The 2011 year was the first year in which baby boomers became eligible to receive an Age Pension. However, for many baby boomers, the ability to draw an income stream has started a lot earlier in life with individuals either retiring well before age 65 or transitioning to retirement.
With a SMSF, the ability to draw an income stream is outlined by the governing rules of the fund (i.e. trust deed). These rules need to adhere to the requirements contained with superannuation law, being the SIS Act and SIS Regulations. Trust deeds may be prescriptive in terms of the operation of paying a pension, or alternatively they may be quite flexible in their terminology (e.g. the fund can pay a pension that complies with superannuation law). In many instances, the procedures and policies required around the operation of the pension are left to the trustees to implement.
Which leads me to what should be included with pension documentation for a SMSF? The decision to start a pension is an exchange between the member and fund trustees to commence an income stream, but what form should this take? and what other important elements should it include?
I believe the following considerations should also be included within your SMSF pension documentation:
1. Member Request to commence to pension
This should include information such as type of pension to commence (e.g. Account Based Pension or Transition to Retirement Income Stream), commencement date, purchase price, notification that the member has satisfied a condition of release, nomination pension amount and frequency, reversionary beneficiary and whether the member wishes to segregate any specific assets to the pension account.
2. Trustee Resolutions regarding the pension commencement
This resolution should include information including acknowledgement of the member request, type of pension requested by the member, satisfaction that the member has met a condition of release to pay the pension, commencement date, review of member account balance to pay an amount based on the purchase price, level of pension to be paid (minimum, maximum or specified amount), creation of a new superannuation interest for the member, confirmation of any reversionary beneficiary, segregation and PAYG withholding obligations with the Australian Taxation Office.
3.Trustee Notification to the Member
This advice to the member is to confirm the commencement of the pension, including many of the terms and conditions as specified with the member request and outlined within the trustee resolutions.
Many trust deeds many be silent in respect to procedural issues with the operation of the pension. These procedural issues may include dealing with commutation, death and failure to meet the pension standards. Many of these items have been recently highlighted by the ATO in TR2011/D3.
Other important issues and considerations
In addition to the documentation relating to the commencement of the income stream, there are a range of other important things that need to be considered including:
- Where the pension member is under age 60, the fund will be required to register for PAYG withholding and the member will need to complete a TFN declaration advising
- report any pension member’s withdrawals on a quarterly basis, including any PAYG withholding tax to be withheld. This will be completed on an Instalment Activity Statement or Business Activity Statement (where fund is GST registered).
- The fund will be required to prepare a PAYG payment summary for each pension member to include as assessable income within their personal income tax return. The fund will be required to submit any PAYG summaries (income stream and lump sum) with the PAYG Payment Summary statement.
- Where the fund’s assets unsegregated, that is, no specific assets have been set aside to support the pension account, the fund will need to obtain an actuarial tax certificate at year-end to determine the tax deduction for exempt current pension income (ECPI). Only where the fund’s assets are segregated, will an actuarial tax certificate not be required.
What do you consider as important elements to include within pension documentation?