When you start a pension, you need to make minimum pension payments. If you don’t, your SMSF loses its tax exempt status. So getting this right is important.

Minimum Pension Payments

Once you have started a pension, you need to withdraw a minimum amount each year. You calculate this minimum amount by applying a percentage to your pension account balance as of 1 July.

Percentage

This percentage is usually:

4% if you are under 65

5% if you are under 75

6% if you are under 80

7% if you are under 85

9% if you are under 90

11% if you are under 95

14% if you are 95 or older

But until 30 June 2022 these percentages have been cut in half to help you cope with the COVID-19 crisis. So at the moment you only need to withdraw:

2% if you are under 65

2.5% if you are under 75

3% if you are under 80

3.5% if you are under 85

4.5% if you are under 90

5.5% if you are under 95

7% if you are 95 or older

So these lower percentages to 2020/21 (1 July 2020 to 30 June 2021) as well as 2021/22 (1 July 2021 to 30 June 2022).

Purpose

Why a minimum pension payment? Why not just leave this up to you? The answer lies in the sole purpose in s62 SIS Act.

Superannuation is to provide for your retirement. It is not meant to be a tax effective vehicle of wealth transfer from one generation to the next. And so the legislator wants your super gone by the time you go. Hence the minimum pension payments.

Age

You take the age as of 1 July. How old were you on 1 July? This will determine the relevant percentage.

Member Account Balance

You apply the percentage to your member account balances in pension phase. Your account based pension balance (ABP). Not your total superannuation balance, which also includes accounts in accumulation phase.

And also not your transfer balance account (TBA). The TBA is about what you move into pension phase. Not about what happens after that. So investment earnings (or losses) and pension payments don’t affect your TBA. But they affect your ABP and hence your minimum pension withdrawals.

Date

If you started your pension before the 1 July, you use the balance as of 1 July. If it commenced during the year, you use the pension balance as of that date – the commencement date. So you need to determine your balance including investment earnings and losses as of that day. So most pensions start on 1 July. Saves you extra work.

Pro Rata

If the pension commences after 1 July, the minimum payment amount is calculated proportionately to the number of days remaining in the financial year, starting from the commencement day. Another reason why starting your pension on 1 July is less work.

Rounding

The minimum amount is rounded down to the nearest 10 whole dollars.

1 June

You don’t need to worry about minimum pension payments in a year if the pension commences in June of that year.

Below Minimum

What happens if you didn’t pay enough out during the year? You thought you had taken out plenty but as it turns out it wasn’t enough. What now? There is bad news and there is good news.

No Longer ECPI

The bad news is that you lose the pension status for that account. The super income stream for that account is taken to have ceased at the start of that income year for income tax purposes. So that pension account loses its ECPI status. ECPI stands for Exempt Current Pension Income.

Commute Back To Accumulation as of 1 July

So you need to commute that account based pension back to accumulation as of 1 July and hence pay tax on any income or capital gains during that income year. Any payments you made during the year from that account are super lump sum payments. And you need to report the commutation in any TBAR you lodge for that fund.

Commissioner’s Discretion

The good news is that there is a way out of all this. You might be able to apply the Commissioner’s discretion if you made an honest mistake or matters outside of your control prevented you from making the minimum pension payment.

But the honest mistake only counts as such if the shortfall is less than 1/12 of the minimum payment. 1/12 as in one payment of 12 monthly payments per year. And you need to make the catch-up payment as soon as you become aware of the shortfall. If you do that, your pension can keep its ECPI status and no need to commute.

Percentage

Going back to the list of percentages, can you see how the percentage accelerates? It starts with an increase of 1%, then 2% and then a jump by 3%.

And can you see how the intervals gets shorter? It first is 10 years and then increases to increments of 5 years. So your percentage will increase significantly as you age.  But at the same time your opening balance will decrease as you make payments, unless your investment returns exceed your pension payments. So whether your  pension payments increase or decrease from year to year depends on how this plays out.

Does all this make sense? Just call me if you have a question. My mobile number is 0407 909 779 – Heide. There might be a simple answer to your query.

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An edited version of this article is also published on the Tax Talks website for tax agents.

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation

Here is a handy SMSF to do list so you can manage your SMSF from start to finish. A short bucket list for your SMSF.

SMSF To Do List

Your SMSF will go through different stages that will mirror your life cycle. Every stage has different hurdles to take. So here is a step by step SMSF to do list.

Step 1 – Set Up Your SMSF

Your SMSF is not a separate legal entity, but a fiduciary relationship – governed by a deed – between trustee and members about fund assets. So to establish your SMSF you need a deed, a trustee, members and fund assets.

# 1   Get a Deed

Your SMSF is only a fiduciary relationship, which your SMSF deed will govern.

# 2    Appoint Trustees

Your SMSF needs at least one trustee. You could choose individual trustees, but don’t. Go for a corporate trustee, ie a company. Every member must be a director of this company. And every director must be a member. 

# 3    Select Members 

Your SMSF needs at least one member but can have up to four (soon to be six). An SMSF member must not be the employee or employer of another member, unless they are related. 

Only choose fellow members you want your super to go to. So if you want your fund assets to go to your children of a previous marriage, don’t share an SMSF with your current spouse. 

# 4    Set Assets Aside

You get assets into your SMSF by making a contribution and / or transferring your super from another super fund to your SMSF. 

# 5    Write a Strategy

Every year, all members of your SMSF need to review and sign an investment strategy that takes each member’s risk profile into account. In this document you list your SMSF’s investment objectives, review the fund’s diversification, liquidity and solvency and decide whether to hold insurance within the fund. 

# 6    Get an ABN and TFN

Once your SMSF has been willed into existence, you need to get a TFN and ABN for your SMSF. Your corporate trustee will have received an ACN upon registration.

# 7   Sign Trustee Declarations

As a new trustee or trustee director, you need to sign your SMSF trustee declaration within 21 days of joining. In this form you confirm that you understand your duties and responsibilities as trustee. 

# 8    Stay in Australia

To receive concessional tax treatment as a complying super fund, your fund must  to be an Australian super fund (among other conditions). To be an Australian super fund, your SMSF must have its central management and control in Australia. And central management and control includes all trustees or trustee directors.

———–

Step 2 – Contribute to Your Fund

So now that your fund is established, it is time to accumulate funds. 

# 9    Mind the Cap

The annual caps for concessional and non-concessional contributions are $25,000 and $100,000 respectively – both subject to age and work test, and the later also subject to your total superannuation balance (TSB).

# 10    Use Current Cap Space Later

If your TSB is less than $500,000, you can carry unused concessional cap space into the next 5 years. 

# 11    Use Future Cap Space Now

If your TSB is less than $1.6m and you are under 65, you can contribute 3-years’ worth of non-concessional contributions in one year. So you can use this year’s cap plus the cap of the next two years all in one hit.

# 12    Track Your TSB

Simply speaking your total superannuation balance – TSB – is the total of your accumulation and pension accounts. It plays a central role – various concessions use it as a cut-off point. So track your TSB.

———-

Step 3 – Invest Fund Assets

Now is the time to invest your super. And there are strict rules about what you can and can’t do.

# 13    Avoid Mates Rates

Your SMSF is not allowed to make an investment per s109 (1) (a) SIS Act where the parties to the transaction are not dealing with each other at arm’s length.

# 14    Avoid Related Party Deals

Your SMSF is not allowed to acquire any assets from a related party – not even at arm’s length – unless the asset is either a listed security or business real property or the total of your in-house assets would not exceed 5% of the fund’s total assets.

# 15    Avoid Personal Use

You can invest in collectables and personal use assets – so-called ‘s62A items’ – such as artwork, jewellery, artefacts, coins, antiques, wine, cars, books and recreational boats. But you can’t allow a related party to use, lease or store them at their private residence per s62A SIS Act and s13.18AA SIS Regs. 

# 16    Avoid Loans to Members

Your SMSF is not allowed to lend money or provide other financial assistance to members or their relatives per s65 SIS Act .

# 17    Avoid Loans to SMSF

Per s67 SIS Act your SMSF is not allowed to borrow money for more than 90 days and even under 90 days only under very limited circumstances. But there is one way around. An LRBA.

# 18    Use an LRBA Instead

A limited recourse borrowing arrangements – LRBA – means that the geared asset is put into a bare trust. This way the lender only has recourse to that particular asset.

# 19    Have Sole Purpose

And above all else, maintain your SMSF solely for the purpose of providing retirement benefits to you or death benefits to your beneficiaries if you die. 

————

Step 4 – Access Your Super

Super is about saving for your retirement. And this means that you usually can’t access it until you do.

# 20    Meet a Condition of Release

While alive, you can only access your super upon meeting a condition of release. There are four general conditions of release linked to your age and your employment status. And then there are various special conditions of release, for example permanent disability, terminal illness or the first home buyer super scheme. 

# 21    Start a Pension

Starting a pension involves a bit of paper work. You need to request the pension as a member and then approve it as a trustee.

# 22    Track Your TBA

Your transfer balance account (TBA) tracks the amounts you move in and out of pension mode. Even if you are a member in various super funds, you only ever have one TBA. Your TBA can’t exceed $1.6m, the current TBC. 

# 23    Report Events

The ATO wants to track your TBA. For that purpose, you need to report any events that will result in a debit or credit to your TBA. Reportable events are the start of a new pension including a reversionary pension, LRBA payments, personal injury settlement payments as well as commutations.

# 24    Make Minimum Pension Payments

Once you start a pension, your SMSF must pay you a minimum pension amount each year. The amount is a percentage determined by your age and applied to the opening balance of your pension account. 

——-

Step 5 – Say Good Bye

One day you have to call it a day and say good-bye. You either cash out your super and close your SMSF. Or you let it ride to the end and then let your super assets pass to your dependents or otherwise your estate.

# 25    Identify SIS Dependents

Only your SIS dependants can receive your super directly from your super fund. Everybody else can receive your super, but only through your estate.

# 26    Determine Type of Death Benefit

Your super is usually paid out as a lump sum. But some SIS dependants can choose whether they want a lump sum or a death benefit pension. 

# 27    Identify Tax Dependants

Tax dependants receive all death benefits tax-free. Everybody else will pay tax on the taxable component. 

————-

Step 6 – Keep House

And then just some housekeeping rules that apply to your SMSF at all times, no matter at what stage in the SMSF life cycle you are at.

# 28     Lodge an Annual Return

Your SMSF needs to prepare and lodge its annual return by the due date. 

# 29    Get Audited

Your SMSF needs to get audited each year by an approved SMSF auditor, who is registered with ASIC. 

# 30    Tell the ATO

As an SMSF trustee you need to notify the ATO of any changes to trustees or trustee directors, members or contact details within 28 days.

____

So this is your SMSF to do list. We didn’t think it would be this long. It is amazing how much there is. If you have a question, please reach out. We love to help.

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation

Penalty units for SMSF trustees can cost you dearly – up to $12,600 per trustee. 

Penalty Units for SMSF Trustees

As an SMSF trustee you need to follow certain rules. You need to comply with the SIS Act and SIS Regulations and everything that follows.

If you break these rules, the ATO as the SMSF regulator has 7 different actions at their disposal to force you into compliance. One measure is to hit you with administrative penalties. And these are all about penalty units.

Penalty Units

Penalty units – abbreviated as PU – are a concept that is neither new nor unique to superannuation. You can find penalty units across all statutory laws in Australia. 

The Commonwealth of Australia and the Australian states and territories each have their own PU system with a different value allocated to that unit and a different manner and frequency of adjusting this value.

Fines are calculated by multiplying the number of penalty units prescribed for the offence with the value of a penalty unit.

The advantage of using units rather than actual dollar values is that the law doesn’t need to be amended each time penalties are adjusted to inflation or for other reasons.

Instead the law just says x number of units. And the value of these penalty units is set outside of the actual law.

Federal Penalty Units

Federal penalty units only apply to federal offences. The SIS Act is a federal law and so any breaches of the SIS Act are subject to federal penalty units.

Since 1 July 2017, the value of a federal penalty unit has been $210. But this value will increase on 1 July 2020 and then every 3 years on 1 July after that to account for inflation. The increase will be indexed to the All Groups Consumer Price Index.

Not long ago a federal PU was still $170 (2014/15) and then $180 a year later (2015/16 and 2016/17). 

SIS Act

For any breaches of the SIS Act, ss166 SIS Act allocates penalties that range from 5 to 60 penalty units. The ATO refers to these as administrative penalties.

At currently $210 per unit, administrative penalties range from $1,050 (5 units) to $12,600 (60 units) per member. So if you have an SMSF with four individual trustees, you might look at a total penalty of 4 x $12,600 = $50,400.

Penalties

There are four mortal sins that will attract the highest penalty of 60 units. These are breaching the rules about lending in ss 65 (1), borrowing in ss 67 (1) and in-house assets in ss 84 (1) as well as failing to notify the ATO about significant adverse events in ss 106 (1). 

Anything else will be treated less harshly. Breaching operating standards in ss34 (1) SIS Act attracts 20 units. Failing to keep proper minutes and records or to inform the ATO about a change of trustees or directors will get you 10 units. And failing to comply with an education direction, failing to appoint an investment manager in writing or failing to provide required information to the ATO as the regulator of SMSFs will get you 5 units.

No Discretion

There is no discretion when it comes to applying these penalty units. Administrative penalties are automatically imposed as per s166 SIS Act.

If you breach a certain subsection of the SIS Act, you automatically receive the stipulated number of units set out in s166 for that subsection.

As an example, breaching the lending rules in ss65 (1) SIS Act by lending to members and relatives attracts a penalty of 60 PU. The ATO can’t say, “We give Peter 60, Paul 50 and Mary 10 PU.” The ATO has no such discretion. If Peter, Paul and Mary breach the lending rules in ss 65 (1), they receive 60 units each. Not more and not less. End of story.

Remission

Where the ATO has discretion is in the remission of these penalties. This is where they can look at individual circumstances and exercise discretion.

A good compliance history and immediate action to remedy the breach will increase your chances that the ATO remits your penalties. Even more if you have a reasonable explanation how the problem occurred.

But don’t count on a remission in serious or frequent cases of non-compliance.

Combination of Measures

The ATO often combines administrative penalties with other measures like education or rectification directions or the issue of a non-compliance notice. So they fine you and then get you to clean up the mess. 

Each Trustee

Each trustee might be subject to a fine. Be it the corporate trustee or individual trustees. 

And this is one of the many arguments for a corporate trustee. Because if your SMSF has individual trustees, then each trustee cops the full fine.

Let’s say your SMSF with four individual trustees breached the borrowing rules in ss 67 (1). So each of you gets a $12,600 fine, meaning a total penalty of 4 x $12,600 = $50,400.

ATO

The ATO’s compliance philosophy is to prevent rather than correct. They want to support you as SMSF trustees to establish and maintain good compliance from the start. Getting you to do the right thing from the start is much easier for all involved than to wield the heavy stick later on.

Units v Points

You might have heard of penalty points instead of units. Same thing. Statutory law uses the term ‘units’ but the SMSF community often talks of ‘points’.

Adverse Tax Consequences

Sometimes penalty units are just the side show. The real issue is often the tax treatment you face as a result of a breach. 

Take a non-arm’t length acquisition of assets as an example. If you acquire an asset at non-arm’s length, then all income from this asset, including the subsequent capital gain is treated as non-arm’s length income and taxed at the top marginal tax rate (45%). This might cost you millions of dollars, but definitely a lot more than the 60 penalty unit you might get.

So don’t just look at penalty units or points. Always consider the resulting tax treatment as well.

Does all this make sense? If you have a question, please call or email us. There might be a simple answer to your question.

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.