Hot Issues
spacer
SMSFs: Our 'hardest' jobs
spacer
ASIC issues alert over big gaps in SMSF trustee knowledge
spacer
Super savings gap for women stuck at 30%
spacer
Statistics for all Australians
spacer
Super set to play bigger retirement role
spacer
Why SMSFs want estate-planning advice
spacer
The power of financial role models
spacer
Assess your retirement financial resources
spacer
Cryptocurrency audits tipped to increase this EOFY
spacer
Time to check your risk exposure?
spacer
Some general interest stats on SMSFs
spacer
Check trust deed to protect super in estate planning
spacer
Survey reveals strong opposition to retirement system changes
spacer
Australia by numbers – Update
spacer
Federal Budget 2018 – Overview
spacer
Your Budget
spacer
4 components of our 2018 Federal Budget
spacer
Tools to help you manage your financial position are available on our site.
spacer
New rules capture SMSFs trading big with cryptocurrency
spacer
Common EOFY slip-ups flagged for SMSFs
spacer
Beware residency rules if moving overseas
spacer
99 pct of SMSFs missing global opportunities
spacer
How to plan for a better retirement
spacer
Australia by numbers - Update
spacer
Determine your retirement goals
spacer
ATO issues update on cryptocurrency compliance traps
spacer
How likely is a global trade war?
spacer
Gig economy spike prompts calls for super policy changes
Article archive
spacer
Quarter 2 April - June 2018
spacer
Quarter 1 January - March 2018
spacer
Quarter 4 October - December 2017
spacer
Quarter 3 July - September 2017
spacer
Quarter 2 April - June 2017
spacer
Quarter 1 January - March 2017
spacer
Quarter 4 October - December 2016
spacer
Quarter 3 July - September 2016
spacer
Quarter 2 April - June 2016
spacer
Quarter 1 January - March 2016
Quarter 2 of, 2016 archive
spacer
Making investing a family affair
spacer
Super and divorce: a personal finance issue
spacer
Market Update - May 2016
spacer
ASIC flags SMSF investors in scam risk
spacer
Older, greyer and still working
spacer
Working and contributing to super past 65
spacer
The pitfalls of part-year pensions
spacer
Replenishing SMSF memberships
spacer
Budget will hit 15% of SMSFs
spacer
The insidious side of low interest rates
spacer
Market Update - April 2016
spacer
Budget 2016-17
spacer
Do investment principles stand test of time?
spacer
Estate Planning - early inheritance
spacer
US economy will bend, not break
spacer
A detailed look at the ATO’s new LRBA guidance
spacer
Defying life's blueprint
spacer
ATO continuing lodgement crackdown
spacer
Another twist on the gender savings gap
spacer
Market Update – March 2016
spacer
Going solo
spacer
Age Pension means-test prevents rational decision-making
spacer
Changing times for super collectables
spacer
Preservation Age Rule
spacer
Why investing for retirement isn't just about super
The pitfalls of part-year pensions

 

The process of starting an account-based pension or transition to retirement pension involves complying with a range of requirements you need to be aware of.

           

Commencing an account-based pension or transition to retirement pension part way through the year can present some challenges that need to be conquered to ensure there are no compliance issues along with the resulting consequences.

There are, of course, the common requirements that apply no matter when a pension is commenced. Some of these include:

  • A condition of release must be satisfied. 
  • The trust deed of the SMSF must allow for the payment of an account-based pension or a transition to retirement pension. 
  • The member must make a written request to the SMSF trustee(s) to commence a pension, nominate the start date, the amount required and the frequency of payments. 
  • Because an SMSF is considered a financial product under the Corporations Act 2001, before a pension is commenced a product disclosure statement (PDS) needs to be provided to the member or acknowledgment by the trustee(s) that it is believed, on reasonable grounds, that the member has received, or knows that they have access to, all of the information that a PDS would be required to contain. 
  • Trustee(s) need to consider whether there are enough liquid funds to support the pension payments. 
  • Written notification must be provided from the trustee(s) to the member in respect of minimum and possibly maximum payments requirements, the tax-free portion that will be applicable and other taxation implications – for example, if the member is under 60 the requirement to withhold tax from any income stream payments made.

There are, however, other requirements that are still applicable to full-year or part-year pensions but are a bit trickier or can be overlooked where a part-year pension is involved.

Don’t forget to revalue the assets

When a pension is commenced at the start of the financial year, the assets will have been valued as part of the preparation of the financial statements of the SMSF for the previous financial year. When a pension is commenced part way through a financial year there is still a requirement to revalue the assets of the fund and this will mean the preparation of a separate set of financial statements, at the time when a pension is going to be commenced, to determine the total value of the fund. 
This will determine the portion that will be transferred to a pension account and any funds that will remain in the accumulation account. This is important for calculating the mandatory minimum and maximum amounts that must be paid.

Difficulty in working out the minimum and maximum pension payments

Once a pension commences, there is the ongoing requirement to ensure that the payments made in a financial year satisfy the minimum and maximum percentage requirements. This can be a bit tricky where you have to calculate for a part year and, of course, if the minimum amount is not paid or the maximum is exceeded (transition to retirement income stream) it will mean that the payments made are no longer classed as supporting the payment of an income stream and it will be ruled that the payment of the pension ceased at the start of the financial year and that portion of the fund was not in pension mode.

Any payments made will be treated as super lump sum payments for both income tax and SIS regulation purposes. It also means that the SMSF will not be able to claim exempt current pension income and any income will be taxed at 15 per cent as well as any capital gains. It doesn’t appear to be that complicated; however, it can be.

Consider this scenario: a couple have super in both a retail super fund and also an SMSF. They were receiving a pension from the retail super fund and decided to roll their balance from the retail super fund into their SMSF during the year and commence a pension in their SMSF part way through the year. That requires consideration of many factors and makes the calculation quite difficult.

Clarification on the segregated method

In an SMSF, there may be a member who is in pension phase and another member who is still in accumulation phase. These balances need to be separated or segregated to work out the exempt current pension income portion in relation to the balance that is supporting the payment of an income stream. Where it is not possible to separate the funds, they are classed as being unsegregated and an actuarial certificate is required. When the assets that are supporting the payment of a pension are clearly segregated, there is no requirement to obtain an actuarial certificate.

Up to October 2015 it was not possible to use the segregated method if a pension was started part way through the year, as the ATO stipulated that the segregated method can only be used where assets have been segregated for the entire financial year. An addendum to Taxation Determination (TD) 2014/7, however, clarified that: if the balances are clearly segregated, then there is no requirement to obtain an actuarial certificate where a pension is commenced part way through the financial year.

By Audrey Dawson, director, Super Confidence


Columnist: Audrey Dawson 
Wednesday 27 April 2016
SMSFadviser.com.au