?
Client age – how far into your life cycle are you?
Liquidity, Income and Growth – do you require liquid funds for lump sum expenditure, do you require regular income from investments, are you focused on growth only?

In summary, the main issue isn’t if you have a high growth, balanced or conservative profile, the most important aspect is that your risk profile reflects you and your personal circumstances. Risk profiling is important for an adviser to review regularly with clients to ensure the clients’ thoughts and preferences have not changed over time and that the investment remains appropriate.

Is the tide turning?

If you’ve had a gutful of the dreaded COVID-19 virus and the media coverage it has brought with it, you’re not Robinson Crusoe.

Let’s put all of that negativity to one side and focus on real data which indicates to me that perhaps the tide is turning in a positive direction, which could be to the benefit of the thousands of part owners of the banks.

I’ll get to the point, home loan deferrals.

Back in March last year when the ‘you know what hit the fan’, the banks offered borrowers of both home and business loans the option to defer or ‘hit pause’ on their repayments for 6 months.

Data announced by the CBA in their full-year results back in August indicated that at the peak of home loan deferrals there were 154K loans on pause. At 30 June 2020, this had dropped to 145K, and at the end of July 2020 they were 135K or 8% of their book.

As reported in ‘The Australian’, data produced by regulator, the Australian Prudential Regulation Authority (APRA) indicated that at the end of November this number had dropped to just over 2%. At the same date, WBC’s deferred loans sat at 3%, NAB’s at just over 1% and ANZ’s had dropped to 3%.

It’s evident all lenders have experienced the positivity of this trend with the total value of the $2.7 trillion in loans across all lenders on deferral dropping from 10% in May – June 2020 to 1% currently.

How is this going to be of benefit to a bank shareholder?

Well, banks account for loan defaults by making a ‘provision’ for bad debts in their accounts. They book an entry that hits profit now and when the loan goes bad it is written off against the liability on the balance sheet. They essentially ‘provide’ for the likelihood of debts going bad without knowing what will actually go bad before it does go bad.

The CBA in their FY20 accounts made an additional $1.5 billion provision for the potential default of loans due to the impact COVID-19 was forecast to have on their loan book. This provision amounted to 15.8% of full-year net profit after tax. At the time of provisioning in June 2020, there was still a great deal of uncertainty around how bad the economic impact would be and by extension the number of loans that would go bad. Fast forward to today and it appears the fallout will be nowhere near as bad as what the CBA thought it might be when they made that $1.5 billion provision.

While the landscape is not as bad as feared, the CBA did not undo the provisioning in the half-year to 31 December but instead chose to be conservative and keep that powder dry due to the lingering doubts over the tourism, leisure and hospitality industries, those specifically hardest hit by COVID.

The CBA did increase their payout ratio to 67% for the interim dividend after the withdrawal of the 50% restriction imposed by APRA, however, there is still room for significant dividend growth in the full-year results which will be announced in August. The other ‘Big 3’ are about to report their half-year results…we anxiously await their dividend announcements.

With the availability of franking credits attached to those bank dividends, yields can become even more compelling to investors, especially for self-funded retirees in the tax-free pension phase, given the average term deposit rate over the 12 months is ~0.50%.

On the back of improving economic growth as the vaccine rolls out, we could continue to see some air getting pumped into the share prices of the banks over the coming months, but we all know how things can quickly change for the worse.

It’s that time of the year, tax time!

“It’s that time of year! What do I need to think of before the 30^th of June rolls around again?”

If you use a tax agent for your annual tax return, you will have provided your information to your accountant and your tax return is probably ready to submit to the Tax Office, for last year’s tax.

What is different for me this year?

Many of us worked from home during the year due to COVID-19, this can mean a small tax deduction. If you worked out of your own home from mid-March to 30 June 2020, you can claim a deduction of $0.80 for every hour out of your home office. The accountant can work it out for you, but it’s as simple as letting them know the date you began working from home and your usual weekly hours worked. Assuming you worked 15 weeks at home at 40 hours/week, this could mean a tax deduction of about $480.

What about Division 293 tax? If you are a high-income earner (>$250K/year) you may have to pay additional tax on super contributions. Check your MyGov account to make sure you don’t miss seeing the notification from the ATO. You do need to pay the tax, but you don’t need any penalty on top for late payment.

How can a high-income earner get a tax break? If your spouse is younger than 75 and their income is less than $37,000, you can make a contribution to your spouse’s super account and receive a tax offset that will reduce your tax. The maximum offset is $540 and the optimum contribution amount to receive this offset is $3,000.

“I have surplus income, and I pay tax at the top marginal tax rate. How can I reduce my tax?” Talk to your pay office about setting up a salary sacrifice arrangement. This arrangement can save you some tax, and boost your future retirement benefits – that’s a win/win solution.

There is a cap in place that limits how much you can contribute to super on a pre-tax basis and this is made up of the employer contributions and any contribution you make, such as salary sacrifice. It’s important not to exceed this cap. The cap for 2020/21 is $25,000. You can also contribute a lump sum amount if you have made some savings during the year, and then claim a tax deduction against that amount, again it’s important you don’t exceed the cap.

“I sold some shares during the year at a profit and now I’m going to have to pay tax on the capital gain, can I do anything to reduce or eliminate this tax?” Yes, if you have spare capacity under the concessional contributions cap mentioned above, you can contribute part of the proceeds to superannuation and claim a tax deduction, again providing you don’t contribute more than the cap.

“During the year I sold the family home where we had lived for 20 years, but now I can’t put it into my superannuation.” Well, yes, under certain circumstances you can put it into super if you meet all the downsizer contribution rules, one of which is that you are 65 years of age or older. You don’t have to meet the work test and any downsizer contribution sits outside normal contribution caps.

Don’t forget that you can speak to one of our friendly financial advisers for information and assistance with your tax. Call us today!

The value of trust

Melissa Caddick was a Sydney based fraudster who went missing late last year. Her foot, still secure within her sports shoe, recently washed up on a beach.

Melissa held herself out to be a financial planner, and over several years, weaved an elaborate web of deceit designed to entrap friends and family into investing through her. However, Melissa’s only ‘investment’ was in herself, using investor funds to establish and maintain a lavish lifestyle.

In carrying out her charade she assumed the identity of another, genuine, financial adviser. And it was only when this financial adviser reported the misuse of her identity to the Australian Securities and Investment Commission (ASIC) that the charade finally unravelled.

Melissa was very successful in duping many people out of a lot of money over an extended period of time. How is that possible? A simple check on the ASIC website would have exposed her, but no-one bothered to check. They trusted her, they wanted to believe, and if truth be told, they were greedy to participate in the ‘fabulous returns’ that Melissa seemed to be able to achieve for her investors.

Trust is a very fragile ‘creature’. Once it’s been lost, it’s almost impossible to restore. It’s a fundamental aspect of a relationship that you’d have with a real financial adviser. I’ll often say to a prospective new client, “I’d like to earn your trust”. What I mean by this is that I don’t assume that someone is going to trust me simply because I’ve asked them to. I wouldn’t! I expect to be able to demonstrate through my actions that their trust has been earnt by way of me aiming to deliver tangible and verifiable results. Sometimes this means telling clients things that they’d rather not hear; this investment didn’t perform as we would have liked, but these did; you don’t have enough capital to retire, your fees will need to increase. However, these are all examples of being transparent and correctly managing people’s expectations which is an integral part of trust.

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