By Monica Rule

Many people commence accessing an income stream benefit (i.e. a pension) from their Self Managed Superannuation Fund (SMSF) without being aware of the requirements under the superannuation law, taxation law or the corporation law.  Many also do not have appropriate documentation in place.    So let’s have at look at the requirements.

Conditions of release
An SMSF member needs to meet one of the conditions of release under the superannuation law in order to access their superannuation savings in their SMSF. The conditions are things such as reaching your preservation age and retiring from the work force; reaching the age of 65; transitioning to retirement; or temporary incapacity or terminal medical condition grounds. 

Trust Deeds
The trust deed of an SMSF must allow for the payment of a superannuation benefit in the form of an income stream.  If the trust deed does allow for an income stream benefit, it will also state the process of how an SMSF member can access this benefit and the trustee’s obligation in paying the benefit.

Trustee Minutes
Most SMSF members and trustees are not aware of the requirement to document decisions made and actions taken by their SMSF.  For example, the process of a member accessing a pension from an SMSF may include notifying their SMSF trustee in writing of their intention to commence a pension.  The trustee will then acknowledge, in writing, the member’s intention in a trustee minute. A meeting of trustees (whether it be the individual trustees or directors of a corporate trustee) will normally take place where the member’s intention to access a pension is discussed and a decision made to allow for the commencement of the pension.  The minutes of the meeting may detail the member’s superannuation account balance and the resolution that the trustee is satisfied the member is eligible to be paid a pension from the SMSF.  The trustee will then notify the member in writing regarding the commencement of their pension. The member will then need to formally accept the offer in writing.

Market value
An SMSF trustee must determine the market value of the assets in the SMSF supporting the pension on the day the pension commences.  All income and contributions received during the financial year must be included in the valuation.  This will then assist the trustee to calculate the tax-free and taxable components of the member’s account at the commencement of the pension. These components will then be used for each pension payment.

Investment strategy
SMSF trustees/members may want to review their SMSF’s investment strategy to ensure that it still reflects the members’ retirement needs.  An SMSF needs to hold more cash in the pension phase than in the accumulation phase in order to meet pension payment obligations and other liabilities.

Product disclosure statement
There are opposing views in the financial industry as to whether an SMSF is required to provide a Product Disclosure Statement (PDS) to a member commencing a pension from their SMSF.   The confusion is caused due to subsection 1012D(2A) of The Corporations Act 2001 which states - a PDS is not required to be given if the financial product is an interest in a self-managed superannuation fund and there are reasonable grounds for believing that the fund member has access to all of the information that the PDS would be required to contain. 

ASIC provides guidance in Regulatory Guide (RG 168) in respect of subsection 1012D(2A). It states:
“While each member of an SMSF must be either a trustee or a director of the SMSF (if the trustee is a body corporate), and as such has an obligation to know about the fund in order to fulfil their duties, this does not, in itself, give an issuer or adviser reasonable grounds to believe that a prospective member has, or has access to, all of the information required.” 

In my opinion, regardless of the legal arguments, I think it is a good idea for trustees to issue a PDS when a member commences a pension. I doubt that many trustees could honestly say that they have reasonable grounds for believing that their fund members have access to all the information that a PDS would be required to contain. In any case, legal document providers, such as Law Central, provide excellent and inexpensive PDS templates which will give trustees piece of mind should they be challenged over the issue.

A PDS should contain all the information that an SMSF member needs to make an informed decision on whether to convert from an accumulation phase to a pension phase.  The PDS should outline the pension entitlements, type of pension, pension commencement date, annual payment requirement, and tax treatment of the pension.   A PDS should be provided either when the trustee acknowledges receipt of the member’s election to take a pension or when the trustee makes the first pension payment.

Minimum pension limit
Once a pension commences, a minimum amount needs to be paid from the SMSF.  The minimum amount is determined by the member’s age and the percentage value of the member’s superannuation account balance at either the commencement date of the pension or at 1 July each financial year.  If an SMSF has not paid the minimum amount, then the member’s superannuation benefit will not be treated as an income stream and the SMSF will not be entitled to a tax exemption.

The ATO has stated, however, that it would treat an SMSF as having paid the minimum pension, if the following conditions applied to the SMSF:

• the underpayment of the pension was an honest mistake or outside the control of the SMSF trustee;
• the underpayment of the pension did not exceed one-twelfth of the annual minimum pension amount; and,
• the only rule broken by the SMSF was the minimum amount not being paid.

If these conditions apply to an SMSF, provided the SMSF trustee makes a catch up payment for the amount underpaid within 28 days of becoming aware of the mistake, the ATO will generally treat the underpayment as being paid in the year that it should have been paid. However, this can only be self-assessed once.  If it happened again, an application would need to be made to the Commissioner of Taxation to exercise his general power of administration, to treat the underpayment as having been paid in the year if should have been paid.

Maximum pension limit
If you are accessing your pension under the transition to retirement grounds, then the maximum limit applies which is 10% of your pension account balance.  You cannot draw a pension above this limit without adverse taxation consequences.

Actuarial certificate
An actuarial certificate is a written statement provided by a qualified actuary that states the proportion of an SMSF’s income that should be exempt from income tax.  As to whether an SMSF trustee needs to obtain an actuarial certificate will depend on the method the SMSF trustee chooses to fund the member’s pension payment.  There are two methods – the segregated method and the unsegregated method.  An SMSF can use one of these methods or a combination of both methods.

Gold and Platinum Members read on for further information regarding these methods.

Where an actuarial certificate is required, it must be obtained prior to lodging the SMSF’s annual tax return for the year that the SMSF is claiming the tax exemption on pension income.

Withholding Tax and Payment Summaries
An SMSF may need to register for Pay As You Go (PAYG) withholding tax.  An SMSF must withhold tax from pensions paid to members who are under the age of 60 and/or if the pension payments include a taxable component.  This must be done before the first pension payment is made.  For information on how much to withhold, refer to ATO publication NAT 70982 – “Tax table for superannuation income streams”.  If an SMSF did withhold tax from pension benefits, then it will need to provide a PAYG payment summary by 14 July following the end of the financial year in which the payment was made.  For information on payment summaries, refer to ATO publication NAT 70987 – “PAYG payment summary – superannuation income stream”.  In addition, if an SMSF issued payment summaries, its trustee also needs to lodge a PAYG payment summary statement (ATO publication NAT 3447) with the ATO by 14 August of each financial year.  An SMSF may be able to lodge payment summaries and PAYG withholding reports online. For more information on lodging documents online, visit ato.gov.au/onlineservices.  If an SMSF lodges an electronic PAYG withholding payment summary with the ATO, there is no need to forward copies of the payment summaries or complete a PAYG summary statement.

Starting pension payments
A pension account is created from superannuation savings accumulated in the SMSF. Investment earnings are added to this account and a member’s pension payments are withdrawn from this account until the account balance is fully paid out.  Pensions paid to members, from an SMSF, over the age of 60 are tax-free.  The SMSF trustee is not required to report the pension payment to the ATO and the member is also not required to include these payments in their income tax return.  However, if an SMSF member is under the age of 60, part of their pension payment may be tax-free and the balance taxable.  The taxable component of the pension payments are taxed at their marginal tax rate plus the Medicare levy.  They will also be eligible for a 15% tax offset if they are at or above their preservation age.

For Gold and Platinum members please read on for the minimum amount required to be paid from an SMSF under the superannuation law as well as common mistakes made by SMSF trustees and professionals that are of concern to the Australian Taxation Office.

Monica Rule is an SMSF Specialist and author -  www.monicarule.com.au

Related Documents:

• Self Managed Superannuation Fund Deed
• SMSF - Deed Update
• Pension Pack for Self Managed Super
• Investment Strategy for Self Managed Super 15/16
• Webinar Recording - Investment Restrictions for Self Managed Superannuation Funds
• Webinar Recording - Tips and Traps for Property Investment in your SMSF
• Product Disclosure Statement (General)
• Product Disclosure Statement (Pension Only)