15 May 2011 | Superannuation
The amount of work and documentation required by trustees of an SMSF to commence a pension differ depending on what the rules of the fund are.
Q. We have a fund of $900,000 with $120,000 in cash and the rest in shares. If a pension was to be paid to a 55 year old on retirement (the other member under 55 and working part time), how is the separate account commenced?
A. Whenever SMSF trustees need to establish what must be done the first place to check is the fund’s deed. This will set out what the minimum requirements are. Over the years a set of standard documents have evolved for starting a pension, these include:
Your fund’s trust deed may state that you only need to document in writing that a pension will be paid. If this is the case only a letter from the member requesting the pension, and a letter from the trustee confirming the details of the pension, need to be prepared.
In addition to the bureaucratic paper work, as you will be under 60 when the pension commences, your SMSF must apply for PAYG withholding tax registration. A tax file number declaration must also be completed and the fund will deduct tax from the pension if it is made up of taxable benefits.
If you were 60 or older, or your super account was made up entirely of tax free benefits, your SMSF should not have to register for PAYG withholding tax as no tax would be deductible. Extra work may be required because your fund will still have another member in accumulation phase.
When a fund has members in both accumulation and pension phase they have the choice of getting an actuarial certificate each year or segregating the assets of the fund between pension and accumulation members. The actuary advises the trustees what portion of the income relates to the pension members, and is tax free to the fund, and what relates to the accumulation members.
Where the trustees choose to segregate the assets of the fund investments are allocated between the pension phase and accumulation members. Once the assets are segregated it is best if the trustees have two bank accounts for the fund. One is allocated to the pension members that receives the income from the pension investments. Payments from the account include the pension plus any PAYG withholding tax deducted from the pension.
The second bank account receives income from the investments allocated to the accumulation members, and also the super contributions received by the fund. Income tax payable on contributions and income earned by the accumulation member would be paid from this accumulation bank account.
Q. I am 62 and have an SMSF in accumulation phase. I am the sole director of a company which is the trustee. I work full time and salary sacrifice the maximum into the SMSF. I want to start a transition to retirement pension and have been told by the ATO that I only have to complete a Tax File Number declaration which I have done, is any other documentation required?
A. I am sure other documentation will be needed and you should check your fund’s deed to determine what that is. As you are over 60 the TFN declaration was not needed as no tax will be deducted by the fund.
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