Reference no: EM132317425 , Length: word count:2000
TASK - CASE STUDY
Consider the following case study and respond to the questions which follow:
Gerry O'Reilly is a self-employed dentist aged 58. Gerry is married to Mary aged 45 and together they have 2 young daughters aged 13 and 11. Gerry also has a son, Hamish aged 23 from a previous marriage. Hamish works with Gerry in their dental practice.
Gerry draws an income of $310,000 from the business. In addition to this he makes the maximum concessional contribution to super each year.
Gerry and Mary own the following assets:
|
Assets
|
Jointly
owned
|
Gerry
Owned
|
Mary
Owned
|
|
|
|
|
|
|
|
|
Cash
|
$ 55,000
|
|
|
|
|
Fixed Term Deposits
|
$ 110,000
|
|
|
|
|
House and contents
|
$ 990,000
|
|
|
|
|
Cars
|
$ 110,000
|
|
|
|
|
Art collection
|
|
|
$ 35,000
|
|
|
Investment property
|
|
|
$ 850,000
|
|
|
Listed share portfolio
($100,000 unrealised capital gain)
|
$ 215,000
|
|
|
|
|
Business Interest
|
|
$ 415,000
|
|
|
|
Business Property
|
|
$ 550,000
|
|
|
|
Total
|
$ 1,480,000
|
$ 965,000
|
$ 885,000
|
$ 3,330,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REST
Superannuation Fund
|
|
Gerry Account
Balance
|
Mary Account
Balance
|
Combined Total
|
|
Amount
|
|
$ 750,000
|
$ 720,000
|
$ 1,470,000
|
|
|
|
|
|
|
|
Grand total
|
|
|
|
$ 4,800,000
|
Gerry's super fund comprises $500,000 taxable and $250,000 tax free component. Mary's REST account comprises $300,000 taxable and $420,000 tax free component.
Mary's investment property is a residential property located in Redcliffe currently rented to her mum. The unit is managed by a professional property management group at a
commercial rate. Costs for the property include: Body Corporate $6,500, Rates $3,200, Water $1200 cleaning costs $3,500, agents fees of $1800. Rental income is $525 per week.
Gerry and Mary's financial adviser has advised the couple to establish a SMSF. Gerry and Mary would like to arrange for their respective REST superannuation balances to be rolled over to their SMSF.
Gerry & Mary have no debt.
Question 1
a) How do Gerry and Mary go about setting up the SMSF ie what key steps are involved? What key documents need to be put in place and what do they need from the ATO?
b) What are the options available to Gerry and Mary regarding the trustee structure of the fund? Which option would you recommend? Why?
c) Gerry and Mary wish to roll over the balance of their REST super accounts. What are the tax effects of the rollover (if any)? What will be the tax components of their new SMSF accounts?
d) Under the superannuation covenants and operating standards, the trustee of a superannuation fund is required to formulate, regularly review and give effect to an investment strategy. Detail an outline structure suitable for Gerry and Mary's SMSF.
Only 12 months has elapsed since the establishment of the SMSF and Gerry and Mary have now decided to separate. Mary has decided to relocate to Belfast and intends to spend the next 3 to 4 years working overseas. Gerry and Mary intend to enter into a legally binding financial agreement which will provide for the following division of assets:
|
Assets
|
Jointly
owned
|
Gerry
Owned
|
Mary
Owned
|
Total
|
|
|
|
|
|
|
|
Cash
|
$ 55,000
|
$ 35,000
|
$ 20,000
|
$ 55,000
|
|
Fixed Term Deposits
|
$ 110,000
|
$ 55,000
|
$ 55,000
|
$ 110,000
|
|
House and contents
|
$ 990,000
|
$ 300,000
|
$ 690,000
|
$ 990,000
|
|
Cars
|
$ 110,000
|
$ 55,000
|
$ 55,000
|
$ 110,000
|
|
Art collection
|
|
|
$ 35,000
|
$ 35,000
|
|
Investment property
|
|
|
$ 850,000
|
$ 850,000
|
|
Listed share portfolio
($100,000 unrealised capital gain)
|
$ 215,000
|
$ 215,000
|
|
$ 215,000
|
|
Business Interest
|
|
$ 415,000
|
|
$ 415,000
|
|
Business Property
|
|
$ 550,000
|
|
$ 550,000
|
|
Total
|
$ 1,480,000
|
$ 1,625,000
|
$ 1,705,000
|
$ 3,330,000
|
|
O'Reilly Family Superannuation Fund
|
|
Gerry Account
Balance
|
Mary Account
Balance
|
Combined Total
|
|
Amount
|
|
$ 750,000
|
$ 720,000
|
$ 1,470,000
|
|
|
|
|
|
|
|
Grand total
|
|
$ 2,375,000
|
$ 2,425,000
|
$ 4,800,000
|
In drawing up the financial agreement Gerry was determined to retain ownership and control of his business and commercial property and despite wanting to retire in the near future was prepared to trade off other assets to achieve that.
Question 2
Mary has decided to resign as Trustee and member of the O'Reilly Family Super Fund and will rollover her balance to a new fund. Gerry would like to retain the SMSF.
a) What are the capital gains tax considerations on splitting the fund into two SMSFs?
b) What are the options available to Gerry regarding the trustee structure of the fund? Which option would you recommend? Why?
c) Gerry's accountant has suggested that Gerry transfer the commercial property where Gerry's business is located into his SMSF. Is this permissible under the SIS Act? What are the key considerations?
Question 3
Mary likes the concept of a SMSF and intends to establish her own SMSF by rolling over her existing superannuation balance into her new SMSF prior to moving overseas.
a) What options are there for Mary regarding the trustee structure of the fund? What issue does Mary need to be careful of given her temporary absence from Australia.
b) Mary intends to use some of the funds available in her SMSF to purchase pieces of art. Would Mary's SMSF be permitted to invest in pieces of Art? If, so what conditions would apply?
c) Would Mary's SMSF be permitted to acquire her existing $25,000 Art collection? What are the key issues under the SIS Act that allow or disallow this?
d) Mary would like to transfer the residential property into her SMSF. Is this allowable? What are the key issues under the SIS Act that allow or disallow this?
e) Assuming Mary does not make contributions to her SMSF while she is overseas, will her fund be classified as a resident fund in the next two financial years and beyond? What difference would it make if she contributes to her SMSF while overseas? What is the impact of becoming a non resident fund?
Question 4
Gerry intends to retire when the girls are independent but does not want to sell his commercial property. On his death he would like to ensure the commercial property is transferred to Hamish with any remaining superannuation balance in the fund to go to his two other children.
a) Following separation and in the time leading up to retirement (7 years) Gerry's super fund account balance grows at the rate of 8% p.a. (4% growth and 4% income) plus his normal concessional contributions each year. What is his account balance at the end of year 7? How much tax on earnings and contributions will the fund pay in year 7? (assume earnings and concessional contributions are credited annually at the end of the relevant year, capital gains are not realised and tax is deducted annually at the end of the relevant year)
b) What other super strategy might Gerry be able to use in the lead up to retirement? What are the benefits of such a strategy?
c) Assume Gerry retires after 7 years (age 65) and decides to convert his fund into an Account Based Pension. Using your account balance calculated in Question 4a what would be Gerry's minimum pension payment? Are there any limitations to how much pension that can be drawn in any one year?
d) Gerry's mother is single, 80 years of age and has assessable financial assets of
$280,000. These assets are financial assets for income test purposes. Gerry's mother has personal effects to the value of $12,000. What is her age pension entitlement? Why? Assume single homeowner, no dependents. Use Centrelink data provided below.
Assets test limits for allowances and full pension
|
|
Homeowner
|
Non-homeowner
|
|
Single
|
$258,500 - $564,000
|
$465,500 - $771,000
|
|
Couple (Combined)
|
$387,500 - $848,000
|
$594,500 - $1,055,000
|
Some assets are deemed to earn income, while certain assets are not included in the assets test.
• For pensions, assets over these amounts reduce pension by $3.00 per fortnight for every $1,000 above the amount (single and couple combined).
Income test for single, couple combined, illness separated (couple combined)
Attachment:- Assessment task.rar