What financial advisers are asking

Financial advisers have a myriad of issues to resolve every day. From the technical issues that arise when you're getting to the right solution for a client, to the regulation and compliance requirements that sit across every aspect of your work. And, let's not even get into deciphering what's expected of you by the Code of Ethics....

It's a lot and you want to be certain you're on the right path.

The Knowledge Shop financial advice membership offers technical help desk support across multiple specialities. 

Here’s a sample of top questions and answers from Knowledge Shop’s financial advice membership - it's your professional 'wingman'.

Taxation

• Main residence 6 year absence rule for a father moving into care 
• Applying the CGT retirement exemption contribution rules

Superannuation

• Catch up contributions for someone who has never worked in Australia and never made a contribution
• Downsizing the farm

Centrelink and aged pension

• Effects of a trust distributions on aged pension
• Impact on aged pension when family home transferred for $0

Compliance and ethics

• Do I need to refund the review fee if a client missed their meeting?
• We don't have any complaints, do we need to lodge a 6 monthly report with ASIC?
• My client gave us a 3 out of 5 on Google. Is that a complaint?

Taxation

Main residence 6 year absence rule for a father moving into care 

We have a client who's father is going into aged care and paying a refundable accommodation deposit. He will have no ownership over the accommodation. He has a house and is considering renting it out once he moves into care. Is it correct that the main residence exemption 6 year rule would apply to this situation?

You are correct that paying a RAD does not give someone ownership in a dwelling so no new main residence would be acquired. Assuming the eligibility criteria are met, your client's father could choose to apply the absence rule under s118.145 and continue to treat the former home as a main residence. This could apply for up to 6 years if rented or indefinitely if not rented.

Applying the CGT retirement exemption contribution rules

Can you please assist in clarifying the Small Business CGT Retirement Exemption contribution rules please?

Background

• Member aged 74 (turns 75 in 2023-24)
• Reached his $1.6m Transfer Balance Cap on 30 June 2019 with his Account Based Pensions
• Also has an accumulation account of $1m

1. Assuming he meets the eligibility criteria to make a CGT Retirement Exemption contribution (and hasn’t previously made one in the past) in the 2023FY, then his lifetime limit is $500,000 which can be contributed to the SMSF?

2. A CGT Retirement exemption contribution is not counted towards the NCC caps nor does the member’s total super balance (TSB) preclude them from making this type of contribution, however it does count towards their lifetime super CGT cap of $1.65m?

3. No work test needs to be met if the CGT exempt amount is contributed before he turns 75?

1. If the client has a gain exempted under the retirement exemption they can contribute up to $500,000 of the exempted gain into super. There aren’t any TSB limits on making small business CGT contributions, however the age 75 contribution deadline still applies so you need to be mindful of that (contributions must be received no later than 28 days after the end of the month the client turns 75).

2. Small business CGT contributions aren't part of the usual NCC caps but do form part of the overall lifetime CGT cap, so as long as you have confirmed no other small business CGT contributions have been made then you should be OK there.

3. The work test doesn't need to be met for small business CGT contributions. This changed on 1 July 2022 (see Repealing the work test for voluntary super contributions). Once the client has passed the age 75 deadline then the contribution cannot be made.

Superannuation

Catch up contributions for someone who has never worked in Australia and never made a contribution

Client is 63 years and only has investment income. She will be selling an investment property in 2023 FY and will have a substantial capital gains tax payable. She has never worked in Australia and has made no contributions to super.

Under the carry forward rules can she use the unused concessional contribution for the 2019, 2020, 2021 and 2022 FY totalling $102,500 and make this contribution in the 2023FY. In addition she can also contribute $27,500 for the 2023FY. Please confirm.

There is no requirement to have made super contributions in the past to use carry forward concessional contributions or even to have had an Australian Super Fund.

The only criteria is having under $500,000 in total super balance on 30 June (2022 in this case) and having the unused amount - which these clients would meet if they have never had Australian superannuation.

You are correct on the amounts. If we are triggering the gain in FY 2023 then we would have 2018-19, 2019-20, 2020-21, 2021-22 plus the current year of 2022-23) which would give them a total of $130,000 available.

You haven't mention the size of the assessable gain but we don't recommend contributing an amount that would take the client below their effective tax free threshold which would be approximately $21,884 for 2022-23.

If your client is not planning on retiring in Australia then before contributing they should seek advice on any tax ramifications in their home country that could apply to drawing lump sums or pensions from the Australian superannuation system.

Downsizing the farm

A farming couple, both over 65 years of age, sell their farm for $5m and retire. The couple can access the 15 year exemption on this property for CGT purposes. They wish to contribute the majority of the proceeds into superannuation. They have no superannuation savings prior to this. What must they do to allow them to also access the downsizer contribution to maximise the amount they can get into superannuation?

The ATO has confirmed in Guidance Note 2018/2 that their isn't any need to apportion the proceeds across the main residence and non main residence parts for downsizer purposes so as long as the overall farm sells for more than $600,000 and they meet the other requirements then they can make the $300,000 each in contributions (see below).

Murray sells the farm containing the main residence for $3 million dollars
Under the CGT rules Murray is entitled to partially disregard the capital gain on the main residence and the adjacent land, up to 2 hectares, which is not used to produce income. If Mavis' name had been on the title to the farm, she would have also been able to partially disregard a capital gain in the same manner.

Murray and Mavis both meet the main residence requirement.

When working out the maximum amount Murray and Mavis can contribute, there is no need to apportion the proceeds of sale from the property based on which part of the property was eligible for the main residence exemption. They are entitled to make downsizer contributions of up to $300,000 each into their superannuation as this adds up to less than the proceeds of sale from the property.

The requirements, forms and deadlines for a downsizer contribution are on the ATO link below. https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Downsizer-contributions-for-individuals/?page=2#How_you_will_know_if_you_are_eligible

Centrelink and aged pensions

Effects of a trust distributions on aged pension

One of our clients has a discretionary trust and is thinking of giving trust distributions to his parents for the FY22, FY23 and/or others.

We want to know whether any trust distributions provided by our client to his parents will reduce or eliminate their eligibility for the Age Pension?

Another question we want to ask is regarding the disclosure of these trust distributions. For example, does one have to disclose that one received trust distribution 5 years ago? Is there a limit?

If one received trust distribution today, it would affect the age pension in this year. However, if one received a trust distribution 5 years ago, would it still affect today?

If the parents have no control over the trust and were not the source of the funds in the trust then they would generally be treated as 'non attributable stakeholders'.

The parents will have the income divided by 26 and assessed as fortnightly income for 12 months from the date of resolution to distribute. There isn't any look back outside of the 12 months and there is no 5 year rule. This should only be an issue if they were already receiving Centrelink or were looking to apply in the next 12 months. See: https://guides.dss.gov.au/social-security-guide/4/12/7/50

"Distributions paid to non-attributable stakeholders on or after 1 July 2000

Distribution or dividends paid to a NON-ATTRIBUTABLE stakeholder on or after 1 July 2000 may be assessed as a gift from the attributable stakeholder/s (subject to their attribution percentage/s) and income of the non-attributable stakeholder for 12 months from the date of the resolution to distribute.

Example: John, who is in receipt of an income support payment, is the sole attributable stakeholder of a private family trust. After 1 July 2000, John distributes $6,000 to each of his 2 children (recorded on the trust income tax return), who are also in receipt of income support payments. From 1 January 2002 John is subject to the deprivation provisions in respect of the $12,000 he 'gifted' to his children. This gift received by John's children is treated as income of John's children for 12 months from the date of the resolution to distribute.

Exception: Distributions paid to a non-attributable stakeholder will not be assessed under the deprivation provisions for the controller if:

• the income support recipient can show they were not in receipt of an income support payment and could not have reasonably known that they would require income support at the time the distribution or dividend was paid, AND
• the income support recipient makes a written declaration of the above.

The distribution will still be assessed as income of the non-attributable stakeholder for 12 months from the date of the resolution to distribute. This rule also applied to income assessed from discretionary trusts pre-1 January 2002.

Impact on aged pension when family home transferred for $0

Adult son purchases father's main residence for nil consideration with a market value of $400K. Property unencumbered.

Adult son then intends to pay the father $1,000 per week down the track, during such point in time the father will be receiving the Centrelink Age Pension.

Question: How would Centrelink treat the father's $1,000 weekly annuity paid for income testing purposes?

Under the Centrelink gifting rules, the father will have a deprived asset of $390,000 assessed for 5 years from the property transfer ($400,000 less $10,000 annual allowable gifting limit). If the father isn't eligible for the Age pension for over 5 years, then that won’t be an issue but if he does apply earlier then he will need to disclose this gift and it would be counted as an asset until the original 5 year period elapses.

If the son doesn't have a legal obligation to pay the father the $1,000 a week, then this would likely be a receipt of a regular gift for the father. Regular gifts received from close family members are not counted as income for the Centrelink income test - see below.
https://guides.dss.gov.au/social-security-guide/4/3/9/50

Gifts
The following table shows how different gift situations are assessed as income for social security purposes.

Note: Prior to 1 July 2017, gifts received regularly from an immediate family member were reduced to a fortnightly equivalent and treated as income for benefit purposes.

Impact on aged pension of splitting land into parcels

Can you please advise on the implications on the following:

Mum owns a 5 acre property that contains her main residence and surrounding land. Due to age, she wants to downsize and it considering splitting the title into 2 and transferring the excess land to daughter's trust for the trust to then subdivide again into 2 blocks and construct a dwelling for rental purposes.

Mum acquired land October 1985. Transfer will be at market value, and Mum will pay for the expenses relating only to the initial splitting of the 5 acres into two blocks.

As I understand, Mum will be liable for capital gains tax on the land as there is no dwelling to which we can apply main residence exemption however she can access general 50% CGT discount. There will obviously be stamp duty on the transfer. Mum is currently in receipt of full Centrelink age pension. My understanding is that the entire property is currently an exempt asset for Centrelink asset test purposes however this will obviously change post sale, similarly with income test likely to apply on the cash/loan receivable. Will Mum's age pension be further affected by the capital gains income in the year of transfer?

A main residence and the surrounding 2 Hectares would be exempt for Centrelink income and asset purposes. 2 hectares is just under 5 acres. https://www.servicesaustralia.gov.au/real-estate-assets?context=22526 The Centrelink income test doesn't capture capital gains - see below.

https://guides.dss.gov.au/social-security-guide/4/3/8/30

Capital gains

Sale of real estate may result in a capital gain. A capital gain is NOT treated as income for social security income support purposes. If a capital loss is made it CANNOT be offset against other income amounts.

The main impact of selling part of this land is that Mum would have the proceeds assessed as an asset and income from any investments she makes may be captured under the deeming provisions for the income test depending on the type of investment.

Mum would still remain a homeowner based on living in the remaining part of the property and to keep at least a part pension she would need assessable assets of less than $622,250 (single) or $935,000 (combined if member of a couple). To continue to receive a full pension she would need assets below $280,000 or $419,000 (combined if member of a couple).

As long as the transfer is at market value there shouldn't be any Centrelink gifting issues.

Compliance & ethics

Do I need to refund the review fee if a client missed their meeting?

A client of mine failed to turn up for his review meeting. It’s not the first time. Given he did not cancel or reschedule, do I have to refund the review fee? PS: My dentist charges me a fee if I don’t turn up without first cancelling or rescheduling.

Yes, you do unless the review meeting is rescheduled within the 12 month period of the agreement.

Assuming the client did not turn up to the review in the 12 month period, the fee needs to be refunded and a new ongoing service agreement be established.

If the fee arrangement in place includes a review and the review does not occur within the 12 month period, there is a potential breach of section 912A General Obligations of the Corporations Act 2001 that requires an AFS license to demonstrate it is acting efficiently, honestly and fairly. In this case, a fee has been deducted but the service not provided.

Accepting a fee and not providing a service is also a breach of the Code of Ethics. This is because, by not providing a service when a fee is charged, a relevant provider has breached the values of the Code of Ethics e.g., to act honestly in other words to do what you say you are going to do.

Charing a fee and not providing the service is also a clear breach of Standard 9 of the Code of Ethics. This standard states that a relevant provider has an ethical duty to act with integrity. It also requires a relevant provider to act in the best interests of each client. Acting with integrity requires openness, honesty and frankness in all dealings with clients. For example, acknowledging that the service was not provided and refunding the fee.

The Standard also requires that all financial product advice, and all financial products, be offered “with competence”. Among other things, this also requires that all relevant providers act efficiently, honestly and fairly. Paragraph 912A(1)(a) of the Corporations Act requires licensees to “do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”; this Standard ensures that a corresponding ethical duty applies to all relevant providers and not just their AFS license.

We don't have any complaints, do we need to lodge a 6 monthly report with ASIC?

I understand that all AFS licenses must lodge a complaint report to ASIC every 6 months. But we haven’t had a compliant. Do we still lodge a report?

Two things: yes, you must lodge a report even if you have not had a complaint; and, really, no complaints?

From 1 January 2023, all AFS licences are required to lodge a report with ASIC every six months. The report must include any complaints that they have received since 1 January 2023. And, if no complaints have been made in the period, the requirement is that an AFS licence must still lodge a report indicating no complaints have been received.

ASIC have provided a handbook to assist AFS licences comply with the new requirements. All licences must lodge their reports every six months.

See https://asic.gov.au/regulatory-resources/financial-services/dispute-resolution/internal-dispute-resolution-data-reporting

On the second point, it is unusual to receive no complaints. It would be worth doing a double check to ensure that you are capturing the expanded definition of a complaint that came in on 1 October 2021. See Regulatory Guide 271 (RG 271.27 is very broad and 271.31 and 271.32 for clarity).

My client gave us a 3 out of 5 on Google. Is that a complaint?

I received a 3 out of 5 review from my client on Google. In the feedback, they mentioned that it took too long to update and execute their investments but other than that, we were good. I have spoken to the client since and they are fine, it was really their opinion at the time. I am assuming general feedback is not a complaint – they weren’t dissatisfied as such with a 3 review?

Yes, the “feedback” is a complaint. The definition of what is a complaint was broadened in October 2021. A complaint is now defined as an expression of dissatisfaction made to or about an organisation, related to its products, services, staff or the handling of a complaint, where a response or resolution is explicitly or implicitly expected or legally required. This also includes social media or accounts controlled by the firm and is the subject of the post and the person posting is both identifiable and contactable.

In your case, you received a negative comment (and expression of dissatisfaction) specifically about the services provided by your firm. And, the client is identifiable. The complaint needs to follow your internal dispute resolution process.

I understand from your question that you contacted the client and resolved their issues regarding the execution of the investments. You need to have a record of the complaint and confirmation that the complaint has been resolved. This is important, as of 1 January 2023, it is a requirement that all AFS licenses lodge a complaints report (even if they have not had a complaint) with ASIC every 6 months.

For clarity, if the review was anonymous (you could not identify the client), then it would not be a complaint.

See Regulatory Guide 271.