This NEWSLETTER is mainly devoted to explaining the MAJOR CHANGE that is occurring in 2013. After nearly 20 years of providing this Service to the Victorian legal profession I am merging my Service into a broader Service that will extend the areas of law and also the geographic base of the Service.
I am able to do this because of my great relationship with Guy and Danni Dawson of BY LAWYERS FOR LAWYERS in New South Wales. BLFL has provided the legal content for the LEAP Legal software system for over 10 years. During that time Guy and Danni have developed Step by Step Guides in over 20 common areas of law and have established a ‘stable’ of authors to write and maintain those Guides. In recent years we have discussed and planned the extension of the BLFL product from simply a texted-based information resource to become a response-based Service modelled on my Service.
This has been trialled over the last two years as a Question & Answer Service attached to the BLFL Step by Step Guides and it has been well received. Subscribers email questions to BLFL and the question is then allocated to the appropriate expert for answer. This is usually given within 24 hours of receipt of the question. We have now named the Service MENTOR to reflect the objective of providing a Service based on experience and expertise to the legal profession.
This Service is now ready to go live. SMOKEBALL is the vehicle by which lawyers will be able to access MENTOR. SMOKEBALL is essentially the publishing arm of LEAP. LEAP subscribers have automatic access to the BLFL Step by Step Guides through LEAP but non-LEAP subscribers are also able to access SMOKEBALL products, which include the Step by Step Guides but also many other publications.
The MENTOR subscription is a stand-alone subscription Service. If your firm is an existing LEAP or SMOKEBALL subscriber, you simply subscribe to MENTOR as an additional product. If you do not presently subscribe to LEAP or any SMOKEBALL product then you simply subscribe to MENTOR (through SMOKEBALL) as a stand alone subscription. Once you have subscribed to MENTOR you simply open the www.smokeball.com.au site and click on the MENTOR tab on the right hand side of the homepage, type your question and send it to MENTOR. The question will then be allocated to the appropriate author and a response provided, generally within 24 hours, if not sooner.
The MENTOR subscription is a firm-wide subscription and there are no limits to who in the firm can ask the question or the number of questions that can be asked.
MENTOR will be a wonderful resource for the small practitioner who acts across a wide range of areas of law, but also more specialist practitioners who will be able to ‘bounce off’ another experienced practitioner questions relating to their speciality. Young practitioners and support staff will have a resource that they can access before bothering a busy principal and the principal will thereby benefit from less interruptions. Large firms will add it to the suite of resources that they provide to staff to encourage on-line research.
MENTOR does not provide legal advice. An appropriate disclaimer will appear with all responses. A dictionary definition of MENTOR is “a person who is considered to have sufficient experience or expertise to be able to assist others less experienced”. MENTOR will help you get started or point you in the right direction to assist with the resolution of a problem. It will not replace the need to seek assistance from Counsel from time to time but it will assist in identifying the problem that you are facing and, hopefully, the answer to that problem.
My experience over 20 years of answering questions is that 80% of the time I am able to point the inquirer in the right direction, 10% of the time I simply confirm what they were thinking and 10% of time I suggest that they need to brief Counsel. I expect that the same will apply to MENTOR.
In recent years I have moved my inquirers away from the telephone to email. I now receive 90% of my inquiries by email, 99% of which I answer overnight. The introduction of MENTOR fits nicely with my planned trip in 2013. I will be away from May until October and all inquiries during that time will need to be by email. Due to the time difference, questions asked before 3pm will generally be answered before 5pm THE SAME DAY but certainly overnight at worse. The only difference is that the email will be sent via MENTOR rather than directly to me. When asking the question you can specify that you want the question to be sent to me.
MENTOR costs $660 pa. plus GST – that is a total cost of $726 pa.
This can be paid monthly at the rate of $55 plus GST ($60.50pcm).
Payments can be by cheque, direct debit or credit card.
The MENTOR INVOICE for 2013 is attached to this Newsletter for those members of SIS whose subscription expires in December 2012.
I have included an ORIGINAL Invoice that you retain for your records and a COPY invoice that you return with payment. The ORIGINAL Invoice just has the annual fee but the COPY has details of the various methods of payment.
If you pay the full year by cheque, just attach the cheque to the COPY Invoice and return by post. If you pay the full year by direct debit, please complete and return the COPY Invoice by post with the appropriate details for payment by direct debit.
If you wish to pay by credit card (either in full or monthly) return the COPY Invoice by post with your credit card details. Alternatively, if you are paying by credit card, you can ignore my Invoice and simply go directly to the MENTOR homepage on www.smokeball.com.au to register and pay there.
If returning the Invoice, it is important that you include an email address on the COPY Invoice. This will be the email address that you enter to sign in to access MENTOR. May I suggest that you use
You must make sure that you establish this email address as a valid email address on your system as it will be the email address that MENTOR uses to communicate with you. Once registered you will then need to establish a PASSWORD which can be a firm wide PASSWORD giving all your staff access.
When you want to ask a question you go to the MENTOR tab and enter the email address and PASSWORD. As the email address and PASSWORD is common to all users in your firm it is just a matter of you making sure all potential users are aware of this email address and PASSWORD. With this in mind, the next page of this NEWSLETTER is designed to be photocopied and circulated throughout your office. Just insert your MENTOR email address and PASSWORD once you have registered.
Answers do not need to come back through this generic email – you can specify an email address for the answer when you ask the question.
You can begin to use MENTOR as soon as you register and pay. If your SIS subscription is paid until December 2012, you can subscribe to MENTOR now or you can wait until the New Year to join MENTOR. If your SIS subscription is paid until June 2013 (and therefore no Invoice is attached) you can continue to email me directly until 30 June 2013. However, if you see the value of MENTOR in those many other areas of law that MENTOR covers and I do not, then you might decide to subscribe to MENTOR immediately and enjoy those additional benefits. If so, just go to www.smokeball.com.au, hit the MENTOR tab and register. This method requires monthly payment by credit card.
WE NOW SUBSCRIBE TO THE MENTOR ON-LINE INFORMATION SERVICE.
THIS IS SIMILAR TO THE SERVICE PROVIDED BY RUSSELL COCKS BUT IT COVERS ALL COMMON AREAS OF LAW.
YOU CAN ASK A QUESTION OR SEEK INFORMATION ABOUT VIRTUALLY ANY AREA OF LAW THAT WE PRACTICE IN AND EXPECT TO RECEIVE A RESPONSE WITHIN 24 HOURS.
GO TO www.smokeball.com.au
HIT THE MENTOR tab on the right hand side
TYPE IN email address
If you are working in LEAP then simply go to the USE GUIDE tab and a link to MENTOR appears. Hit the MENTOR tab and type in the above email address and PASSWORD.
LAST CHANCE SALOON
WILL BE PRESENTING A PROGRAM OF
6 HOURS OF SUBSTANTIVE LAW CPD
THURSDAY 28 March 2013
(the day before Easter Friday)
SPEAKERS WILL INCLUDE WELL KNOWN BARRISTERS & EXPERTS
9.30 – 1.00
Property Law topics
1.30 – 5.00
Property Law topics
$660 per registrant for both sessions – 6 hours CPD
sessions may be booked for just morning or afternoon at $330 per session
$550 per registrant for 2 registrants from one firm
$275 per registrant per single session if 2 registrants
$440 per registrant for 3or more registrants from one firm
$220 per registrant per single session if 3 or more registrants
NAME(S) ..……………………………………….. cheque enclosed $………..
ADDRESS (DX if any)…………………………………………………………
photocopy and return with cheque to
Russell Cocks DX 483 or GPO Box 2149 Melbourne 3001
TAX INVOICE ABN 13 460 951 767 incl. 10% GST
CONFIRMATION OF REGISTRATION WILL BE SENT
CPD IN EUROPE
May – September 2013
Russell Cocks is conducting CPD in NINE European locations during the northern Spring & Summer. Sessions will be in the first and third weeks in each of the months from May until September.
VENUES FOR 2013
week 1 week 3
MAY PARIS BARCELONA
JUNE SAN REMO LAKE COMO
JULY LONDON (The Ashes)
AUGUST St. PETERSBURG BERLIN
SEPTEMBER VENICE ADRIATIC COAST
Sessions will be conducted in the first and third week of each month. Tuesday sessions include 3 hours of COMPULSORY (ethics related) TOPICS and sessions on Thursday relate to Property/Probate topics. You can undertake Tuesday in one city and Thursday in a different city.
$1,100 PER REGISTRANT for 10 hours CPD
(no charge for accompanying persons)
A FAMILY LAW STREAM is being conducted by an Accredited Family Law Specialist in PARIS, BARCELONA & LONDON. This will comprise 5 hours of FAMILY LAW presented on the WEDNESDAY in each location as an alternative to the PROPERTY LAW sessions conducted on the THURSDAY.
Expressions of interest:
Please email: email@example.com
and further information will be provided
from the Law Institute Journal PROPERTY column
Distress is an ancient common law right entitling a landlord, initially, to seize and retain a tenant’s goods if the tenant failed to pay rent. Eventually the right was extended to permit the landlord to sell those goods if the tenant continued to fail to pay the rent. It would be hard to imagine, perhaps short of flogging, a right more at odds with modern consumer protection principles and, not surprisingly, this right fell by the wayside many years ago, 1948 to be exact. However, as observed by DP. Macnamara in VCAT in Kiwi Munchies P/L v Nikolitis  VCAT 929 “It is staggering the number of agents and solicitors who seem to be ignorant of this fact.”
That case, amongst other issues, considered the consequences of the landlord effectively exercising distress by demanding that a defaulting tenant pay arrears of rent before allowing the tenant to recover the tenant’s goods from the premises. Absent a right to distress, now long since gone, the landlord’s actions in seizing the tenant’s goods amount to trespass and conversion. The result was disastrous for the landlord, with an order for compensation for equipment and stock, at that stage stored in a shed in the landlord’s backyard, of $14,000 in respect of premises that were let for less than $12,000 per year.
The recording of the contractual agreement between the landlord and tenant in that case was less than clear. The arrangement had commenced with a ‘skeleton’ lease of 12 months, was then recorded by a ‘standard’ lease which included an option, and by the time the dispute arose it appears that the tenant was over-holding in accordance with the terms of the ‘standard’ lease. The landlord’s agent served a (badly worded) ‘Notice to Remedy’ and subsequently re-entered the premises and changed the locks. Whilst it was common ground that the lease had eventually come to an end, the exact timing of the determination of the lease was not identified and the actions of the landlord, which amounted to distress and were thus illegal, were regarded as having taken place before the lease had come to an end.
This was a distinguishing feature with the recent case of Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L  VCAT 546. This is a real David v. Goliath dispute but again centred on the tenant’s failure to pay rent and the seizure by the landlord of the tenant’s equipment and goods. The tenant issued proceedings based on detinue and conversion and if the landlord’s actions amounted to distress then they were unjustified and the tenant would succeed.
The landlord however foreswore the remedy of distress and based its claim on particular clauses in the lease that it claimed created a contractual right for the landlord to remove any of the goods of the tenant from the premises after breach and store them at the cost of the tenant. The landlord did not claim the right to sell the goods, merely that the lease gave the landlord a possessory lien over the goods and thereby a defence to the claim of conversion.
The landlord argued that the possessory lien created by the lease could only come into existence after the lease had been terminated and the landlord had taken possession of the goods. The lease created the contractual right, but it only crystallised after termination of the lease when the landlord actually took possession of the goods. Hence that could not amount to distress, as distress can only be levied during the subsistence of the lease, as had been the case in Kiwi Munchies. This argument was accepted.
The landlord relied upon two clauses in the lease to justify its actions. Whilst one of the relevant clauses referred to the right to remove the tenant’s property as arising after ‘re-entry’ (which amounted to termination of the lease), another clause suggested that the lien arose upon mere ‘breach’ by the tenant. The Tribunal concluded that as this clause was capable of giving the landlord the right to seize the tenant’s goods for mere breach that did not amount to termination of the lease, the clause therefore purported to authorise conduct that ‘amounts to distress for rent and is illegal’. It followed that such a clause is contrary to public policy and therefore void. It was irrelevant that the possessory lien had in fact been exercised after termination and therefore did not amount to distress, it was sufficient that the clause purported to authorise such conduct during the term of the lease, which conduct would have amounted to distress.
The Tribunal therefore concluded that whilst the landlord’s conduct had not constituted distress, as it had occurred after the lease had been terminated, nevertheless there was “no contractual or other right to seize or retain the Goods following termination of the Lease, pending payment of outstanding monies owed under the Lease.” The hearing was adjourned to consider the appropriate order, which would have included an order for compensation to the tenant for trespass and conversion.
This case does not mean that a lease cannot include clauses giving landlords contractual rights in respect of tenant’s goods AFTER termination of the lease. It simply means that such clauses must be VERY carefully drawn.
OFF the PLAN SALES
Many properties are sold ‘off the plan’. This is the phrase used to describe a property that is a lot on a PROPOSED plan of subdivision, meaning that the plan of subdivision creating the lot has been drawn but it is not yet registered at the Land Titles Office.
Historically, it was not permissible to sell ‘off the plan’. Until amendments to the Sale of Land Act 1962 it was basically illegal to enter into a contract for the sale of a piece of land unless that land had its own title. Unfortunately the subdivision process can be very time consuming as the infrastructure required for the plan to get to a stage where responsible authorities are satisfied that the plan can be registered and separate titles issued is often substantial. In the case of land subdivision, this involves the provision of roads and services and in the case of building subdivision, it involves construction of the building. However the market consisted of vendors who were keen to secure purchasers for these separate lots and purchasers who were keen to secure their ‘little piece of heaven’ and so the restriction on sale that was a dampener on economic activity was eased.
However, in recognition that such contracts generally involve a developer and a consumer and therefore are conducted in an uneven bargaining environment, some restrictions still apply to such sales. These restrictions also recognise that there is likely to be a substantial delay between contract and settlement. Indeed, this very month, an obligation to include a conspicuous Notice to that effect in every off the plan contract has come into force. Other statutory provisions relating to such sale include limitation on the amount of the deposit and an obligation that it be held on trust, an obligation to include information about land surface works, a default period for registration (sunset clause) after which time the purchaser may avoid the contract and protection against changes to the proposed plan. These obligations require the inclusion of various provisions in the contract and these are included in the General Conditions.
Despite the fact that off the plan sales form a substantial part of the market, there have been relatively few decisions that have considered the meaning of these statutory protections. In the apartment market, there were some proceedings involving dissatisfied purchasers in the early days of the Docklands project, but those complaints tended to relate to price rather than off the plan issues. In the land subdivision market, the lack of cases probably reflects the fact that it is just too expensive for John Citizen to consider taking a land developer to Court in relation to such matters.
In recent years off the plan sales have become popular in an area that is something of a combination of the other two areas. Urban renewal and infill housing has created a market for small land subdivisions that involve the subdivider either constructing a home on the subdivided land or arranging for that construction. This scenario produced the recent case of Joseph Street P/L v Tan discussed in the September 2012 column and has now produced Besser v Alma Homes P/L  VSC 460.
This case involved a 4 lot plan of subdivision of a large block on a main road in Caulfield and the purchaser entered into an off the plan contract for a ‘front’ unit for $1,250,000. The contract included a copy of the proposed plan of subdivision which included a plan showing a common driveway between the two front blocks giving road access for the two rear units and revealed that an owners corporation would be created with each unit having a 25% entitlement and liability. After registration of the plan the purchaser became aware that the lot entitlement and liability had changed so that each front unit had an entitlement and liability of 1 out of 202 – less than 0.5%. This unilateral decision by the developer had apparently been made on the basis that the front units would not use the common property and, on a liability basis, could be seen to advantage the front units.
However this proposal had not been communicated to the purchaser, who took the view that the change amounted to “an amendment to the plan of subdivision which will materially affect the lot” thereby entitling the purchaser to avoid the contract pursuant to s.9AC of the Sale of Land Act 1962. The vendor argued that the change to the lot entitlement and liability schedule was not a change to the plan, but that argument was rejected. Similarly, the vendor’s argument that the amendment did not “materially affect” the lot was, not surprisingly, rejected. Pagone J. alluded to the loss of voting rights consequent upon the amendment, but the affect on insurance entitlement in the case of a combined building policy would also be a powerful reason to find material affectation.
Interestingly, the fact that the notification of the amendment and the purchaser’s avoidance was made after registration of the plan was not an issue. Section 9AC(1) does include the words ‘before the registration of the plan’ but presumably the vendor accepted that as notification came after registration of the plan, an attempt to limit the purchaser’s avoidance right to prior to registration would be doomed to fail. The interaction between s9AC and s.10, which also creates an avoidance right but is limited to exercise prior to registration, is uncertain and legislative clarification of the purchaser’s rights in this regard is needed.
SECTION 32 REVIEW
The Victorian government is conducting a review of the operation of s.32 of the Sale of Land Act 1962 through Consumer Affairs Victoria. The aim of the review is to “reduce the burden of ‘red tape’ on business and the community”. It might therefore be expected that the review will lead to a reduction in the disclosure obligations.
This is likely to disappoint consumer groups who would prefer a widening of those disclosure obligations in relation to matters affecting the quality of land, such as to require disclosure of the existence of asbestos or petroleum products on the land.
The review acknowledges that the purpose of the s.32 requirements was to reverse the onus for obtaining information from the purchaser to the vendor. Prior to the legislation (first introduced in 1982) the principle of caveat emptor meant that the vendor had limited disclosure obligations and the purchaser was obliged to obtain all relevant information relating to the property either before contract or, at the purchaser’s risk, after contract. Requiring the vendor to provide this information in the form of a Disclosure Statement before contract was essentially a consumer protection device.
There have been piecemeal amendments to the Act over the years and it would appear that one motivation for the review is to generally ‘clean up’ the requirements and perhaps transfer the requirements to Regulations rather than being specified in the Act so as to make review a simpler process.
One simple amendment would be to do away with the requirement that there be a separate Disclosure Statement and that a copy be included in the contract. This obligation is honoured in the breach and failure to comply would never be grounds to avoid. There might have been an argument that having a separate Statement somehow brought home to a prospective purchaser the significance of its content but the fact is, this does not happen and provision of a Statement in the contract should be sufficient.
The terms of reference of the review appear to flirt with the possibility of relieving the vendor of the disclosure obligation on the basis that the information is conveniently available to the purchaser. Apart from the fact that much of the information is not available to the purchaser, it would not be a good use of resources to require a number of prospective purchasers to duplicate the inquiries when a vendor can produce the Statement by one such inquiry.
The review also raises the issue of the timing of disclosure. At present the Statement must be provided pre-contract and is generally provided with the contract. In NSW an agent must not place a property on the market unless the equivalent Statement is available. There seems little virtue in adopting this requirement in Victoria, especially if the aim is to reduce ‘red tape’. A purchaser is not obliged to sign a contract when it is produced and has the right to seek advice in relation to the contract and Disclosure Statement when provided.
The disclosure of outgoings might be an area for reform. All properties attract rates and prospective purchasers might be expected to be aware of that fact. There seems little value in disclosure unless the purchaser is going to become liable for what might be described as an exceptional charge and that could only happen if the rating authority had followed a regime of giving notice to the vendor and such a notice would be required to be disclosed by the ‘notice’ provisions. Most vendors now adopt the ‘not more than’ formula for rate disclosure and removal of the obligation is not likely to undermine purchaser protection.
The review raises the question of the warnings that are required by s.32 and questions whether they might not be better located in the contract of sale, as are cooling off warnings and the new off the plan warning. The standard contract already specifically incorporates the Disclosure Statement, thereby including the warnings contained in that Statement and requiring such provisions to be included in the contract rather than the Disclosure Statement simply moves the red tape, rather than reducing it. That said, there would be some virtue in bundling all of the statutory warning in one place, whether that be in the contract or the Disclosure Statement.
Disclosure of services and service providers to the property has long been a contentious issue. For those 95% of properties sold in serviced areas, it is a non-event. For that small number of properties that are not serviced, a beefed up warning to prospective purchasers might be sufficient to alert them to the need to make inquiries in this regard.
The title documents to be disclosed are usually brief but a lot on a large plan presently technically requires the whole plan. This could be relieved by just requiring copies of relevant parts of the plan. Lots affected by such things as building envelopes and design guidelines seem destined to continue to consume trees but this aspect may at least be minimized when the long promised electronic conveyancing environment arrives. Developers’ off the plan contracts are the worst offenders in this regard and no doubt the primary aim of the review, but one would expect them to be the first to adopt an electronic environment.
Auto-reversionary pensions after MYEFO
By Daniel Butler (firstname.lastname@example.org), Director, and Bryce Figot (email@example.com), Director, DBA Lawyers
The Federal Government’s October 2012 Mid-Year Economic and Fiscal Outlook (‘MYEFO’) included an important announcement that provided a great boost of confidence to the SMSF industry. Namely, with effect from 1 July 2012, a tax exemption will apply following the death of an SMSF member in receipt of a pension until that pension has been paid out of the fund.
In light of this announcement, this article considers whether it is still important that pensions be made ‘auto-reversionary’.
In draft taxation ruling TR 2011/D3 the ATO stated:
A [pension] ceases as soon as the member in receipt of the [pension] dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund’s deed, or the rules of the [pension], to receive [a pension] on the death of the member.
This caused considerable concern. To illustrate, consider an SMSF with one member where that member has been receiving a pension for many years. Due to the pension (income tax) exemption in subdiv 295‑F of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’), the SMSF probably has not paid any income tax, including capital gains tax (‘CGT’), for a number of years. Now assume the member dies. The SMSF assets might be carrying a large, unrealised capital gain. The Superannuation Industry (Supervision) Regulations 1994 (Cth) require the deceased member’s benefits be cashed as soon as practicable after death. Accordingly, the assets might either be transferred out of the SMSF in specie or alternatively the assets might be sold and the proceeds used to pay out the death benefit. Either way, the SMSF will have a CGT event. According to the view in TR 2011/D3, there is no longer any pension and thus there is no longer any pension exemption. Accordingly, the CGT event could result in a significant tax bill to the fund.
TR 2011/D3 acknowledged that, with the correct documentation in place, it is possible for the member’s pension, upon death, to automatically continue. In this instance the pension exemption continues and no tax bill would arise to the fund. A pension structured like this is often referred to as a pension that automatically reverts, or an auto-reversionary pension (‘ARP’).
Change announced by the MYEFO
The MYEFO announced that:
The Government will amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund. This change will have effect from 1 July 2012. This measure is estimated to have a small but unquantifiable cost to revenue over the forward estimates period.
The superannuation law requires the benefits of a deceased member to be paid out of the fund as soon as practicable following the member’s death. The continuation of the earnings tax exemption beyond the death of a member will be subject to this existing requirement.
This change will benefit the beneficiaries of deceased estates by allowing superannuation fund trustees to dispose of pension assets on a tax-free basis to fund the payment of death benefits.
As noted above, the extension of the pension exemption following death will apply from 1 July 2012. However, TR 2011/D3 applies from 1 July 2007. This means that for pensioners who died on or prior to 30 June 2012, unless they had an ARP, the ATO consider the pension exemption ceased on the person’s death. We note the ATO view is reflected only in a draft ruling which is not law nor is it a binding ruling. Nevertheless it is consistent with the ATO’s view reflected in ATO ID 2004/688 where the pension exemption ceased upon the member’s death. Thus, if taxpayers do not follow the ATO’s view they may be at risk and should seek expert advice on how to manage such risk.
How to set up an ARP
Most reversionary nominations are mere wishes and are not binding. Thus to effect an ARP a ‘locked in’ reversionary nomination must exist. Typically, in an SMSF this requires a special deed that facilitates a nomination that binds a trustee’s discretion (ie, an effective fetter binds a trustee’s discretion based on a specific power in the deed).
Our experience over many years has shown that under most SMSF deeds we have reviewed, the binding death benefit nomination (‘BDBN’) would prevail over a reversionary nomination. BDBNs are more specific as to death and are binding. A reversionary nomination, on the other hand, is typically discretionary and is effected at the time of commencement of a pension.
Alternatively, the ARP can also be facilitated by a BDBN that directs not just to whom the death benefit is to be paid (eg, to spouse) but also how (eg, as a pension). Naturally, the SMSF deed should also authorise this.
Thus, an ARP typically needs to be ‘locked into’ the SMSF governing rules to be effective and often this is via a specially drafted SMSF deed with a reversionary nomination and/or by a suitably drafted BDBN.
Are ARPs still required?
The next question is, once the MYEFO extended pension exemption announcement becomes law, will an ARP ‘locked in’ reversion still be required?
Interestingly, an ARP will, following the proposed change, not be required for the pension exemption to continue beyond a pensioner’s death . However, the ATO consider that an ARP was required for pensioners who died on or before 30 June 2012 to ensure the pension exemption continues beyond death.
Therefore strictly speaking there appears to be no need for ARPs after 30 June 2012. However, considering the proportioning rule in s 307-125 of the ITAA 1997, there can be significant advantages in ensuring each pension has a ‘locked in’ ARP as it provides better protection against adverse tax and succession risks.
Broadly, the proportioning rule results in each benefit reflecting the applicable proportion of tax free and taxable components. In other words, one cannot ‘cherry pick’ the tax free money; a benefit paid must reflect a proportion of each (tax free and taxable) component.
In an SMSF environment, a member is generally required to have one or more separate pensions to have more than one superannuation interest. This is because, an SMSF member only has one interest unless they have one or more pensions: Income Tax Assessment Regulations 1997 (Cth) regulation 307-200.05. Indeed, a lot of planning has been directed at ensuring the tax free component of each pension has been maximised in recent years and this has generally resulted in members having numerous pensions (aka superannuation interests) in the same SMSF.
In some cases, taxpayers may have certain pensions that are 100% or predominantly tax free and others that are predominantly taxable. In this situation, the death of the pensioner may, given the ATO’s views in TR 2011/D3, result in a member ceasing his or her pensions unless an ARP is in place for each pension. If the pension ceases, it reverts back to accumulation mode and if there are several pensions involved, the different pension interests are merged together. This results in mixed taxable and tax free components, which cannot be separated or untangled again. Thus, ensuring ARPs exist in respect of each pension will overcome this risk. Naturally, to achieve an effective ARP requires an appropriate SMSF deed, pension documents or BDBN. These documents are generally available from SMSF lawyers.
The announcement in MYEFO is great news for the SMSF industry and the government should be commended for its foresight and practical approach. However, there are still reasons to ensure a pension is an ARP to protect against adverse tax consequences. Quality SMSF documentation here is a key factor in achieving an effective strategy.