Superannuation is a major part of Australia’s retirement income system. With the progressive tightening of income tests and reductions in Government benefits, superannuation is likely to overtake the age pension as the major source of support for the majority of working Australians in their retirement years.
There are currently over $2 trillion in superannuation assets in Australia. Superannuation is currently the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). This is likely to grow significantly in the next 25 years with over $10 trillion in assets projected to be held in superannuation in Australia by 2040 (see Assorted forecasts, Treasury RIM Group and Cooper Review ).
Given the importance of the superannuation sector to working Australians, and its importance in the financial system and the economy more broadly, governments need to ensure that there is confidence in the system, and that it meets contemporary standards and is consistently delivering the best outcomes for members.
It is now a matter of law, subject to certain transitional arrangements, that the majority of Australians will only be able to access their superannuation entitlements when they reach 65 years of age or become permanently incapacitated or die. This exposes persons over 65 years of age to the risk of abuse. Elder abuse can take the form of deception, threats, violence, coercion and other fraudulent pressures to make a person contribute, withdraw or transfer superannuation funds for the benefit of the abuser.
The Australian Law Reform Commission (“ALRC”) in Report 131 issued May 2017 entitled “Elder Abuse and National Legal Response-final report” identified a number of areas of concern that specifically related to elder abuse through the use and management of superannuation.
1. Binding Death Benefit Nominations (BDBNs)
People who have an interest in a superannuation fund may wish to authorise an attorney (appointed by an enduring power of attorney) to deal with their interests. Retail funds often will not recognise such an appointment or authority. There may also be uncertainty as to how a BDBN is filled in, what will be accepted by the fund, whether the BDBN complies with the very wide variety of requirements of different funds and whether it is simply being incorrectly completed.
The increasingly complex legislation surrounding relationships and the rights and entitlements of former spouses and children can make the whole issue of estate planning and the preparation of BDBNs a very complex process. In the absence of any proper or direct regulations or guidelines for superannuation trustees nationally, it can often be the case that BDBNs are not properly prepared and are being found to be invalid at the date of death of a member. In some cases the BDBN has lapsed because of some failure to observe a time-frame applicable to one fund but not another, which can cause unexpected windfalls or unexpected disputation after a member passes away.
2. Management of Self-Managed Super Funds (SMSFs)
The other area where problems arise is SMSFs. SMSFs may be a very good idea for persons with access to their superannuation who want to directly control it as trustees of their own funds, while they are fully capable, but once they are elderly or become subject to illness, or simply deteriorate due to advanced age, the procedural and technical aspects of managing such a fund can become overwhelming.
The ALRC identified a number of recommendations in its report regarding SMSFs, mainly being recommendations for changes in the law.
Some recommendations include
- to better facilitate the process for appointing a person’s attorney as trustee or director of a self managed super fund in the event of disability,
- improved planning for a potential legal disability as part of the operating standards of a self managed super fund, and
- provide for Australian Taxation Office notification where an enduring attorney has taken over as trustee/director of the SMSF following the principal suffering legal disability.
Tax on superannuation benefits
It is often considered that super funds are a tax-free environment, but this is not the case at all. If a member nominates a beneficiary who is not a dependant or in an interdependent relationship, there can be harsh tax consequences. If a BDBN appoints a spouse (who is still the spouse at the date of death), no tax is payable. If the nomination appoints non-dependant children as beneficiaries of the fund death benefits, then tax may be payable at the rate of 15% on the benefit paid. If the funds are payable to a member’s estate, the tax may increase substantially.
Another fact that is often forgotten is that relationships can change over the years. Applying a “set and forget” mentality with non-lapsing BDBNs can cause very unfair consequences where relationships have soured or persons who were in a good relationship no longer enjoy that relationship at the date of death of the member. As matters stand, if the BDBN form is adequately prepared, there may be no right to appeal to any court or tribunal, and the benefit must be paid to the person nominated as the beneficiary.
Poor financial advice
Another area of potential abuse arises through poor management advice as trustees of SMSFs become older and less able to monitor their decision-making, and the laws applicable to their decisions become more complicated. Trustees of SMSFs can be exposed to risk in that unscrupulous intermediaries can take advantage of their diminished investment acumen and may possibly misappropriate or misuse the funds under administration in schemes such as churning investments, inappropriate investments, skimming and theft of funds. These were identified as areas of concern by the ALRC which recommended that greater powers be given to the Australian Prudential Regulation Authority to limit or control misuse of members and trustees of funds by their advisers.
What should members of superannuation funds watch out for?
With elder abuse involving superannuation, all superannuation trustees, members and their advisers need to be aware that:
- the laws in respect of superannuation are changing rapidly, both by decisions of the courts and by the way that the retail funds and self-managed super funds are regulated by different authorities,
- any estate planning process must address the issue of entitlement to superannuation proceeds, control of funds, transfer of control upon loss of capacity or death,
- the tax consequences of payment to non-dependant beneficiaries need to be considered before decisions which can trigger substantial tax liability,
- BDBNs need to be examined, the trustees of the fund need to confirm that they are validly prepared and members need to consider periodically whether or not their nomination is appropriate,
- in the case of lapsing BDBNs, when the benefit lapses, some mechanism needs to be maintained to ensure that a new nomination is made, and
- in the case of multiple interests in different superannuation funds all interests need to be pursued and benefits need to be examined at each stage of the superannuation cycle.
Role of estate planners when dealing with superannuation
Finally, a uniform approach to the regulation of this industry would be helpful. The ALRC’s inclusion of superannuation as an area which exposes Australians to potential elder abuse is very timely and most welcome.
It remains to be seen whether regulators and the wide variety of government, non-government and different state interest groups will accept and act on the ALRC recommendations. In the meantime there has never been a greater need for members of superannuation funds to make sure they access good legal advice when they make plans to adequately deal with their superannuation entitlements on retirement and at the time of their death.
How we can help
Quinn & Scattini Lawyers have a number of lawyers with the depth of experience and compassion necessary to provide assistance in this area where it is essential that lawyers deliver highly customised advice to older clients. No matter what your elder law problem, we have the right people to assist.
Why choose us?
You will be talking to a real expert, local to you. You will not be treated like a file number, but as a real person, and a person going through a difficult and stressful experience. Get expert advice, not just what you want to hear, in a language you can understand, not legal jargon.
Q&S’s expert lawyers are available at any of Q&S’s seven office locations.
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