Personal Services
Commercial Law



The Law Society of NSW

Rockliffs
Solicitors & IP Lawyers
Level 5, 50 King Street
Sydney NSW 2000

Ph: 02 9299 4912
Fax: 02 9262 2603
lawyers@rockliffs.com.au

Changes to Superannuation

Author: Peter Gell
Publish Date: July 7, 2005

On and from 1 July 2005 it will be possible for small managed superannuation funds to offer non-commutable income streams in the form of either a non-commutable annuity pension or a non-commutable allocated annuity pension.

The purpose of this is to allow the person below the age of 65 to access superannuation without have to retire.

There are cashing in restrictions which apply to a person who has not ceased working.

Fund members can access the pensions once they have reached 55 years regardless of them continuing the work provided the benefits are accessed by way of this non-commutable allocated pension. The non-commutation condition operates so that a member who is working cannot cash out preserved and restrict components of the superannuation fund.

There is no doubt the government is driving members of self managed super funds towards pensions. In a self managed superfund the income earned on underlying assets supporting a pension is tax free and certain capital gains tax can be avoided by converting assets in a self managed superannuation fund to supporting pension benefits rather than liquidating those assets to pay out a lump sum.

From 20 September 2004 it is also possible for superannuation funds to payout market linked pensions. These pensions are excluded from the definition of defined benefit pensions and are designed to run down over the nominated term of the pension. They are linked to life expectancy of the pensioner.

The advantage of these pensions over allocated pension is that they are treated as complying pensions for RBL purposes. A retiree can therefore access their pension RBL assuming at least 50% of the benefits that count for RBL purposes are attributed to the market linking pension. Market linked pensions also provide for 50% asset test exemption under social security rules.  The pension requires the member to nominate his life expectancy and to apply what is referred to as a payment factor to work out the amount of the pension which must be fixed from year to year. There are no minimum and maximum amounts which can apply with an allocated pension.

For further information, contact  

SERVICE TRUSTS

With service arrangements and service trusts the Commissioner has issued a draft tax ruling - TR5005/D5 which sets out the Commissioner's views on Phillip Trust type arrangements. The Commissioner has also produced a book headed "Service Arrangements" which sets out how you can review whether payments made under service arrangements are commercially realistic and reasonably connected to your business.

The booklet contains a number of complicated examples and requires a number of elements to be established:

  • The service arrangement must be explained on a commercial basis. A commercial basis can include asset protection, access to staff skills or know how, the relieving of responsibility for conducting and managing certain functions, the relief from risks or relief from financial or legal obligations such as worker's compensation, payroll tax, superannuation etc.
  • The service fees and charges must be commercially realistic. The booklet produced by the Commissioner suggests a number of different methodologies. These are complicated. One suggested approach is the cost plus approach. This involves looking at the gross profit mark ups that independent suppliers would apply to a particular operating costs in order to arrive at a sale price for a particular property or services.
  • Another approach advocated is the net profit approach. This looks at the net profit achieved by independent suppliers in respect of the provision of same or similar property or services in the open market.

Either approach is complicated and for a service trust arrangement to survive an analyses must be undertaken of each item of expenditure. As a minimum the suggested documentation required is the following:

  • The service agreement
  • Documents showing how you and the service entity arrived at a pricing structure for the services.
  • Tax invoices for the service fees charged and evidence of payments.
  • Calculations statement showing how the service fees were calculated from time to time including details of any mark ups have been applied.
  • Minutes of meeting concerning the service entity.
  • Budgets, business plans and organisational charts for the business and the service entity.
  • Detailed profit and loss statements and balance sheet for both the business and service entity.
  • The constituent documents for the service entity. Resolutions by the service entity about distributing profits.
  • A list of personnel employed by the service entities together with relevant duty statements.
  • Employment contracts time sheets and other personal records and reporting guidelines from employees to the service entity.
  • Relevant insurance contracts and
  • Relevant lease and/or rental agreements.

A service arrangement is not to be approached lightly and requires a great deal of preparation in terms of the ascertainment of the charge ups of the fees and services to be charged service entity across to the partnership and the proper documentation of the arrangement.

For further information or assistance please contact Rockliffs on 02 9299 4912 or email us at lawyers@rockliffs.com.au


Back