In SMSF, how to start and stop
The Australian Tax Office (ATO) is the regulator of self-managed super funds (SMSF), and enforcer of the law. Here is how to start and stop a pension in your SMSF (Self-Managed Super Fund).
Commencement of a pension officially begins when?
The commencement day of an SMSF pension is the first day of the time period to which the first payment of the pension relates. This will generally be determined by the date set by Trustees as the day the pension starts as well as the governing rules of the fund. For pensions that commenced before 1 July 2007, they must continue to be paid under the previous pension payment standards unless the pension is an allocated pension. With allocated pensions, one can choose to start paying them under the minimum standards any time after 1 July 2007, without having to commute and start a new pension, as long as this is allowed by the rules of your fund.
For pensions that commenced between 1 July 2007 and 19 September 2007, you can choose to pay the pension under the previous or the new pension rules, provided it is allowed by the rules of your fund. All pensions that commencing after 19 September 2007 must meet the minimum pension standards. Allocated pensions are generally now called Account-Based pensions. An account-based pension refers to a pension where an account balance is attributable to the member. That means, the amount supporting the pension must be allocated to a separate account for each member.
Minimum Pension Amounts defined –
The minimum amounts or standards mean that the super pensions paid must meet all of the following requirements:
- The pension must be account-based, except in limited circumstances.
- You must pay a minimum amount at least annually, stipulated by law see HERE.
- You cannot increase the capital supporting the pension using contributions or rollover amounts once the pension has started.
- A pension being paid to a member who dies can only be transferred to a dependant beneficiary of that member.
- You cannot use the capital value of the pension or the income from it as security for borrowing.
- Before you can commute a pension, you must pay a minimum amount in certain circumstances.
There are no maximum draw-down limits for pensions commencing after 19 September 2007, except for transition-to-retirement income streams.
Ceasing a pension
These are the most common ways to stop or know that a pension has ceased
Pension capital is exhausted
A super income stream ceases as no super income stream benefits are payable when both the:
- Capital supporting the pension has been reduced to nil;
- Member’s right to have any other amounts applied (other than by way of contribution or roll over) to their superannuation interest has been exhausted.
For an account-based pension, the pension ceases when the money funding the pension has run out.
Failure to meet the super pension standards
If a fund fails to meet the required super pension standards for an account-based pension in an income year, the super income stream is taken to have ceased at the start of that income year for income tax purposes.
From the start of the income year, the member’s account is no longer taken to be supporting a super income stream. Any payments made during the year will be super lump sums for income tax purposes and lump sums for SISR purposes.
Where the underpayments relate to a retirement phase income stream, this also means the fund will not be entitled to treat income or capital gains as ECPI for the year.
When a new super income stream commences, you as trustee will be required to recalculate the tax-free and taxable components of the new pension.
One of the most common reasons for not meeting the pension standards is failure by funds to meet the minimum annual pension payment requirements.
There are limited circumstances where the Commissioner of Taxation will allow a pension to continue, even though the trustee has failed to pay the minimum amount of pension.
We have published a Q&A on our website (below). These highlight the conditions to satisfy to allow a pension to continue if a fund fails to meet the minimum pension payment requirements in an income year.
See also: SMSFs – Minimum pension payment requirements FAQs
Pension is fully commuted
A super income stream ceases when a member or a dependant beneficiary requests to fully commute their entitlements to future super income stream benefits to a lump sum entitlement takes effect.
A request to fully commute a superannuation income stream takes effect as soon as the trustee’s liability to pay periodic superannuation income stream benefits is substituted with a liability to pay a superannuation lump sum to the member or dependant beneficiary.
A payment resulting from a full commutation can’t count towards the required minimum annual pension payment amount.
The taxable and tax-free components of the commutation payment will have the same proportions as those determined for the separate interest that supported the pension when the pension commenced.
Before fully commuting a member’s pension, you should ensure all minimum annual pension payments are made.
You must also consider the more restrictive commutation rules that apply to TRIS.
If a member fully commutes a pension and retains the amount of the commutation lump sum within the fund, you will be required to recalculate the tax-free and taxable components of any new benefit subsequently paid from the fund.
Pension ceasing upon death
A pension ceases as soon as a member in receipt of the pension dies. That is unless a dependant beneficiary is automatically entitled to a reversionary pension.
For examples and more details, see the ATO site – SMSF starting and stopping a pension HERE.
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