Advanced Pension strategies
&
Auditors Role
Manoj Abichandani
SMSF Specialist Advisor
SMSF Specialist Auditor
ASIC Approved SMSF Auditor
Our Objective Today
1.
2.
3.
4.
5.
6.
7.
8.
Commencement of a pension in a SMSF
What are the Pension Standards
Transition to Retirement Pension
Reversionary Pension
When does a pension Cease
Death of a pensioner
Pension Strategies
Audit of Pension Funds
Disclaimer
Material contained in this presentation is a summary only and is based
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the market. It is not the intention of Deed Dot Com Dot Au Pty Ltd that
this presentation be used as the primary source of readers’ information
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excluded).
This presentation has been prepared for general information and not
having regard to any particular person’s investment objectives, financial
situation or needs. Accordingly, no recommendations (express or
implied) or other information should be acted upon without obtaining
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Deed dot com dot au Pty Ltd
Why Pensions is such an important topic
•
•
•
•
1 Million members – 39% receiving Pensions
8.5% receiving Transition to Retirement
Pensions
$19.1 Billion were paid in pensions
With Baby Boomers retiring about 30,000 new
members will be commencing pensions
Issues - Eligibility to commence a Pension
1. What is the age of the pensioner’s and of their
partner or spouse?
2. Has the member satisfied a condition of release
and turned 60?
3. Has the pensioner retired or reduced their working
hours? Has the member retired (number of hours
worked per week) or are they commencing a
transition to retirement pension?
4. Does the pensioner need to top up their
employment income with pension income?
Issues - Pension commencement Issues:
5. What is the current net rate of return been produced
by the fund assets and will a tax saving result if a
pension is commenced?
6. Does the retiring member intend to withdraw their
superannuation interest and re-contribute the amount
as *non-concessional contribution to the fund?
Issues - Pension Calculation Issues
7. What are the tax components of the member’s
accumulation pension account?
8. What is the member’s taxable income from non-super
sources during the year?
9. Can a member use a salary sacrifice strategy in
conjunction with the pension, to reduce their taxable
income?
Issues - Pension Payment issues
10. Does the member’s benefit contain an unrestricted
non-preserved component?
11. Should the member’s accumulation account be split
into two pensions, one containing the unrestricted
non-preserved benefit and one containing the preserved
component?
12. When to pay the pension so that the minimum pension
payment requirement is met.
13. Can we pay the minimum or maximum pension amount
in cash or in assets of the fund?
Issues - Estate planning issues
14. What is the member’s estate plan? Does the member
have dependants that can receive the remainder of the
pension on death as a reversionary income stream
or a lump sum?
15. In case of death of the pensioner, how can death
benefits be paid and who do they need to be paid to
(multiple marriages etc)?
Issues - Other Pension issues
16. Does the member have the capacity to make further
concessional contributions to the fund and are we
going to segregate these assets?
17. What is the member’s investment strategy and will it
produce sufficient cash flow to meet pension
obligations and minimum pension payment standards?
18. Is the pension fund going to borrow?
1.
Commencement of a pension in a SMSF
a) Preservation Age
b) Net Market Value
c) Taxable and Tax Free Components
d) Documents required to commence a pension
What type of Pensions can be commenced
from a SMSF
Income Stream
• Only Account Based Pensions Reg 1.06 (9A)
• Must satisfy SISA and SISR
• Regular Payments from a separate superannuation
interest
Annual Payment – but – not Lump Sum
Account Based Pensions SISR 1.06(9A)
Major Issues
• Loss of Exempt Pension Income Deduction
• Taxable component being paid to a nondependant
• Net Market Value to convert 100 % or Part of
accumulation account (SISR Sch. 7 (2) (2))
• Decide commencement date of pension –
before sale of an asset - CGT ISSUES
• How often the payments will be made (at least
once in a year) – No payments if pension
commences after 1st June (SISR Sch 7 (1) (4))
The Money in the SMSF are Preserved up to
Retirement Age
A Persons Preservation age depends on their Date of Birth
Date Of Birth
Preservation Age
Before 1st July 1960
55
1 July 1960 – 30th June 1961
56
1 July 1961 – 30th June 1962
57
1 July 1962 – 30th June 1963
58
1 July 1963 – 30th June 1964
59
After 30th June 1964
60
Year 1960 + 55 years = 2015
How Pension Payments are taxed
Tax Free
Component
Taxable
Component
55 and over
Not included
in Income
Tax Rate
But 15 %
Rebate
60 and over
Not included
in Income
Tax Free
Age
Market Value of Assets at Pension
Commencement (SISR Sch. 7 (2) (2))
Mid – Year Pension Commencements
Purchased
Property
$400K
Pension
Commencement
date
Value of property
$1M
All assets must be
at NMV to work out
minimum pension
amount
Each superannuation interest has
Two components
• Taxable = tax deductible
(concessional)
• Tax Free = un – deductible
(non-concessional)
(Pre 1983)
SMSF Structure - Every Superannuation
Interest has its own proportion
Member 1
Member 2
Member
Accumulation
Account
Accumulation Account
TF/T
TF/ T
Pension Account 1
TF/T
Pension Account
Pension Account 2
TF /T
TF/T
Multiple Pensions
• Each Superannuation Interest has its “Tax Free” and
“Taxable Component”
Accumulation
Taxable
Tax Free
Pension Account
Pension Account
X Can’t Pick
Once mixed
cannot be un-mixed
Tax Free Pension
Taxable Pension
On pension start date
• Pension Account
– Taxable & Tax Free components are
calculated as % value of
superannuation interest
• Growth in same %
• Pension in same %
• In accumulation account
– Growth is Taxable component
Income in Accumulation phase
Opening Bal.
Tax Free
Taxable
50,000
50,000
Income
Closing Bal
20,000
50,000
70,000
Income in pension phase – Proportionate rule
Tax Free
Taxable
Total
Op Bal.
50,000
150,000
200,000
%
25%
75%
100%
Income
3,000
9,000
12,000
Pension
- 1,000
- 3,000
- 4,000
Total
52,000
156,000
208,000
Pension Commencement
• Commencement
– Date when to commence a pension
– Supporting documents
• Pension Agreement
• Trust Deed
• Binding or non-binding Death benefit nomination
• Funding
– Accumulation Account
– Rollover
– New contribution
How to document account based pensions
Steps have to be followed - to claim Exempt
Pension Income
1. Member to apply for pension
2. Application has to be accepted by Trustee and
PDS to be issued
3. Schedule of Pension payments “Taxable” &
“Tax Free” components
4. Pension Conditions have to be decided
5. Pension Agreement executed
Pension Terms & Conditions
• Pension Conditions
– Between Trustee & Member
– Terms of payment Monthly / Weekly
– Date Pension has to commence
– % of accumulation account
– Minimum amount which has to be withdrawn
– Reversionary or Not
• Multiple Income Streams
– More than one superannuation interest
– Estate Planning opportunities
• Taxable Component
• Re-contribution Strategies
Superannuation Interests
1. Every member gets only one accumulation account
2. No new contributions in pension account
3. Income in Accumulation phase Increases “Taxable
Component” but proportionately in pension account
4. When a pension is commenced – all the assets of the
superannuation interest are to be valued at market value
2. What are the Pension Standards
a) Minimum payments
b) Add to an existing pension
Other Pension Standards
Account Based Pension
1.
2.
3.
4.
5.
Minimum pension payment
No Maximum – 10% in case of TRIP
(Clause 1 & 2 of Sch. 7 SISR)
Can be transferred only after death or Family Court
Order
Capital Value & Income cannot be used as a security
(SISR 1.06 (9A) (d))
Cannot add more to the capital of the pension
(SISR 1.06 (1) (a) (ii))
Pension member may devise a separate investment
strategy (SISA Sec 52(f))
6.
Pensioner has reached preservation age or other
conditions of release (Reg 1.06 (9A)
7.
How often the payments will be made (at least once in
a year) – No payments if pension commences after 1st
June (SISR Sch 7 (1) (4))
8.
In case of death of member – who should get the
reversionary pension (SISR 1.06(9A) (C ))
9.
Before commuting the pension during the year –
withdraw the minimum amount (SISR 1.07D (1) (d))
What Happens: If no minimum Pension is paid
• The Fund has not met Pension Standards
• Pension ceases at the beginning of the year
• Pension account has merged with accumulation account
• Fund cannot claim Exempt Pension Income Deduction
1/12 short is / may be allowed – TR 2013/5
Must pay minimum amount
• If not enough cash = borrow
– 90 day allowed – limited to 10% of assets
• Promissory notes / Cheques
– Must be cashed when presented at a reasonable time
– 1/12 short may be allowed – TR 2013/5
• Commute a part of the pension at the start of the year
– If some amount is paid which is less than minimum
amount
Cannot add more contributions to a pension
account (SISR 1.06 (1) (a) (ii))
Pension Account
No Tax on Income
Accumulation Account
Tax on Income
FROM
Employer
Member
Spouse
SMSF
Roll over
Other
Pensions
Lump Sums
Member
3. Transition to Retirement Pensions
Transition to Retirement Pension
• Trust Deed must allow it (SISR 6.01 (2) )
• Member must be preservation age (55
Years)
• Pension Minimum 4% and maximum 10%
of account balance
• Assets paying pension do not pay any
Income tax (up to $100K Limit - Gone)
• Assets of accumulation phase moving to
pension phase pay no CGT
Transition to Retirement Income Pension
Pension Account
No Tax on Income
SMSF
Pensions
Accumulation Account
Tax on Income
Member
Segregated (Actuarial Determination) OR un segregated Super Fund
Tax Saving by being on TRIP
$500K Fund – 6% income
Tax Rate
Income
of fund
Tax Saved
in Super
Min
Pension
Tax on
pension
21%
<$37K
30,000
$4,500
$10K
$600
34.5%
<$80K
30,000
$4,500
$10K
$1,950
39%
<$180K
30,000
$4,500
$10K
$2,400
47%
>$180K+
30,000
$4,500
$10K
$3,200
Secrets of a Good TRIP
1. Maximise Tax free component (un-deducted) in
super
2. The sooner super is in pension phase – the
sooner it will pay NIL tax – AGE 55
3. Imputation Credits are refunded to pension
funds = high contribution = no tax
4. Actuarial Certificates
5. Not Suitable only when high income of
pensioner and low income of SMSF
4. Reversionary Pensions
- No Reversionary pensioner nominated
- Reversionary Pensioner nominated
Reversionary Pensions
Reversionary Pensions:• After death pension reverts to dependant
• Must be a tax dependant (Spouse or Child under 18 or
under 25)
• If no reversionary pensioner is nominated - Lump Sum is
paid - all assets have to be sold – NO TAX PAID before
lump sum can be paid to dependant / non-dependant
No reversionary pensioner nominated
Assets of the SMSF
Sold to pay lump sum
SMSF
SMSF
Accumulation phase Pension phase
Pension
Commencement
Date of Death
SMSF
Accumulation phase
Lump Sum Paid to
Dependant or non-dependant
Tax Free Both
components
Tax 17%
Taxable Comp.
Reversionary pensioner nominated
SMSF
SMSF
Accumulation phase Pension phase
Pension
Commencement
Date of Death
Reversionary
Pension phase
Dependant will join the
SMSF as a member if
not already a member
or will get two pensions
if already on pension
5. When does a pension cease
a) Capital exhausted
b) Pension /Commutation
c) Partial Commutation
When does a pension Cease
• The capital is exhausted
• The pension is fully Commuted
• Fails to comply with SIS Regulation
“Pension Standards”
• A member dies and there is No
AUTOMATIC reversion
On Death : If paid as a Lump Sum
Payment to non-dependants – 17%
Tax
When does a pension Cease
• The capital is exhausted
– No new fund earnings
• Reserve allocation
• Negative Earnings
– Excessive withdrawal
Roll-overs or new contributions cannot be added to
capital of an existing pension
When does a pension Cease
• The pension is fully Commuted
– Member application to commute
– No future entitlement to an income
stream
– Lump Sum can now be paid
• Why Commute
– Capital Preservation
– Commence a new pension with new
money in Accumulation Account - also
known as re-boot of pensions
– Wind up fund - pay death benefit
Once commuted – the pension rolls back
into Accumulation Phase
What happens if you commute a pension
• Loss of Exempt Pension Income
– Income Tax and CGT
• Recalculation of Tax Free and Taxable
Component
– Pension is mixed with accumulation
account
– Once mixed cannot be unmixed
Can be good or bad for the fund and for
Estate Planning
Commutation of a Pension
• Before commutation
– Must pay the minimum amount
– Pro-rata withdrawal from 1st July to date
of commutation
• Why merge Pension - Benefits of Multiple Pensions
– Pro-rata minimum withdrawal for each
pension
– Access to withdraw more – existing
accumulation account
– Have various Tax Free Vs Taxable
ratios for each Pension
Rebooting Pensions
Un realised Gain
Accumulation Account
End of Financial Year
Pension Payment
Existing Pension
Merging Pensions – good idea?
Pension 1
Taxable
Tax Free
Pension 2
Tax Free
Taxable
Merging Pensions
Commute Pension 1
& Re-contribute
To accumulation
= Commence a new
pension
Pension 1
Taxable
Tax Free
Pension 2
Tax Free
Pension 3 instead of Pension 1
Tax Free
Taxable
Merging 2 Pensions
Commute Pension 1
Re-contribute
Commute Pension 2
To accumulation
= Commence a new
pension
Pension 1
Taxable
Tax Free
Pension 2
Tax Free
Taxable
Pension 3 Instead of Pension 1 & 2
Tax Free
Taxable
Partial Commutation of a Pension
• Partial Commutation does not result in ceasing a
pension
• Before commuting the pension during the year –
withdraw the minimum amount (SISR 1.07D (1) (d))
• Lump Sum paid to member from Partial
commutation counts towards the minimum pension
payment requirement (and can be paid in-specie)
– Minute the election that payment is not a
superannuation income stream
When to use Partial Commutation
• Lump Sum is better than Pension
– Age 55 to 60
– Low Rate threshold is not utilized ($185K)
– Member is not working
– Age Pension Centre-link is not an issue (spouse of a
Age Pensioner)
• Lump Sum is included in Income
• Beneficial if even Low Rate threshold is utilized
– No tax till $18K
– 15% rebate on payments
Can do both – Pensions till $18K = Then Lump Sum
6. Death of a Pensioner
a) Issues
b) Reversionary Pensioners
c) Lump Sums
Death of Member / Pensioner – Issues
1. Was the member in accumulation phase or
pension phase;
2. Is the death benefit of the member is being paid
out to a death benefits dependant;
3. Is it being paid as a lump sum or as an income
stream;
4. Is there a binding death nomination is in place;
Death of Member / Pensioner – Issues
5. What are the taxation components of the death benefit
6. Insurance claim to be treated in the fund and whilst
making a payment to the non death benefit dependant;
7. If assets of the fund are being sold to pay death benefit,
what is the tax implication of the capital gain to the fund
8. Age of dependant receiving death benefit
Death of Pensioner
• Reversionary Pension must be “Automatic” and must be
documented (SISR 1.06(9A) (C ))
• Current pensions – can you add an Automatic reversionary
beneficiary – whilst alive
– Commute and commence with new terms and conditions
• Contradictory Documents
– Binding Death Nomination
– Trust Deed
• Change to Death Benefit Pension after death
– Look at the Pension Agreement
– Trust Deed must allow this to happen
• Trustee discretion
Death of Pensioner
Trustee Discretion
• Pensioner 67 Years old = Spouse 50 Year
– Which one is better
• death benefit lump sum or a pension
• Amount of pension is based on the age of
Pensioner in the first year
– 5% in first year then 4%
• Pensioner 56 Years old = Spouse 62 Year
– Which one is better
• death benefit lump sum or a pension
7. Pension Strategies
– Rebooting Pensions
– Merging Pensions
– Re-contributions
3 Main Pension Strategies
1. Commence TRIP on 55th Birthday
2. Salary Sacrifice - Less tax at Individual level to be paid
from 55 years to 59 years and nil after age 60
3. Maximise “Tax Free” component for Estate Planning
Before turning 65 years - lump sum payments
and re-contribution strategies
• Must convert “Taxable” component to “Tax Free”
Component
• “Tax Free” component must be contributed where there
is no “Taxable” accumulation account as once mixed it
cannot be un-mixed
• Maximise non-concessional contribution
• If retired “62 $540K / 63 X / 64 X/ 65 $540K”
Re- contribution Strategy
Lump Sum / Pension payment 2014- 15 year
Age
Amount of
Payment
Taxable
Component
55 and over
Up to $185K
Tax free
55 and over
Over $185K
15 %*
60 and over
Any Amount
Tax Free
*Any re-contribution above $185K should be done after age 60
Re-contribution Strategy
Contribution
$540K once in three years
SMSF
Spouse 2. Over 60
Spouse 1 . 55 to 60
If Younger spouse gives up work early
Re-contribution Strategy
between 60 – 65 years
• When you die :
– Taxable component paid to nondependants (Adult Kids)
• Withdraw $540K of Taxable Component
and - re-contribute as Tax Free
• Larger fund balance or have already used
up $540K or over 65 Years age
– Can contribute back in spouse’s name
Re-contribution Strategy - 2 funds
SMSF
Accumulation
$2M Taxable
Component
SMSF
Pension
Tax Free Component
Mr. & Mrs
over 60
Re-contribution Strategy for older spouse
SMSF
SMSF
Mr. Over 60
Mrs. 55 to 59
Up to Low
Rate
Threshold
$185,000
Two Funds - TRIP
Accumulation Fund
Pension Fund
SMSF
Pension
SMSF
Accumulation
Taxed
Component
Tax FREE Component
Employer
Member
between 55 & 60
To avoid mixing Taxed and Tax free components
8. Audit of fund paying a pension
Audit Issues – Pension Funds
1. Does trust deed allow account based pensions
( TRIS SISR 6.01 (2) )
2. Fund is claiming Exempt Pension Income –
Why – is any member on pension – since
when – Pension documents
3. Evidence & Calculations of “Taxable” and “Tax
Free” components at the time of
commencement of pension
Audit Issues – Pension Funds
GS 009 – Audit of SMSF’s
4. Actuarial Report if there is an accumulation
account and pension account in existence at
the same time and assets are not segregated
5. Correct withholding tax in case of member is
less than 60 years old
6. Minimum amount withdrawn – maximum 10%
withdrawn in case of TRIS
We Sell Only Online
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SMSF Deed Update
Pension Documents
Corporate Trustee
Actuarial Certificates
Incl. GST
$125
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$81 + ASIC Fees
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