Advanced Pension strategies Auditors Role Manoj Abichandani SMSF

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

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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 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 (9 A) • Must satisfy SISA and SISR • Regular Payments from a separate superannuation interest Annual Payment – but – not Lump Sum

Account Based Pensions SISR 1. 06(9 A) 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)) • 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 1 st 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 1 st July 1960 55 1 July 1960 – 30 th June 1961 56 1 July 1961 – 30 th June 1962 57 1 July 1962 – 30 th June 1963 58 1 July 1963 – 30 th June 1964 59 After 30 th 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)) Mid – Year Pension Commencements Purchased Property $400 K Pension Commencement date Value of property $1 M 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 TF/T TF/ T Pension Account 1 TF/T 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 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 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 (9 A) (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 (9 A) 7. How often the payments will be made (at least once in a year) – No payments if pension commences after 1 st June (SISR Sch 7 (1) (4)) 8. In case of death of member – who should get the reversionary pension (SISR 1. 06(9 A) (C )) 9. Before commuting the pension during the year – withdraw the minimum amount (SISR 1. 07 D (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 ns tio ribu SMSF ont C W NE Member Spouse 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 $100 K Limit - Gone) • Assets of accumulation phase moving to pension phase pay no CGT

Transition to Retirement Income Pension Account No Tax on Income s ion t u b ri SMSF ont c w Ne Pensions Accumulation Account Tax on Income Member Segregated (Actuarial Determination) OR un segregated Super Fund

Tax Saving by being on TRIP $500 K Fund – 6% income Tax Rate Income of fund Tax Saved in Super Min Pension Tax on pension 21% <$37 K 30, 000 $4, 500 $10 K $600 34. 5% <$80 K 30, 000 $4, 500 $10 K $1, 950 39% <$180 K 30, 000 $4, 500 $10 K $2, 400 47% >$180 K+ 30, 000 $4, 500 $10 K $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: • 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 Accumulation 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 Accumulation 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 1 st 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 Existing Pension Payment

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 Pension 1 ion t a t u m Com Tax Free & on i t u trib n o c Re- Taxable Commute Pension 1 Re-contribute Commute Pension 2 To accumulation = Commence a new pension ck a B ll o n. R o i s 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. 07 D (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 ($185 K) – 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 $18 K – 15% rebate on payments Can do both – Pensions till $18 K = 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(9 A) (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 55 th 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 $540 K / 63 X / 64 X/ 65 $540 K”

Re- contribution Strategy Lump Sum / Pension payment 2014 - 15 year Age Amount of Payment Taxable Component 55 and over Up to $185 K Tax free 55 and over Over $185 K 15 %* 60 and over Any Amount Tax Free *Any re-contribution above $185 K should be done after age 60

Re-contribution Strategy Contribution $540 K once in three years SMSF Spouse 2. Over 60 m Lu m su Spouse 1. 55 to 60 p 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 $540 K of Taxable Component and - re-contribute as Tax Free • Larger fund balance or have already used up $540 K or over 65 Years age – Can contribute back in spouse’s name

Re-contribution Strategy - 2 funds SMSF Accumulation $2 M Taxable Component w Ne ns o i t bu i r t n Co SMSF Pension Tax Free Component Mr. & Mrs over 60 0 K 4 $5 ch a E

Re-contribution Strategy for older spouse SMSF Mr. Over 60 Mrs. 55 to 59 Up to Low Rate Threshold $185, 000

Two Funds - TRIP Accumulation Fund Pension Fund SMSF Accumulation Taxed Component ns SMSF Pension Member between 55 & 60 Employer NE W Co nt r ibu t io Tax FREE Component 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 SMSF Trust Deed SMSF Deed Update Pension Documents Corporate Trustee Actuarial Certificates Incl. GST $125 $165 $81 + ASIC Fees $97. 50

Any Questions ? ? GIVE HELP AT AGE 50 not at 60