Legal pitfalls of a BDBN

Despite its significance, there can be quite a few pitfalls that have the power to override the wishes in a binding death benefit nomination (BDBN) and render it invalid.

A BDBN is a member’s written direction to their super fund’s trustee that outlines who the trustee is to pay the member’s death benefit to upon the member’s death. BDBNs are a relatively new legal instrument, and as such, the laws regarding them continue to develop and change, which is why many pitfalls can exist to those who are unaware of changes. Getting a BDBN right is no easy tasks, as there are numerous risk areas including:

Careless wording
Many BDBNs can be easily challenged due to poor wording such as ‘the BDBN is only binding if it is to the trustee’s satisfaction’. This type of wording can easily give rise to argument if, for example, the trustee decides to reject the BDBN when the member dies.

Prior deed history
Most SMSF deeds are varied without proper checks on the prior document trail, including conditions and consents that must be satisfied. If an SMSF has existed for some time and undergone variations,  a deed history review may be warranted. Such a review should encompass:

– the original deed of establishment

– any subsequent deed of variation

– any deeds of change of trustee

It may be best for an experienced professional to conduct the review. Attending to any issues promptly can be far more cost effective than being exposed to future legal challenge.

Poor quality documents
Ineffective documents may result in a member’s super proceeds being paid to the wrong people. In quite a number of recent disputes, this has happened after an expensive and drawn out legal battle. While it can be tempting to save some money upfront by using a cheaper option, high-quality will always pay off in the long run.

Salary sacrificing

While many employees can sacrifice salary in exchange for most work-related purchases, it is essential that employers are aware of FBT when working out the expense that will replace the income in a salary sacrifice arrangement. Employees should also be wary that if their employer has to pay FBT, that cost will most likely be passed on to them under a salary sacrifice arrangement.

If an employee needs to purchase equipment for their work, they can work out a salary sacrifice with their boss to buy the equipment and reduce their personal tax bill if:

• the piece of equipment is considered to be ‘a tool of trade’

• the piece of equipment is used primarily for work purposes

• the piece of equipment is the only tool received during the year with that function, and;

• if both the employee and employer have agreed to undertake the salary sacrifice arrangement beforehand.

There are particular types of benefits an employer can provide to their employee that may trigger an FBT liability if provided under a salary sacrifice arrangement. These include cars, property and expense payments.

However, there are certain fringe benefits that are specifically exempt from FBT under the law. These work-related FBT exemptions can be beneficial to employees under a salary sacrifice arrangement. To be exempt, a purchased item must be:

• a portable electronic device

• an item of computer software

• an item of protective clothing

• a briefcase

• a tool of trade

Guide to successful business borrowing

It is important for businesses to maintain a good relationship with their bank in order to safeguard their future access to funds.

1. Prepare a strong business plan

This is one of the first steps to ensure that the bank will identify it as a low risk business and therefore someone they are willing to give funds to. A solid business plan highlights the viability of the business, information about the experience and success of the owners and managers, expenses which the loan will cover,as well as detailed sales expectations.

2. Establishing a personal relationship

Over time, an owner establishes key contacts within their bank that are familiar with their business and financial needs. Keeping these contacts informed of any changes to the business or cash flow projections before it comes as a surprise will build trust between the bank and the business.

3. Knowing your business inside out

By keeping themselves updated of their own financial status, by obtaining credit reports and public records, business owners will know what research the banks will obtain when deciding on the amount, if any, to loan to the business.

4. Learn the banking language

Understanding banking terms such as credit ratings, cost of capital and other financial drivers will place business owners in a strong position when negotiating the terms of their loans.

5. Keep the adviser informed

Financial advisers are there to advise and will have an intimate knowledge of bank processes. Keeping them posted of any plans or changes will allow them to better advise the business on the best course of action, and ensure that the business will continue to prosper.

The pros and cons of employing telecommuters

The workplace environment has changed dramatically over the last decade, with the practice of working from home becoming a more accepted workstyle.

Telecommuting refers to employees who work exclusively from home, but also includes those who part-time at home, and part-time in the office. While this workstyle has been found to provide a number of benefits to a business and its employees, there are some circumstances where it may not always be the best approach for a business to take. Certain positions, such as ones that don’t require a large amount of collaboration, are better suited to telecommuting. Businesses should also be aware that for telecommuting to succeed, the right technology and the right structure must be incorporated.

To help decide if telecommuting is right for you, here are some pros and cons of the practice:

Pros

• Hiring telecommuters means employers are not limited by geography. Many businesses miss out on a lot of potential talent purely due to potential employees living too far away from the office.

• Telecommuting has the power to remove the stress of commuting to and from work and increase employee flexibility.

• Employers may actually save money since they don’t have to spend money on buying office equipment or essentials for employees in the office.

Cons

• Employees who telecommute must be extremely self-motivated, focused and driven to be able to work from home. From an employer’s perspective, it can be quite hard to gauge whether a prospective employee has these skills. Employees who like structure and routine also may not thrive in an environment that provides an extra level of flexibility.

• Trying to manage telecommuting employees can be difficult for managers. Working with telecommuters requires patience, more communication and understanding.

• Telecommuters may feel lonely working away from everyone else, and are more likely to be overlooked for career advancement opportunities. If they are out of sight, they are probably out of mind too.

Keeping up with your employees

When you are kept busy with the ups and downs of running a business, it can be easy to fall out of touch with your employees. While this doesn’t necessarily bring about any immediate repercussions, not keeping up with employees can be quite costly in the long run, in terms of employee engagement, work ethic and job satisfaction.

In order to retain hard-working employees, employers should consider the following issues and how they might address them:

Employees keep an eye out for new jobs
Even though an employee may appear happy in their current position, the chances are that they are keeping an eye out for new work. To avoid losing an employee to a new job position, employers should consider meeting with employees on a regular basis to obtain feedback and discuss job expectations and concerns.

Employees may not be as engaged as you think
A disengaged employee is of no benefit to anyone. While employees may appear to be working hard in the office when you’re around, it can be very easy for them to become distracted when they feel like they have no purpose. Purpose is key to employee engagement. Employers should make their employees feel that their efforts contribute to a business’s overall goal, as this can be both rewarding and motivating.

Employees aren’t satisfied with their pay
Compensation is one of the leading drivers of an employee’s attraction and retention. If your employees aren’t happy with their pay, you need to know about it before they find a better option elsewhere. Giving a pay raise or bonus isn’t always an option. However, there are budget-friendly ways to compensate employees, such as offering workplace perks or benefits.

Reducing tax in your SMSF

There are some effective, and often quite simple, strategies to reduce the tax payable in an SMSF that many fail to take advantage of.

Nomination of beneficiary
Those who nominate a spouse, child or financial dependent as a beneficiary may avoid paying tax on a lump sum death benefit.

Delaying TTR commencement
Members looking to begin a transition to retirement pension in their late 50s may delay this decision until age 60. The benefit of waiting is that members avoid being taxed on super fund pension payments. This strategy may be particularly useful for members who are still working or have other taxable income outside super.

Re-contributing
This strategy involves taking lump sums or pension payments with a high taxable component out of a fund and replacing them with tax-free non-concessional contributions. It is important that the non-concessional contribution is separated from the taxable components in the accumulation balance to avoid losing the benefit of the re-contribution.

Lump sum withdrawals
This solution is suited to members who have a short time to live. They can withdraw all assets from their super fund and their children can avoid any tax upon death. The catch is that if they live longer than expected, they may not be able to transfer the money back into their super account.

Using the CGT discount

A capital gain is a profit made from the sale of an asset. Your capital gain is calculated as the difference between what you paid for the asset and what you eventually sold it for. A capital gain is considered by the ATO as part of your assessable income and is taxed at your marginal rate.

There is, however, a discount that may be applied to capital gains. If you have held the asset for over twelve months, you may be eligible for a 50% discount on the CGT. The CGT discount is also available to trusts and superannuation funds, although for superannuation funds the discount is only 33.3%. The discount is not available to companies.

Of course, there are occasions where you may have to dispose of an asset for less than you originally paid for it. Unfortunately, you are unable to use ‘capital losses’ to reduce your assessable income. However, you are able to carry the loss over to the subsequent income year and use it to offset future CGT liabilities.

Redundancy payments

Redundancy arises in the workplace when an employee’s job no longer needs to be performed. It usually occurs due to the outsourcing of staff or cutting staff numbers and assigning the duties involved in the role equally amongst other staff members. It may also occur due to a business ceasing to make a line of product service.

Over time, there has been an increase in employee expectations of receiving a lump sum (over and above pay instead of notice and any leave entitlements ) when they are made redundant. While this right was limited to award employees or those under various company schemes in the past, the introduction of the Fair Work Act in 2010 made the payment of redundancy a universal right in such circumstances.

However, not all employees are paid a redundancy. In the following circumstances, employers are not obliged to pay redundancy to staff who lose their job:

• when an employer has fourteen or less employees at the time of the termination

• when the business is sold and the employees are taken on by the new employer

• when employees are on a fixed term contract that has expired

• when employees are employed on a casual basis

There is also a further exception for employers if they can prove to the Fair Work Commission that they were proactive in finding new roles for employees. To do this, it may be a good idea for employers to work collaboratively with their HR or management to secure interviews for their staff and assist staff with preparation of CVs.

Negative gearing for property investors

Whether you’re an established property investor or contemplating purchasing your first investment property, you may care to familiarise yourself with the way that negative gearing works.

A property is considered to be negatively geared if the owner has taken on debt in order to acquire it and the net rental income is less than the costs of maintaining the property (including the interest paid on the loan). Investors with negatively geared properties are able to claim the shortfall between their associated costs and rental income as a deduction against their total taxable income. In the event that your taxable income is insufficient to absorb the difference, then the remaining deduction can be carried forward to the next financial year.

Many Australians would not be able to enter the real estate market without taking on some form of debt. While taking on debt allows you to make investments that would otherwise have been beyond your reach, it also ramps up your risk profile because you will have a greater amount invested. Furthermore, if your investment property is underperforming, you remain responsible for making loan repayments.

Obviously, it is preferable to have an investment property that is positively geared, meaning that rental income covers loan repayments, interest and routine maintenance. Paying tax on a profit is typically considered to be a better option than minimising your tax liability while making a loss.

Even if you think that your investment property will be positively geared, understanding the benefits of negative gearing can give you a little peace of mind. You know that if the property does lose money, you will be able to offset the loss against your taxable income. When a property is positively geared, the income earned is added to your total taxable income. As such, it is taxed at your marginal tax rate. The same applies to any capital gain that you make from selling a property.

Diversified growth strategies

Australians looking to increase their super fund’s annual returns may benefit from shifting to a diversified growth strategy.

A diversified growth strategy is a multi-asset program that invests in a range of traditional and non-traditional return sources to achieve a defined outcome.

A recent study has shown that including a 15% allocation to a diversified growth strategy in a typical super portfolio could increase the fund’s realised returns, lower its overall volatility and improve its risk-adjusted returns.

The role that a diversified growth strategy could play within a fund depends on the nature of the investor. For example, super funds with a high level of control may not necessarily need for the strategy as a portfolio diversifier. However, these kinds of super funds may benefit from idea sharing with an investment manager to facilitate more agile management of the portfolio.

Some investors have recognised the role that diversified growth strategies can play in helping to meet their objectives, with the market now attracting around $230 billion of funds globally.

Diversified growth strategies have sparked some interest from some Australian super funds and could be well placed to meet growth return objectives while also providing investors with the confidence that they can achieve desired outcomes.