"Powers of Attorney" - financial controls & family affairs

Enduring Powers of Attorney

An "Enduring Power of Attorney" is often drawn up by a person seeking to take control of their affairs in anticipation of an overseas trip or before a medical procedure.  It is a legal document which enables a person to act as if they were another in legal or financial matters. They are called "enduring" as the appointment of the attorney continues beyond the legal incapacity of the donor.  Since 2004 in Victoria we have Powers of Attorney with specific areas of operation.  The main arenas are financial and medical.  Do you know what's involved as a donor? What are your duties if you have been appointed as an attorney? 

As we age, legal, financial, medical, ethical and emotional issues can converge.  Family members, advisers and caregivers can sometimes be in conflict over "what is best" and it is a useful control mechanism for  specific powers of attorney to be drawn to deal with practical matters after a person has lost their legal capacity.  We don't  have to be "old" to suffer a brain injury from a car accident.

Parents are living longer. The 85-and-over age group is the fastest growing in Australia, and more have dementia. They are staying at home longer, dependent on family care for extended periods. There are more children from those big, post-war families to wrangle over decisions: who is the primary carer, who has financial control, who is mismanaging Mum’s money, who isn’t pulling their weight ...And a parent’s death doesn’t end the fighting; the value of the parental home has increased so dramatically over the decades that more siblings consider it worthwhile going to court over the estate, destroying whatever skerrick of good will may have survived.  Read more here.

Adele Horin's article published on 3 March 2013 in the Global Mail (link above) deals with the increasing frequency of inter-familial disputes in circumstances where aged parents have dementia.  Adele has commenced a blog called "The Coming of Age" which you can read here.

Did you know:-

1. If you have appointed an attorney for financial purposes alone then that attorney cannot act on your behalf in relation to medical treatment and vice versa;
2. An appointment of an enduring power of attorney made prior to 2004 remains valid if it was made in accordance with the laws of the day; and
3. The Office of the Public Advocate recommends all people over the age of 18 appoint someone to be their attorney for both medical and financial purposes regardless of their age or health. Just as you should have a will, so should you have someone who can made decisions on your behalf if you are ever unable to do so yourself.

Leaving the details of medical powers of attorney alone, there are a number of important matters of which any adult should be aware in relation to Enduring Powers of Attorney (Financial).

1. Rules apply to the documentation associated with the appointment of the attorney - you should check that all the formalities have been complied with including witnesses and acceptance of the appointment.  There are three ways the appointment can commence - either from the date of the acceptance by the attorney to appointment, or on a specified date, or on a certain occasion such as when the donor loses capacity.  Medical proof may be required to trigger the appointment in the third instance.
2. Even though a financial attorney has no power over medical consent, s/he should arrange for the donor to give a consent form to the attorney (at the time of the appointment) that enables access to medical records and information about the donor's capacity.
3. It may be desirable for the attorney to know the details of the donor's will - for example where there is a disabled child requiring the preservation of a particular asset such as real property.  It's best to deal with this before the donor loses capacity because an attorney does not have a legal right to see the donor's will.  Also note that once a donor has lost legal capacity, the donor's will cannot be changed unless an order is made by the Supreme Court.
4. An attorney must  have or be able to find out information that will enable him/her to act in the donor's best interests.  It's a significant administrative role requiring knowledge about:-

• bank account details
• real estate details (titles, mortgages)
• shares and investment details
• safe deposit boxes
• motor vehicle details
• names of all professionals:- lawyer, accountant, doctor
• location of financial and legal records
• how to access records on a computer (logins, passwords, backup, security)
• insurance details
• income details and records
• special entitlements and government allowances
• any limitations, conditions or instructions the donor has specified in the power of attorney
• the donor's specific wishes regarding financial and legal affairs and lifestyle wishes with financial implications
• if there is to be more than one attorney - how the attorneys are to work together
• contact details of any enduring guardian or attorney (medical treatment)
• details of donor's will if relevant

Specific duties arise for attorneys which may not be avoided, such as the duty to act in the best interests of the donor and to keep accurate records and accounts of transactions and dealings.  Attorneys must keep their property separate from a donor's and must not overreach their powers according to the appointment.  Attorneys must not have a conflict of interest with the interests of the donor and when executing a document as an attorney, s/he must make a note that it is being executed as Name of donor, by his/her duly appointed attorney, Name of Attorney.  There are other broad duties of an attorney which are imposed by law such as to recognise the donor's right to participate in decisions as much as possible and to respect the donor's worth, dignity and human rights.

It is also relevant to know that some powers of a donor can't be exercised by an attorney, such as the right to vote, as these powers are personal.  Also, if the donor has been appointed by a third party to exercise a power, then that cannot be delegated to the donor's attorney.  For example, if a donor is an executor under someone's will, then this power cannot be exercised by the donor's attorney.

VCAT (Victorian Civil and Administrative Tribunal) has responsibility for powers of attorney, managed by its Guardianship List. It has powers to make determinations in relation to such powers.  This includes powers to require an audit of accounts or seek an investigation into the exercise of the power.  VCAT can also supervise, give advice, vary the effect of a power, declare what the powers are, revoke or suspend the enduring power of attorney.  It can also give permission for an attorney to resign.  Further  information can be found at www.publicadvocate.vic.gov.au

If you don't have an Enduring Power of Attorney (Financial) or Medical then you need to give these matters some thought and seek legal advice.  If you have been appointed as an attorney then you should be mindful of all your obligations and duties arising from this appointment.

Add these arrangements to conducting transparent conversations among family members about expectations surrounding aged care,  parent-to-child loans and lifetime gifts of cash and we suggest that far more families will operate harmoniously in the challenging circumstances of incapacity and death and the living relationships which endure.

Aussie Super - too generous?

Mercer consulting released a report this week which concludes that:
...current tax concessions on superannuation in Australia are not generous when compared to retirement systems in eight other countries, considered to have the best pension systems in the world (Australia, Canada, Switzerland, Netherlands, Denmark,  Sweden, USA and UK).

The report may be downloaded here.

It shows:  

• after tax retirement benefits provided to Australians are lower than five of the eight countries for an individual on average earnings, with a 9% employer contribution over 40 years

• Australia is the only country that taxes employer and self-employed contributions, and it is also the only country where employees don't receive a tax deduction for contributions.  

• Australia is also one of only three countries that taxes income earned by pension and superannuation funds. The other two are Denmark and Sweden. Australia is, however, one of only two countries that does not tax retirement income.  You can read the Fairfax commentary on this here.   In Australia  contributions and earnings are reduced by taxes over a person's working life and  this has a direct impact on the final benefit received by retirees, and in many cases increases the likelihood of people receiving an age pension

• Recent changes to contribution caps leave Australia third last on this measure.

The main conclusion: whilst the Australian superannuation system benefits higher income earners the most, the design of the whole system is reliant upon all those people's taxes paid both during their working lives and on the income earned by their superannuation funds. Amendments to the system made in order to fill a budgetary hole may jeopardise the ability of the system to fund pension benefits into the future.

Super Election

Cartoon by Nicholson from "The Australian" newspaper: www.nicholsoncartoons.com.au

Be prepared for a lengthy debate about Superannuation in the lead up to September's federal election.  A government with falling revenues and big promises (Gonski education reforms, National Disability Insurance Scheme, an ever burgeoning health budget) needs to find the money to pay for the policies from somewhere. Already, we know the following:-

The ALP Government is considering proposals to make changes to the tax treatment of superannuation.

In Parliament on Monday 4 February 2013, Opposition Leader Tony Abbott called  on Prime Minister Julia Gillard to join him in ruling out any ''unexpected adverse changes'' to superannuation arrangements, ''now or in the next Parliament''.

Senator Nick Sherry (former Superannuation Minister from 2007-2009) was reported in the Australian Financial Review (6 February 2013) urging the government not to change the way it taxes super and consider other ways to raise revenue, including cuts to contributions to generous public service super.   He said the current tax treatment for super was “appropriate” though he did add that there were areas within the super system that require attention:

1. the current retirement access age for super of 60 should be raised to 67, which is what the pension access age will climb to over the next decade. (The retirement access age allows people to work part-time and draw down their super at the same time.) and
2. the government’s contribution to military super should be cut from about 28% and public sector super from 15.4% and said there was “no justification” for such a level of contribution “above the community standards”.

In response to that, Prime Minister Julia Gillard has said Labor would “never” introduce a new tax on super lump sums. Instead, the speculation now is that Cabinet's expenditure review committee is examining higher tax rates on super contributions and earnings instead, with a goal of identifying new revenue sources without targeting any one income class.  Unions have urged cabinet to target the top 10 per cent of income earners, arguing that those high earners receive one-third of the existing tax benefits. 

Commentary on the speculation abounds.  The Australian newspaper ran this editorial on 7 February:

The changes smacked of a tax grab on wealthy people motivated by the politics of envy, not considered amendments to shore up the system's long-term viability. The Henry review's recommendations on superannuation, at hand for more than three years, have been comprehensively ignored. Further curbs to superannuation tax concessions will not provide the torrents of revenue the government hopes. Savings from withdrawing tax concessions - routinely put at about $30 billion - are a mirage that assumes contributions continue even if the concessions are withdrawn. Discouraging further contributions to Australia's $1.4 trillion private savings pool will ultimately cost the government money - perhaps not the Gillard government but future governments and ultimately future taxpayers. Superannuation helps defray the long-term cost of the age pension, which at about $35bn a year is by far the largest burden on Australia's taxpayers.

On Friday 8 February the Association of Superannuation Funds of Australia warned:

decreasing incentives for individuals to put super at the forefront of their retirement planning risks creating bubbles in other sectors if investors turn to, for instance, property investments.

And further, Robert Gottliebsen wrote on Friday 8 February that the Treasury has made errors in their calculations of the actual subsidy represented in superannuation concessions which together with inflated projections of returns on investment (7%) have led the Commonwealth government to "muck up the sums", revealed by the Self Managed Superannuation Fund Owners Alliance.  Gottliebsen contends that the real concessions lie in property: "and they can't be touched".  Read it here.

What to do?

We don't yet know the specific policy nor its timing.  There is a question over whether any proposals could be legislated prior to the coming election.  

Investment managers will tell you that "governments in desperate need of revenue will always fiddle with superannuation tax concessions, irrespective of sensible calls by the industry for certainty and confidence" see the view from the Institute of Chartered Accountants.  See also our October 2012 blog post SMSFs - the less change the better.

For retirees - it's irrelevant.  For those nearing retirement it's an uncertainty.  For those aged 40 and younger it's a disincentive to participate in voluntary contributions into superannuation as participants can't have confidence in the system, its longevity and its relevance to the participant over the longer term.  However, we also know that the under 40s are not really the major contributors to superannuation because of the other life expenses such as houses, school fees and other children's expenses .  

We shall observe closely and provide updates as appropriate particularly with a view to SMSFs.

Bringing it home

Industry is coming back to the USA.  Some call it “insourcing” or "onshoring".

Yesterday Apple CEO Tim Cook announced a $100 million investment returning the manufacture of Mac computers to the USA in 2013: “We’ve been working for years on doing more and more in the United States.” He added that he hoped it would spur on more U.S. manufacturing. “The consumer electronics world was really never here. It’s a matter of starting it here.”  Whether this is the start of something bigger or an attempt at good PR in Washington, the Apple announcement comes on the heels of GE’s recent reintroduction of its appliance manufacturing assembly lines to its Louisville Kentucky “Appliance Park” which had been languishing since the 1980s decision to shift manufacturing to China.  The GE initiative is costing $800 million and CEO Jeffrey Immelt said, “I do that because I think we can do it here and make more money.”  The Atlantic Magazine December 2012 contains a fascinating article on the topic entitled “The Insourcing Boom”.

Global economic factors are now in play:-

·         Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

·         The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory in the USA. (Natural gas now costs four times as much in Asia as it does in the U.S.)

·         In US dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.

·         American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

·         U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods.

The compressed and ever shortening product cycle, coupled with the adaptation of "mature" products such as dishwashers and water heaters to include computer software to improve efficiency and functionality also drives changes to factory processes.  Factories take a while to settle into a new product, a new design. They face a learning curve. But models that have a run of only a couple years become outdated just as the assembly line starts to hum. That, too, makes using faraway factories challenging, even if they are cheap.

GE is rediscovering that how you run the factory is a technology in and of itself. The R&D that can happen there, if you pay attention, is worth a lot more to the bottom line than the cost savings of cheap labor in someone else’s factory. GE’s appliance unit does $5 billion in business—and today, 55 percent of that revenue comes from products made in the United States. By the end of 2014, GE expects 75 percent of the appliance business’s revenue to come from American-made products like dishwashers, water heaters, and refrigerators, and the company expects that its sales numbers will be larger, as the housing market revives.

What’s happening in factories across the U.S. is not simply a reversal of decades of outsourcing. If there was once a rush to push factories of nearly every kind offshore, their return is more careful; many things are never coming back. Levi Strauss used to have more than 60 domestic blue-jeans plants; today it contracts out work to 16 and owns none, and it’s hard to imagine mass-market clothing factories ever coming back in significant numbers—the work is too basic.

Appliance Park once used its thousands of workers to make almost every part of every appliance; today, every component GE decides to make in Louisville returns home only after a careful calculation that balances quality, cost, skills, and speed. Appliance Park wants to make its own dishwasher racks, because it can, and because the rack is an important part of the dishwasher experience for customers. But Appliance Park will likely never again make its own compressors or motors, nor is it going to build a microchip-etching facility.

Manufacturing employment will never again be as central to the U.S. economy as it was in the 1960s and ’70s—improvements in worker productivity alone ensure that. Back in the ’60s, Appliance Park was turning out 250,000 appliances a month. The assembly lines there today are turning out almost as many—with at most one-third of the workers.

All that said, big factories have a way of creating larger economies around them—they have a “multiplier effect,” in economic parlance. Revere Plastics Systems, one of GE’s suppliers, has opened a new factory just 20 minutes north of Appliance Park, across the Ohio River in Indiana, and has 195 people there working in three shifts around the clock. The manufacturing renaissance now under way won’t solve the jobs crisis by itself, but it could broaden the US economy, and help reclaim opportunities—and skills—that have been lost across the past decade or more.

Many offshoring decisions were based on a single preoccupation—cheap labor. The labor was so cheap, in fact, that it covered a multitude of sins in other areas. The approach to bringing jobs back has been much more thoughtful.  

It bodes well for the US economy and we consider it’s a trend for Australian investors to watch closely.

Beware! SMSFs investing in property

From time to time the Tax Office issues “Taxpayer Alerts” intended to be an “early warning” of significant new and emerging higher risk tax and superannuation planning issues or arrangements.  This is published for SMSF trustees and their financial advisers “to exercise care” .

The latest Taxpayer Alert TA 2012/7 published 20 November 2012 relates to self managed superannuation funds (SMSFs) which acquire property in contravention of the superannuation laws.  You can find it in full here.  The ATO is particularly concerned about acquisitions involving limited recourse borrowing arrangements (LRBA) or the use of a related unit trust.

Incorrect structuring of such arrangements may lead to a range of significant consequences for the fund such as:

• Having to include the SMSF loan repayments in members’ assessable income;
• Members having to declare the income and associated deductions from the investment rather than by the SMSF;
• Rendering the SMSF non compliant for tax purposes, leading to the requirement that it include amounts of income from previous years in its assessable income (45% tax rate applied to its income and market value of its assets other than undeducted contributions measured at the start of the income year in which the fund becomes non-complying.  There may also be civil or criminal penalties for trustees);
• The unit trust might incur a capital gains tax liability in relation to the disposal of the property; and
• The Members and the SMSF may be required to include a capital gain in their assessable income on redemption of their units in the unit trust.

Structuring such property acquisitions by SMSFs within the rules is complex and requires great care and knowledge of the Superannuation laws and regulations.  We have done these transactions for clients who have specific knowledge of the property in question together with a clear idea of its likely future performance and who are prepared to very carefully negotiate and structure the requisite documents.  It’s certainly not for everybody.

We also note that residential real estate in Australia would need to rise around 8% from today to reach its all time high (in 2010) and we consider generally that now is not the time to consider such an acquisition within super, with the primary purpose of seeking capital gains.  The Australian equity market by comparison needs to rise by over 50% from today to reach its all time high (2007).  In all likelihood both asset classes will make new highs in the next decade but this comparison shows equity markets have more to gain than Australian residential real estate.  The comparison is different for commercial and industrial property.

We know you won’t find many financial advisers in Australia taking this line –there are many spruikers out there offering to SMSFs the prospect of property investments using LRBA or related unit trusts.  Be warned!

SMSFs - the less change the better

Cartoon by Nicholson from "The Australian" newspaper: www.nicholsoncartoons.com.au

Rumours  abounded prior to the recent Mid-Year Economic and Fiscal Outlook (MYEFO) that Treasurer Swan was looking to fill a hole in the Budget by attacking the superannuation industry one way or another. Changes to capital gains tax had been mentioned by various commentators.  We saw the significant labour union and industry super figure in Bill Kelty come out and make a strongly worded statement via the weekend papers that the government should "be very careful" when tinkering with the superannuation system.  As it's turned out the only measure to hit  self-managed funds is the increase in the SMSF levy from $191 to $259, which equates to around $32 million a year in extra revenue.

An additional pleasing measure for self managed fund trustees and their advisers to know about is the government's move to amend the law as it relates to the tax exempt status of fund income earned on investments used to support pensions.

The government decision overturns a draft ruling made by the Tax Office last year and will allow the pension earnings tax exemption to continue after the death of a pensioner until the deceased member's benefit has been paid out of the fund.

Andrea Slattery, CEO of the SMSF Professionals Association of Australia said on 22 October 2012:

This is excellent news for the thousands of SMSFs in the pension phase which could otherwise have faced significant capital gains tax bills on the payment of death benefits.

The new law will apply for the 2012-13 tax year.

Trustee Penalties - Self Managed Super laws

The Government has released draft legislation which introduces administrative consequences and penalties for trustees of self managed superannuation funds (SMSFs) and the accompanying explanatory material which will apply from 1st July 2013.

The Cooper Review had found that the existing penalty regime applicable to trustees of SMSFs limits the Commissioner of Taxation’s (the Commissioner’s) ability to achieve optimal regulation of the SMSF sector. It concluded that additional tools (both punitive and educational), in conjunction with its existing powers are required to give it more flexibility to deal with non-compliance with the law. In exposure draft stage, the legislation gives the Commissioner powers to issue rectification directions, educational directions and administrative penalties to individual trustees and directors of corporate trustees who contravene the SMSF rules.

Currently, the Commissioner has the following options to rectify non-compliance:-

• making an SMSF non-complying for taxation purposes;
• applying to a court for civil penalties to be imposed. A person may also face criminal penalties for more serious breaches of the law;
• accepting an enforceable undertaking in relation to a contravention; and
• disqualifying a trustee of an SMSF.

These could all lead to members suffering a penalty arguably disproportionate to the breach. Applying current penalties can be costly and time-consuming. The Commissioner is unlikely to use the existing range of powers except in cases of significant non-compliance with the law. The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening conduct by simply rectifying the conduct when it is detected. This may be appropriate in certain circumstances, but the Explanatory Memorandum to the draft legislation states "it is not appropriate that trustees can continue to contravene the law and for their actions to have no consequences".

The new legislation will allow the ATO to levy penalties upon the trustee (i.e. personally payable by the individual person who committed the breach) and which must not be paid or reimbursed from assets in the SMSF. These penalties could range from monetary fines (up to $6,600) through to attending educational courses that relate to their responsibilities as a trustee.

It is intended that the range and type of remedy and penalty will give the ATO greater flexibility and additional tools to regulate SMSF trustees.

This is going to become a greater issue in the context of SMSFs taking a greater proportion of the superannuation industry in Australia.  Disaffected investors are moving into SMSFs at a great pace as the big listed funds are looking at woeful performance results.  Robert Gottliebsen wrote recently:

In a vast number of cases individuals have found they are able to tailor their investments to their own needs and slash their costs. The strong performance of bank deposits has been a major factor in self managed funds doing well.

From minor amounts a decade ago, self managed funds have captured an incredible 35 per cent of the market and look set to take half of all superannuation.