Starting a pension or income stream in your SMSF (and there are similarities with the big commercial super funds as well, as we are all under the same law – SIS Act – Superannuation Industry Supervision Act 1993) requires certain conditions to occur – conditions of release, and certain minimum requirements.
The ATO website explains how it works –
Super income stream
A super income stream is an income stream that is a pension according to the Superannuation Industry (Supervision) Regulations (SIS Regulations).
‘pension’ when referring to the operation of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or SIS Regulations.
‘super income stream’ when referring to the operation of the income tax laws.
An income stream cannot be a pension in accordance with the SIS Regulations unless it meets two fundamental requirements:
- payment occurs at least annually
- for an account-based pension, a minimum amount is paid to the member each year.
A super income stream exists when all of the following apply:
- a member is entitled to a series of payments that relate to each other
- the payments are periodic, whether paid annually or more frequently
- the payments are made over an identifiable period of time
- the pension standards of the SIS Regulations have been met.
A liability to make a single payment for one year is not a series of payments and will not satisfy the requirements of being a super income stream.
Creating a separate superannuation interest in an SMSF
Once a superannuation income stream commences you are required to treat the amount supporting the income stream as a separate interest in accordance with the income tax laws.
The value of the separate interest, including the amount of its tax free and taxable components, must be determined when the super income stream commences. The proportions of the tax components of this separate interest will be the same as the proportions for the tax components of the member’s original non-pension interest just prior to the commencement of the income stream. This prevents members from choosing which tax components they wish to start a super income stream with.
The taxable and tax free components of any pension payment must have the same proportions as those determined for the tax components of the separate interest that supports the pension when the pension commenced.
Determining the value of the assets supporting a pension
Before the commencement of a pension, you must establish the value of the superannuation benefits that are to support the pension. This means that the market value of the assets that are to support the pension needs to be determined on the commencement day of the pension. Similar to valuing assets for the purpose of financial reports, the valuation needs to be based on objective and supportable data.
A reasonable estimate of the value of the account balance can be used when a pension is started part way through the year.
Running a pension
Superannuation pension standards
Once an account-based pension commences you must ensure the pension standards in the SIS Regulations are met, this includes meeting the minimum pension payment requirements.
If the pension standards are not met in an income year both of the following apply:
- a super income stream ceases for income tax purposes
- we consider the trustee has not been paying an income stream at any time during the year.
You should also maintain appropriate records that reflect the value of the pension at commencement, any benefit (pension) payments made and the earnings from assets set aside to support the pension.
Minimum pension payment requirements
A general characteristic of an account-based pension is the need to pay an annual minimum pension amount.
The minimum amount that has to be paid from the pension account depends on several factors such as, the recipient’s age, their account balance and the commencement date of the pension.
If the pension commences on a day other than 1 July, the minimum amount for the first year is to be worked out proportionately to the number of days remaining in the financial year, including the start day.
If the commencement day of the pension is on or after 1 June in the financial year, no payment is required to be made in that financial year.
A payment made from an account-based pension, which would otherwise satisfy the minimum annual pension payment requirements, will continue to be treated as such, even if a member elects to have the payment treated as a superannuation lump sum under s 995-1.03 of the income tax regulations.
The ATO site also explains in more detail, and gives examples on issues such as –
- Can a partial commutation payment counts towards the annual minimum pension payment?
- Can an in-specie partial commutation count towards the annual minimum pension payment?
- Can a full commutation count towards the minimum pension payment?
- What if a trustee fails to meet the minimum annual pension payment requirements?
- Maximum pension payment requirements for a TRIS
- If the trustee has started paying a pension to a member and they receive a contribution for the same member, can they add it to the member’s pension account?
- What are the tax implications for the fund once the trustee starts paying a super income stream to a member?
Once a complying super fund starts to pay a super income stream, it may be entitled to exempt a portion of the income earned from the fund’s assets that are supporting the income stream until such time as the pension ceases. This is referred to as ECPI.
ECPI does not include assessable contributions or non-arm’s length income.
There are two ways of working out the fund’s ECPI. One method requires the trustee to segregate assets used to support the super income stream. The other enables the trustee to exempt a portion of the fund’s total income that reflects the proportion of the fund’s superannuation liabilities that are current pension liabilities. The value of the fund’s superannuation liabilities and current pension liabilities must be certified by an actuary.
When starting a super income stream, the trustee will need to consider how the ECPI will be worked out. Should an actuarial certificate be required this must be obtained by the trustee before lodgment of the Self-managed superannuation fund annual return(SAR).
SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need. A call is FREE. If you have any questions, why not give us a call – it’s FREE! No obligation. 0407 361 596, Paul.