Welcome to our August newsletter and, with winter winding up and tax returns on the way for some, there may be sunnier days ahead.
Ensuring you’ve structured your finances tax-effectively is always a concern, but with new tax rules for super on the horizon, many people with large balances are considering alternative vehicles to save for retirement. In our first article we take a look at Trusts and the new super tax rules.
In our second article we review the importance of iron ore in our economy.
Preparing for loss of capacity or death is vital for SMSF members. It’s important to ensure your trust deed is watertight. In our third article we discuss the importance of SMSF succession planning.
And finally, we have included our market movement & review video for you to stay up to date with what’s happening in Australian markets over the past month.
Trusts and the new super tax rules
Ensuring you’ve structured your finances tax-effectively is always a concern, but with new tax rules for super on the horizon, many people with large balances are considering alternative vehicles to save for retirement.
Unsurprisingly, this has sparked a renewed interest in an old favourite – trusts.
Trusts have always been popular in Australia, with the government’s Tax Avoidance Taskforce (Trusts) estimating more than one million were in place in 2022.
Separating ownership using a trust
The popularity of trusts for business, investment and estate planning purposes is due to both their flexibility and inherent benefits, particularly when it comes to managing your tax affairs.
At their heart, trusts are simply a formal relationship where a legal entity holds property or assets on behalf of another legal entity.
This separation means the trustee legally owns the assets, but the beneficiaries of the trust (such as family members) receive the income flowing from the assets.
A common example of a trust structure is a self managed super fund (SMSF), where the fund trustee is the legal owner of the fund’s assets, and the members receive investment returns earned on assets held within the SMSF trust.
Which trust is best?
There are many different types of trusts, with the appropriate structure depending on the financial goals you’re trying to achieve.
For small businesses and families, the most common trust is a discretionary (or family) trust. These vehicles are very flexible and can be used with immediate and extended family members, family companies or even charities.
In a discretionary trust, the trustee has absolute discretion on how both the income and capital of the trust are distributed to various beneficiaries.
This gives the trustee a great deal of flexibility when it comes time to allocate income to family members paying different marginal tax rates.
Advantages of a trust structure
Discretionary trusts offer tax, asset protection, estate planning and property holding benefits.
They can also assist with the accumulation of assets for younger generations within your family and provide opportunities for the discounting of capital gains.
For small businesses and farming operations, a discretionary trust can be used to provide valuable asset protection. If your business goes bankrupt or a beneficiary is divorced, creditors will be unable to access assets or property held within the trust as it is the legal owner of the assets.
Building wealth outside super
With new tax rules for super fund balances over $3 million being introduced, trusts also provide a useful tool to consider for continued wealth accumulation.
Unlike super funds, trusts don’t have annual contribution limits, restrictions on where you can invest or borrowing limits. Money can be added and removed from the trust as necessary, providing significant financial flexibility.
Discretionary trusts can also be used with vulnerable beneficiaries who may make unwise spending decisions. The trustee can decide to provide a spendthrift child or a family member with a gambling addiction regular income, but not large capital sums.
Holding ownership of assets within a trust is useful for estate management, as the assets will not be part of a deceased estate, avoiding the possibility of a Will being challenged.
Trusts aren’t always the solution
Although trust structures provide many benefits, there are also tax issues that need to be considered. For example, any trust income not distributed to beneficiaries is taxed at the top marginal rate.
Trusts can be expensive to set up, administer and dissolve when they are no longer needed and the trustee’s actions are restricted by the terms of the trust deed.
If a family dispute arises, running a trust can become difficult and making changes once it is established isn’t easy.
If you would like to find out more about trusts and whether one is appropriate for your business or family, call us today.
How iron ore plays a big part in our economy
Iron ore has been the backbone of the Australian economy and many investment portfolios for much of the 21st century.
In 2021, resources accounted for 68 per cent of Australia’s export revenue. This was the year that iron ore prices peaked at almost $US230 a tonne.i
However, its growth as an export icon really took off with the first shipment of iron ore from the Pilbara in Western Australia in 1966.
Today there are three major companies that mine iron ore in Australia – BHP, Rio Tinto and Fortescue Minerals. Considered blue chip stocks, they are often favourites with investors and their share price performance is linked to iron ore prices.
Iron ore’s importance worldwide stems from its use in steel, a key material used in infrastructure, housing and manufacturing equipment globally.ii
The main recipient of Australia’s iron ore is China. In 2022 China bought 1.1 million tonnes of iron ore, 65 per cent of which came from Australia.iii
While demand is still high in China, Covid put a dampener on its economic growth. Its strict measures did not start to roll back until December 2022 and investors began to worry.
While economic activity is slowly resuming, it has reduced significantly from its heady days. As a result, demand for iron ore has also fallen.
This has seen the price of iron ore drop to around the $US100 a tonne mark from its $US230 million peak in 2021.
Although China’s economy is not performing as energetically as it did a decade ago, recent moves to boost domestic demand are causing some optimism among market watchers, although there are still bears around who are more circumspect.
The rest of the world is wrestling with recession and that too has put a dampener on the market.
Added to this slowdown in demand are moves to increase supply by Australia’s major producers and Brazil’s Vale Mining.iv
Luckily, iron ore is relatively cheap to produce in Australia at around $US30 a tonne, which shelters the miners somewhat from price fluctuations. While Rio Tinto and BHP can remain profitable with prices dropping as low as $US60, lower prices will have a flow on effect, impacting superannuation balances, investor returns and the broader economy.v
Impact on the economy
Unfortunately, lower profits mean significantly lower tax revenue and that in turn will affect the Australian economy.
While profits are still boosting the government’s coffers, the outlook is less bright.
Tax revenue from iron ore has made a significant contribution to our economy and has been a key reason for the recent federal budget surplus after 15 years of deficits.
Nevertheless, the domestic economy is still expected to slow as high inflation and global challenges make their mark.
Budget papers estimate that a $US10 per tonne increase in the Commonwealth’s assumed price for iron ore exports is expected to result in an increase in tax receipts of around $500 million in both 2023-24 and 2024-25.vi
But the federal government is still cautious about the economic outlook for Australia and are forecasting a return to a budget deficit and the possibility of a recession as the move to higher interest rates puts brakes on the economy.vii
Aside from economic performance, any reduction in revenue for the mining companies will also translate into lower dividends and lower price growth for investors.
But despite some bearish sentiment in the market including the growing number of institutional and individual investors steering clear of mining stocks over ethical and environmental concerns, there is no denying that iron ore is still a big money spinner.
If you would like to discuss options for investment in the current economic climate, then give us a call.
The importance of SMSF succession planning
Preparing for loss of capacity or death is vital for SMSF members. It’s important to ensure your trust deed is watertight.
There are more than 600,000 self-managed superannuation funds (SMSFs) in Australia, managing close to $900 billion of assets on behalf of over a million Australians.
Each SMSF’s trust deed is legally required to set out the rules for establishing and operating the SMSF including its objectives, who can be a member of the SMSF, and whether benefits can be paid as a lump sum or as an income stream.
But what happens when a member becomes incapacitated, or dies?
Has the SMSF’s trust deed been worded in a way that will make it possible to give effect to the wishes of an incapacitated or deceased member, to the extent those wishes are consistent with superannuation laws?
If you’re a member of an SMSF, it’s important to ensure that you have ticked all the right boxes when it comes to succession planning.
And, to do this, it’s worthwhile considering obtaining tailored professional advice from an SMSF specialist.
Preparing binding death benefit nominations
SMSF members generally have a degree of ability to choose who will get their residual super benefits when they die, by making and giving the SMSF’s trustee a binding death benefit nomination.
This directs the fund’s trustee to pay the benefit to either a legal personal representative or one or more eligible dependants of the member.
However, depending on the wording of your SMSF trust deed and the nomination itself, it is possible that a binding death benefit nomination given by a member will expire after just three years (or any shorter period specified in the trust deed) under Regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth). In that scenario, assuming the member is still alive, their death benefit nomination would then need to be renewed and there would be no death benefit nomination in place unless and until they do so.
But the High Court ruled last year that it is possible for a validly made binding death benefit nomination to last indefinitely if a trust deed’s wording is structured in such a way that effectively avoids the three-year automatic expiry.
This is a prime example of why it may be worthwhile getting professional advice around the wording in your trust deed covering death benefit nominations as well as your nomination form, including whether they are aligned with your preference as to how often (if at all) death benefit nominations need to be updated in order to be legally effective.
Preparing for loss of capacity or death
Another key aspect for SMSF trustees to consider and plan for is who would take control upon a member’s loss of capacity or death.
For example, problems can arise where someone wanted their super money to go to a child from a previous relationship, but where a second spouse controlling the fund was able to frustrate the wishes of the deceased.
It’s certainly worth asking how your wishes will be honoured if you lose capacity or die. Who will or could be running the fund in this situation? As there are a range of legal factors and restrictions that shape who would be eligible to operate the SMSF or make decisions on your behalf, good quality expert legal and financial advice on these matters can go a long way to avoiding inconvenience, confusion and conflict in future.
Reversionary pension nominations
SMSF trust deeds can generally specify that a superannuation income stream that a member of the SMSF is receiving will automatically transfer to an eligible dependant beneficiary previously nominated by the member upon the member’s death. This nomination is typically referred to as a reversionary pension nomination.
For some SMSF members they can be very important, particularly for people who have a high tax-free component or who are expecting a life insurance payout upon their death.
Some SMSF trust deeds are worded in a way that gives priority to a reversionary pension nomination over a binding death benefit nomination, which can lead to unexpected or unintended outcomes after a member’s death.
Reversionary beneficiary nominations are not necessarily needed or suitable for everyone with an SMSF, but for those wanting to implement them it’s important to ensure they’re permitted under the terms of the trust deed and enforceable in the future.
Getting succession planning advice
SMSF trust deeds can be complex documents, and it’s vital to ensure that yours is structured to ensure it is best placed to conform to your wishes in the event you’re incapacitated or die.
Consider giving us a call or consulting a licensed financial adviser or other relevant qualified professional who specialises in SMSF.
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor. We have not taken your objectives, financial situation or needs into account when preparing this article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any financial product we make available before making any investment decision. Before you make any financial decision regarding Vanguard products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD before making any investment decisions. You can access our IDPS Guide, PDSs, Prospectus and TMDs at vanguard.com.au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.
Market movement & review video – August 2023
Stay up to date with what’s happened in Australian markets over the past month.
While the price of most goods and services continues to rise, the good news is the rate of increase is continuing to slow.
As a result, the markets are beginning to breathe a sigh of relief.
The ASX rallied to close the month on a positive note due to a combination of stronger than expected growth data, better than expected earnings and lower inflation.
Click the video below to view our August update.
Please get in touch if you’d like assistance with your personal financial situation.