Speaking at the SMSF Association Technical Summit, Colonial First State head of technical services Craig Day said when thinking about recontribution strategies advisers need to think about what the benefit will actually be.
While implementing a recontribution strategy will primarily have benefits for the client’s beneficiaries after their death rather than the client, Mr Day said this may be an important factor to consider if the taxation of death benefits is something included in the scope of the advice.
“If you’re holding yourself out as some kind of super estate planning specialist and you’ve said in your marketing materials that you will take into consideration the taxation of benefits paid on death, then do you have an obligation to actually look at that recontribution strategy?” said Mr Day.
Mr Day noted the High Court decision Hill v Van Erp, which looked at negligence in the context of legal advice around estate planning.
“[This decision] involved a will that wasn’t properly executed. The person that missed out on receiving half of the testator’s house due to the will not being properly executed sued the lawyer. So there was this question around whether the beneficiaries could actually sue the lawyer in that situation,” he explained.
“What the High Court said was that there was negligence there and that person was impacted by the negligence of the lawyer so therefore they have a right to sue.”
In the context of financial advice, Mr Day said if the adviser has said that they will take into consideration taxation on benefits paid after death, then they may have an obligation to consider a recontribution strategy for a client.
“If you don’t, then could the beneficiaries now potentially sue?” he questioned.
“Could it be even more than that? I would say as a financial adviser you have an obligation to know about the taxation of superannuation including contributions as well as benefit payments including death benefit payments. So if you didn’t do the re-contribution strategy and now the beneficiaries are paying a lot in death benefits tax, could there be action taken?”
Mr Day said this would depend on how the adviser has actually talked to the clients about this and how they’ve offered their services.
“That’s where you need to talk to lawyers about making sure your service offer is clear,” he stated.
When implementing these strategies, Mr Day said it is also important advisers focus on the outcome rather than the purpose.
“Don’t sell any strategy, whether it’s a recontribution strategy or something else, on a tax basis, make it all about retirement. As soon as you start to make it about tax and it takes away from retirement, you begin to bring in part IVA and sole purpose issues,” he warned.
Some of the other important considerations with these strategies, he said, are the pension commutation rules, the contribution caps, potential impacts on the age pension and concession cards, CGT, and what to do with the re-contributed amount.
Part IVA is always a consideration where the sole or dominant purpose of a transaction is to derive a tax benefit. And something forgotten by most – no statute of limitations apply for the Commissioner to commence action on Part IVA controversies. In 2007 NTLG minutes (albeit not binding on him), where a question was raised following the 2004 media release, it was essentially indicated that if the recontribution strategy was applied to an individual age 60 or above there was the possibility Part IVA may apply, but it would need to be examined on a case by case basis. The lack of clarity that the Commissioner has no concerns about the strategy is the issue here. Anyone assuming that in an environment of a shrinking tax base and trillion dollar deficits that there won’t be renewed ‘interest’ by the Commissioner in recontribution strategies at some stage in the near future is probably quite naive. As are those who assume retrospectivity won’t apply and/or think silence from the Commissioner equates to tacit acceptance. Use the strategy, carefully and justifiably.
Service uncertainty that tax accountants have struggled with for years. Amongst other things the most powerful document, as I understand it, in managing this is the engagement letter. You craft that letter and highlight that just because you provide tax advice does not mean you are responsible for everything tax. Unless they are prepared to pay a lot more in fees you cannot be expected to devote time to assessing all the possibilities and all the different types of taxes that may impact the client overtime. To me the fee service nexus is the key. Clients do not want to pay so you take advantage of that by creating a narrative that what they are paying is nowhere near enough to cover the type of services they might think are entitled to. If they want that so called gold standard services it will cost them $X dollars a month, which by definition they almost always decline.
I think the extra challenge for financial planners is the client often morphs into the children of the client. These children can be very greedy and because there is no personal relationship you become a target.
The ATO is already on record that drawing super out just before death could be subject to Part IVA, as the obvious dominant purpose is to avoid death benefits tax.
It would follow that any financial advice or plan to do exactly that would probably put the adviser more at risk of being sued, than not giving this advice. The ATO position could actually be cited as a defence!
As for recontribution strategies, these were also threatened with Part IVA until 2005 when outgoing ATO Commisioner Michael Carmody kindly handed the industry a press release that they would not apply Part IVA to recontributions.
The recontribution strategy has become common place to date but maybe overly so, if it still relies on the authority of that 17 year old press release and nothing else?
So we now need to give advice to beneficiaries who ever they are. A SoA? This is out of control.
I always thought there was a concern that there may be consequences from the ATO if a strategy was employed only for the reduction of tax…
The primary defence would be that the taxpayer does not derive a tax benefit so part IVA is much harder to apply. The children are the ones that benefit but they don’t perform the act.
Further legislative protection and balance equalisation are other reasons to do it perhaps??