One area where trustees can get into trouble is when they do not properly understand the basics of superannuation law. After all, an SMSF is all about providing superannuation benefits for its members.
Any trustees that don’t have a good working knowledge of superannuation law, and cannot answer correctly the following questions, will more than likely make at least one mistake that could prove costly.
One area where unsuspecting trustees of an SMSF can make mistakes is in relation to accepting super contributions from or on behalf of members.
This can include incorrectly accepting a contribution for a member not entitled to make one, or it can relate to the amount of the contribution received.
Apart from the limits placed on how much can be contributed, the ability to make superannuation contributions depends on the type of contribution and a person’s age.
For the purpose of what contributions can be accepted by trustees there are two types of contributions, mandated compulsory employer contributions and non-mandated contributions.
Mandated Compulsory Employer Contributions
Mandated contributions are amounts paid by an employer to a superannuation fund for them to meet their obligations under the Super Guarantee Charge Act. Non-mandated super contributions are all other contributions that employers, employees or members make.
Under the SGC Act up until June 30, 2013 employers were required to make a 9% super contribution for their employees until they turned 70. For the 2014 financial year the SGC contribution rate increased to 9.25% with there being no age limit on mandated super contributions. After that the rate is currently set to increase as follows:
|Financial Year||SGC Contribution Rate|
|2015 to 2021||9.5%|
In addition to increasing the super contribution rate for employees the age restriction has been removed. Commencing on July 1, 2013 where an employee earns more than $450 a month the employer must contribute the SGC contribution for as long as they are employed.
Non-Mandated Voluntary Contributions
These are contributions that are voluntarily made by members and employees. They include salary sacrificed as superannuation contributions, self-employed super contributions, and non-concessional after tax contributions. Under the rules non-mandated voluntary contributions can be made until a person turns 75.
The rules relating to non-mandated voluntary contributions for the relevant age groups are as follows:
Super contributions can be made by, on or behalf of, anyone as long as they are aged under 65 and they are within the contribution limits.
Aged 65 to 74
Contributions for people in this age group can only be accepted by a super fund if the person has worked during a year. To be classed as having worked a person must pass a work test.
The work test requires a person to work 40 hours in no more than 30 consecutive days in the financial year the super contribution is made. The work must be for payment and cannot be volunteer work. Any work done will qualify and it does not have to be work a person would normally do.
For example Albert has been a brain surgeon during his working life. He retires at 63 and as a result of selling a holiday home has a lump sum he would like to contribute to his SMSF when he is 68. He answers an ad for people to deliver advertising material into letter boxes. Over a 30 day period Albert spends 15 hours a week delivering pamphlets. Over a 4 week period he has worked 60 hours, earns the princely sum of $400, but has passed the work test.
Aged 75 and over
Once a person has turned 75 no further non-mandated voluntary contributions can be made by them. Trustees of SMSFs should therefore make sure that once any member turns 75 no further contributions, other than mandated SGC contributions, are received by the fund. As long as a person has met the work test in the year they turn 75 a super fund can accept a contribution for them up to 28 days after the end of the month in which the member turned 75.
What Types of Superannuation are there?
There are two main types of benefits, and three sub categories that can apply to each main type of benefit, a superannuation benefit in a fund can be made up of. The two main types are taxable and tax-free. Trustees of an SMSF must understand that each type of super benefit determines when and how it can be paid out.
Technically speaking the taxable benefit component of a person’s superannuation is calculated by subtracting the total of a member’s tax-free benefits from the total value of their superannuation.
In practical terms the taxable portion of a member’s benefit will be made up of concessional contributions and accumulated income. Over the life time of a super fund the taxable benefits increase as a result of concessional contributions and the member’s share of the net income made by the fund each year.
The value of these benefits decreases as a result of benefits paid out and when there is negative income or a loss is made in a year. A loss can occur when administration costs and investment losses exceed investment income, or the value of the funds investments decrease, such as happened through the GFC, and a large unrealised loss is made on the investments.
The tax-free portion of a member’s benefit was required to be calculated at July 1, 2007 when the new superannuation system started. Its value consisted of their superannuation account at 1 July 2007 that related to their pre-1983 service, undeducted/non-concessional contributions received, small business capital gains tax retirement exemption contributions and the post June 1994 invalidity component.
For a super fund in accumulation phase the value of tax-free benefits increase for members only by new non-concessional contributions received and capital gains tax exempt contributions. They decrease as a result of benefit payments made to a member. Once a super fund starts paying a pension the member’s tax-free benefits percentage stays the same as it was when the pension started.
For example Clark is 64 and Lois is 60 and they have an SMSF. Clark has decided to retire and start an account based pension. At the time the pension commences he has $300,000 in superannuation, which is made up of $210,000 or 70% in taxable benefits and $90,000 or 30% in tax-free benefits. For the entire time that his pension is paid Clark’s superannuation will always be made up of 70% taxable benefits and 30% tax-free benefits.
Preservation of Benefits
The whole purpose of the sub-categories of super benefits is to restrict a member’s access to superannuation until they have a right to use it. As the history of superannuation has shown super is meant to provide an income in retirement. As such the three sub-categories dictate to super fund trustees whether a benefit can be taken at any time, or a condition of release must be met. Conditions of release are explained in the “When can a member access their superannuation?” section.
The three sub-categories of benefits are:
- Restricted non-preserved, and
- Unrestricted non-preserved.
Since July 1, 1999 all super contributions for members under 65, and income earned by a fund on their super accounts, are preserved. The legal way that preserved benefits are defined by APRA in its circular titled “Payment standards for regulated super funds”, is as follows:
“A member’s preserved benefits will be the residual amount of:
- the members total benefits; less
- the members restricted non-preserved benefits and the member’s unrestricted non-preserved benefits in the fund.”
This means that unless a member has met a condition of release previously all of their benefits will be preserved.
This preserved amount will be made up of the different types of contributions received by the super fund, both concessional and non-concessional, and accumulated income earned by the fund. At times of negative investment returns, where an investment loss exceeds the total of a members preserved benefits, the loss is first allocated against the member’s restricted non-preserved benefits, and then if there are still losses against unrestricted non-preserved benefits.
At the risk of repeating myself, because this is such an important point for trustees of a SMSF to understand, preserved benefits remain preserved and not accessible by a member until a condition of release is met.
Restricted Non-preserved Benefits
Thankfully not many SMSFs have this type of benefit. They include undeducted (non-concessional) contributions made before 1 July 1999 and benefits accumulated in certain sponsored super funds established before 22 December 1986. These benefits cannot be withdrawn until a condition of release has been met that does not have a cashing restriction.
Unrestricted Non-preserved Benefits
These are benefits that have remained in a super fund after a member has met a condition of release and no cashing restriction applies.
Some conditions of release cannot be taken as a lump sum or a pension, and as such have restrictions on how the benefit can be taken or cashed. These cashing restrictions are dealt with in the section detailing when a member can access their superannuation.
Those conditions of release with cashing restrictions include:
- Temporary residents permanently departing Australia;
- Severe financial hardship;
- Compassionate grounds;
- Temporary incapacity;
- Non-commutable pensions including a TTR pension; and
- Excess contribution release authorities.
What are the Different Types of Contributions?
Over the life of an SMSF trustees will receive several different types of contributions. These include, often in the order they are received by a super fund, the following:
Non-concessional contributions were once called, and were mainly made up of, undeducted super contributions. This basically means they are contributions to a super fund where no tax deduction is claimed for the amount contributed. In other words, and why they have ended up with the name they have, they are contributions that have not received a tax concession by being claimed as a tax deduction.
The most frequent form of contributions that an SMSF will receive is concessional contributions. They can be received monthly or quarterly as employer superannuation guarantee contributions and salary sacrifice super contributions. They must be this frequent due to the legal requirement for super guarantee contributions to be paid quarterly within 28 days of a quarter finishing.
The other concessional contributions that can be received are self-employed super contributions and one off employer super contributions. The common factor for all four types of concessional contributions is that a tax deduction has been claimed for the amount paid. Thus a tax concession, the amount claimed as a deduction, has been received and hence their name of concessional contributions.
At some point in the life of most SMSFs a rollover payment will be received. Rollovers are simply the mechanism for transferring benefits from one super fund to another. When the rollover is from a taxed super fund there are no tax consequences for the SMSF receiving the contribution. When the rollover is from an untaxed fund tax is payable by the SMSF receiving the rollover.
The make up of a rollover will depend on what types of contributions have been made to the original super fund. The paying super fund must provide a rollover statement that states what the components of the amount rolled over are. They can therefore include both taxable and tax-free benefits.
In theory the trustees of the SMSF must ensure that the components of the amount rolled over are correctly allocated to the different types of benefit for the member receiving the rollover. In practice this is mostly done by the accountant or service provider that prepares the financial statements for the trustees.
What are the Limits on How Much Can Be Contributed?
There are limits placed on all types of superannuation contributions. These can be annual limits, as is the case for concessional contributions, three year limits, as they are for non-concessional contributions, and lifetime limits as apply to the small business CGT exemptions. Where the limits are exceeded penalties are payable.
All limits are applied on an individual basis. As every super fund must have the tax file number for each of its members the ATO can easily make sure the limits are not breached.
The annual and the three year limits are designed to increase over time as a result of changes in Average Weekly Ordinary Times Earnings (AWOTE). Under the old superannuation system the contribution limits changed annually also by increases in AWOTE.
Under the old superannuation system, the one that applies until June 30, 2017, the limits changed by in line with the percentage increase in AWOTE in amounts of $5,000. This means that instead of the contribution limits increasing each year, as they did under the old system, the limit only increased once the cumulative increase reached $5,000. This can result in the limits staying the same for up to 2 or more years.
There was a freeze on increases in the concessional contribution limits until July 1, 2014. This meant the contribution threshold was frozen at $25,000 until July 1, 2014. For the 2015, 2016, and 2017 years the concessional contribution limit increased to $30,000.
As a result of the super reform package passed in late 2016 the concessional contribution limit will decrease to $25,000 for the 2018 year. In addition, the fixed dollar increments in this contribution limit have been decreased from $5000 to $2500. The rate of increase is still based on percentage increases in AWOTE, but as a result of the decreased $2500 fixed amount the limit will hopefully increase more often.
The maximum concessional contribution limit applies on an individual basis, instead of an employer basis. This means that the maximum anyone can have in concessional super contributions a year, if they are under 60, was $30,000 for the 2016 and 2017 years. As a result of the recent super amendments this limit will decrease to $25,000 for the 2018 financial year.
Where a member of a super fund was 49 or older at July 1, 2015 they have a concessional contribution threshold of $35,000 for the 2016 and 2017 years. This limit has been scrapped from July 1, 2016, and there will now only be the $25,000 limit.
As compensation for the removal of the higher limit for those aged over 49 a new system will be introduced from July 1, 2019. Under this system an individual can carry forward unused amounts of the concessional limit over a five-year period as long as their total superannuation balance is less than $500,000. The five year period can be accessed on a rolling basis.
Trustees of an SMSF must therefore ensure that the amount they receive from employers or members as concessional contributions in a year don’t exceed the applicable limits.
An example of how this works is Bruce who is 49 on July 1, 2017 and works for two different companies. His main employer is Wayne Enterprises and he works part time for a security company.
His main employer contributes $20,000 a year as deductible employer concessional contributions while his part time employer contributes $5,000 a year. If Bruce decided to salary sacrifice $20,000 of his salary from Wayne Enterprises for the 2015 financial year his total annual concessional contributions would be $45,000 and thus $10,000 over the limit for the 2017 year and $20,000 over the limit for the 2018 year.
Self-employed/Personal Concessional Contributions
In addition to tax deductible concessional contributions made by employers, trustees of an SMSF are also likely to receive concessional self-employed super contributions. There are strict guidelines as to who qualifies for making self-employed contributions up until June 30, 2017. After July 1, 2017 these tax-deductible contributions will be called personal super contributions and many of the current restrictions will be removed.
Currently a person must pass one of two tests before a contribution can be regarded as a concessional self-employed contribution. Under the first test a person cannot receive, or be entitled to receive, any superannuation support from an employer over a financial year. This is a particularly nasty test. Even if someone did not receive super support from an employer, but the employer is held to be liable for SGC contributions at some later date, that person will not qualify as self-employed.
The second test is more forgiving as this will allow a person to qualify as self-employed if they only received minor employer superannuation support during a financial year. Minor support is defined not by how much is contributed, but by how much a person earns in employment income in a year. To pass this test employment income must be less than 10% of a person’s total assessable income.
Employment income not only includes salary and wages, but also exempt income, reportable fringe benefits and reportable employer super contributions, which are salary sacrifice contributions. Assessable income is the total of a person’s employment income, business income, investment income, partnership and trust income, foreign income, and net capital gains.
In addition to passing these tests a tax deduction is only allowed to people who are under 75 and have notified their superannuation fund in writing of their intention to claim a tax deduction for the contribution.
From July 1, 2017 there will be no employment income tests for someone to make a tax-deductible personal concessional super contribution. The only requirements will be that they are under 65, or if aged 65 up to 74 they pass the work test, and that they notify in writing their super fund of their intention to claim tax deduction for the contribution.
Trustees of an SMSF must also make sure that the relevant notice required under the act, which must be lodged by the person making the tax-deductible super contribution, is completed and retained as a part of the fund’s records.
This notice of intent to claim must be provided to the SMSF before the member has lodged their income tax return for the year the claim is made and before the end of the following financial year the contribution was made.
There can be a risk, when a lump sum amount is withdrawn from the fund before the contribution is classified as tax-deductible, of the amount withdrawn being apportioned between tax-deductible concessional contributions and after tax non-concessional contributions.
The risk of having some of a super contribution not classed as a tax-deductible self-employed contribution can be avoided. This is achieved by lodging an ATO form at the time of making a tax-deductible contribution to a super fund. The form is called a “deduction for personal super contributions” form and it can be downloaded from the ATO website.
There are two types of limits that apply to non-concessional contributions. The first is an annual limit and the second is a “bring forward” or a three year limit.
The maximum annual amount that can be contributed as a non-concessional superannuation contribution is currently six times the annual concessional limit. This means for 2014 it was $150,000, and for the 2015, 2016 and 2017 years it was $180,000. With the other superannuation changes being introduced from July 1, 2017 there are also changes being made to the maximum limits on non-concessional contributions.
The changes result in a two tiered test that reduces the multiple of the concessional contribution limit, and a limit placed on people making non-concessional super contributions depending on the value of all of their superannuation accounts.
Under the first tier of the new system the non-concessional contribution limit will only be $100,000, being four times the concessional contribution limit that will apply from July 1, 2017. The ability to bring forward two years of non-concessional contributions will be retained under the new system.
The second tier of the new system imposes a new limit at which point no further non-concessional contributions can be made. When the value of a person’s superannuation is greater than the new $1.6 million pension transfer limit, no further non-concessional contributions can be made.
For example if a member’s balance was under $1.59 million at June 30, 2017 they can make a maximum non-concessional contribution of $100,000 after July 1, 2017. If that member’s balance was $1.65 million at June 30, 2017, they could not make a non-concessional contribution after July 2017.
Superannuation funds will not have to calculate whether a non-concessional contribution will result in the $1.6 million limit being exceeded continually through a year, instead the $1.6 million limit will apply to what a member’s superannuation balance was at June 30 of the previous year.
As the annual concessional contribution limit increases, so will the annual non-concessional limit increase. People under 65 can make contributions up to this annual limit, but for those aged from 65 to 74 they must satisfy the work test.
Three year Limit
Under this method, a person can bring forward up to two years of the annual limit. Under the current annual limit a person can contribute up to $540,000 in non-concessional contributions in a year, as long they have not exceeded the non-concessional contribution limits previously and do not make non-concessional contributions in the next 2 years. From July 1, 2017, the maximum non-concessional contribution that can be made using the bring forward rule will be $300,000.
The three year limit only applies to people under the age of 65. Someone who turns 65 during a financial year can use the bring forward rule, if they are eligible, before they turn 65. If they make the contribution after they turn 65, but before the end of the financial year, they must have met the work test in that year.
New System effectively applies from July 1, 2016
The current non-concessional contribution limits apply up to June 30, 2017, except when the two-year bring forward rule has been activated. The non-concessional contribution limit that applies until June 30, 2017 is still $180,000 plus the ability to bring forward two years at the current limit.
The maximum non-concessional contribution that can be made after July 1, 2017 will be $300,000 using the bring forward rule. If the non-concessional contribution will result in a superannuation balance of more than $1.6 million, the contribution is limited as follows:
Member’s balance Maximum
Less than $1.4 million $300,000
Between $1.4 to $1.5 million $200,000
Between $1.5 to $1.6 million $100,000
Under the current system if the $180,000 limit has not been exceeded in the previous three years a person can contribute up to $540,000 if they have not turned 66. When a person turns 65 during a financial year, and they can use the bring forward rule, they can contribute up to $540,000 before their 65th birthday without any further tests being passed.
Where someone has turned 65 during a financial year, and make a non-concessional contribution after having turned 65, they must pass the work test for the financial year they are making the non-concessional contribution. Once someone is 66 or older they are unable to use the bring forward rule and are limited to the annual non-concessional contribution limit.
The important thing to understand is that the new non-concessional contribution limits will apply from July 1, 2017, and will only affect superannuation fund members that activate the two-year bring forward rule during the 2017 financial year but do not contribute the full amount.
If the non-concessional contribution, using the bring forward rule, is made before July 1, 2017 the new limits will not apply. If however the bring forward rule has been activated before July 1, 2017, and the full amount not contributed, the new limits will apply.
Transitional arrangements will apply based on when the non-concessional contribution is made that triggers the bring forward rule as follows:
2016 year $460,000
2017 year $380,000
2018 year $300,000
If someone contributed $190,000 during the 2016 financial year, and nothing in the 2017 year, they will be limited to a maximum non-concessional contribution of $460,000. This is made up of two $180,000 maximum contributions and one at $100,000.
If the bring forward rule is activated by a contribution of $190,000 during the 2017 financial year, the maximum non-concessional contribution will be limited to $380,000. This limit is made up of the $180,000 limit applying for the 2017 financial year and two years of the new $100,000 limit.
If the maximum contribution has not been made by July 1, 2017 the $1.6 million limit will also apply to how much can be contributed. This would appear to mean that someone who had triggered the bring forward rule in the 2016 financial year by making a non-concessional contribution of $190,000, that has a superannuation balance at June 30, 2017 of $1.65 million and did not make a non-concessional contribution during the 2017 financial year, could not make any further non-concessional contributions after July 1, 2017.
Non-concessional Contributions not included in the Limits
Two types of non-concessional contributions are not covered by the limits. These are amounts contributed under the small business Capital Gains Tax (CGT) exemptions and contributions resulting from personal injury payments.
Contributions resulting from personal injury claims have no limits at all, but the small business CGT exemption contributions have a lifetime limit. For the 2013 year the limit was $1,255,000 and for the 2014 financial year the limit is $1,315,000. This limit also increases in line with increases in AWOTE in $5,000 increments.
There are no limits placed on amounts that can be rolled over.
When can a Member Access their Superannuation?
One of the biggest danger areas for trustees of SMSFs is allowing members to access their superannuation before they are legally entitled to get it.
The main way that this happens is when funds are paid to a member before they are eligible to receive them. This can occur when superannuation assets used for non-superannuation purposes. An example is when a non-business property is occupied by a member even if only briefly.
Before Transition to Retirement Pensions were introduced access to superannuation depended on a person’s age and whether they satisfied a condition of release. Once a person turns 65 they have satisfied a condition of release and have unlimited access to their superannuation.
For those under 65, except for super benefits under $200, one of a number of conditions stipulated by the superannuation regulations must be met before superannuation benefits can be accessed.
For superannuation benefits of greater than $200 one of the following conditions of release must be met:
terminal medical condition;
severe financial hardship,
termination of employment where benefit is less than $200,
departing Australia permanently,
transition to retirement pensions,
to pay an excess contributions tax liability,
up to 85% of an excess concessional super contribution, and
to pay a Division 293 tax assessment.
There are restrictions placed on how much cash can be accessed depending on the type of condition of release being met. Under each type of condition of release the relevant cashing restriction is shown.
Retirement Preservation Age
To qualify for the retirement condition of release a person must have reached preservation age. The age at which a person reaches preservation age differs depending on when they were born. For those born on or before 30 June 1960 preservation age is 55. The following table shows the different preservation age for people born after 30 June 1960.
|Date of Birth||Preservation Age|
|1 July 1960 to 30 June 1961||56|
|1 July 1961 to 30 June 1962||57|
|1 July 1962 to 30 June 1963||58|
|1 July 1963 to 30 June 1964||59|
|After 30 June 1964||60|
The retirement condition can only be met once a person has reached their preservation age. Once a person reaches preservation age there are different tests that must be passed before the retirement condition is met.
People aged 60 to 64
The retirement test is passed if they cease employment with an employer either as a result of resigning, being fired, or being made redundant.
People aged 55 to 59
The retirement test is passed when they cease employment with all employers and do not intend to work either full time or part time. If someone ceased employment and intends to work less than 10 hours a week they will be regarded as meeting this test.
Trustees of an SMSF under 60 must be very careful, that in the event of taking a retirement payout from their super fund, they can demonstrate they have properly met the retirement condition. At the very least they should write a letter to themselves as trustees saying they were retiring and did not intend to work full or part time again.
A minute would be then passed by themselves as trustees acknowledging the letter and passing a motion that as the member did not intend working more than 10 hours they had met the retirement condition. As long as the facts of the case support that the member did cease working this does not mean, if their circumstances change, they cannot ever work again.
The other conditions of release for accessing superannuation, except for retirement, can be used by a super fund member even if they are under preservation age. These conditions of release are very strict, can differ depending on a person’s age, have limits on how much can be taken, and limits placed on who can access the super.
Terminal Medical Condition
This is one of the newest condition of release and has applied since the 16th February 2008. To meet this condition a member must have been diagnosed with a terminal illness and have less than 12 months to live. If by chance a person survives their terminal illness any future contributions will be preserved until another condition of release is met.
Before trustees can release benefits under this condition certificates from two medical practitioners must be obtained stating that the member has contracted an illness, or suffered an injury, that is likely to result in the death of the member in not more than 12 months from the date of the certificate. One of the medical practitioners must be a specialist practicing in the area of the illness or injury.
Severe Financial Hardship
People aged under preservation age
Must be able to show they:
- have been receiving some form of Commonwealth income support for a continuous period of at least 26 weeks.
- that they are unable to meet reasonable and immediate living expenses.
Once this test is satisfied a super fund member can only make one withdrawal a year of between $1,000 to a maximum of $10,000. As can be seen from the amounts that can be withdrawn, for people under preservation age, the access to super is temporary and limited.
People of or over preservation age
If someone has passed their preservation age by at least 39 weeks, but are still under 65, they must be able to show:
- they are not working in a full or part time employment when they make the application.
- they have been receiving Commonwealth income support payments for a combined total of 39 weeks after reaching preservation age.
When these tests are passed there is no limit on how much can be withdrawn as a lump sum.
To be able to access superannuation under this condition evidence must be provided that a member does not have the financial resources to pay:
- urgent medical expenses,
- the costs associated with illness, injury or death, or
- to prevent their house from being sold because mortgage commitments could not be paid.
- To meet this condition a member must provide certificates from two medical practitioners that the medical treatment is necessary due to a life threatening illness or injury, or to alleviate acute or chronic pain or mental disturbance, and the treatment is not available in the public health system.
The following are expenses included under urgent medical and associated expenses:
- for the treatment of life threatening illnesses,
- to alleviate acute or chronic pain ,
- to alleviate mental disturbance,
- to ease the suffering of a person with a terminal illness,
- to meet the costs of a person’s death, funeral or burial,
- for medical transport of the person or a member of their family, or
- for home or vehicle modifications to meet the special needs of a severely disabled person.
- To be able to access superannuation, to avoid losing their home, a person must be able to prove that if they do not get their superannuation their home will be sold. The proof must be in writing from the financial institution or bank that holds the mortgage. It must state that their mortgage payments are overdue and the house will be sold if a payment is not made.
Under this condition of release only single lump sums can be taken. There is also a requirement that the amount paid does not exceed an amount determined in writing by APRA. If a member of a SMSF needed to use this condition of release APRA should be contacted and asked to confirm in writing that the amount to be paid is not regarded as excessive.
Before a payment can be made using this condition the trust deed of the super fund must be checked to ensure this type of payment is authorised by the deed. If a payment as a result of permanent incapacity is allowed the person must have ceased employment due to their incapacity, and the trustee is reasonably satisfied that the member, due to physical or mental ill-health, is unlikely to ever work again in the type of employment they are qualified to do due to education, training or experience.
Trustees of an SMSF should make sure that they can produce medical certificates proving that the member, due to their incapacity, is unable to continue do the work they are qualified to do. It would also help if employment history records or copies of qualifications could be produced to prove what work the member was qualified to do.
Apart from one exception this condition can rarely be met by a member of an SMSF, and usually applies to members of a defined benefit fund, as the payment cannot be made from a person’s minimum benefits.
Super contributions made by employers and members are included as minimum benefits in an accumulation fund. As a result a guarantee cannot be given that temporary incapacity benefits will not be paid out of these minimum benefits in an accumulation fund.
The only time an SMSF can payout under this condition of release is if they have taken out insurance to cover members in the event of temporary incapacity.
For benefits to be paid out under this condition they must also:
- be paid as an non-commutable income stream or pension,
- not have a residual value that could be paid out once it finishes,
- be paid at least monthly,
- be for the purpose of allowing the member to return to working in the job they were in before the incapacity, and
- cannot be paid for a term longer than the member is temporarily incapacitated.
The benefit must be paid to the member as a non-commutable income stream or pension, up to the level of their income before becoming temporarily incapacitated, and for a period of not more than the period of incapacity.
Termination of Employment where Benefit is Less than $200
Where a member has less than $200 in an employer sponsored super fund, their benefits can be accessed if they cease employment through resignation, redundancy or being fired.
Benefits of less than $200.
Upon the death of a member, no matter what their age, their superannuation must be cashed out as soon as possible. The value of their benefits at death can then be paid to the member’s dependants or their estate.
The definition of dependants for income tax purposes includes:
- current spouse,
- former spouse,
- de facto,
- any child, or
- any person that has an interdependency relationship with the super fund member.
A child can also include children from a marriage, those that are adopted, stepchildren, and those born out of wedlock.
For an interdependency relationship to exist the people must have:
- lived together,
- provide one or each other with financial support, and
- have provided domestic support and personal care by one or each to the other.
In addition the financial support must be relied upon and must be necessary to maintain a person’s standard of living. For this test to be passed not all of the conditions must be met, but they should be seen as providing a broad framework where the facts of each case are taken into account in determining whether a person is a dependant.
The only exception to death benefits having to be paid out is when a member is receiving a reversionary pension. There is also the ability for the trustees of a fund to decide to pay a death benefit to a dependent in the form of a pension.
Departing Australia Permanently
This condition of release does not often apply to SMSFs. Once a person ceases to be an Australian resident they cannot be a trustee of an SMSF. If there were only two members, and one left the country, either a company would have to be appointed to act as trustee, a new member trustee found, or the fund would have to be wound up. For the member departing Australia they can either have their benefit paid out under this condition or they can rollover their accumulated benefits into a commercial fund, industry fund, or a small APRA fund.
Only superannuation benefits accumulated after June 30, 2002 can be accessed under this condition if the member is leaving Australia permanently due to the cancellation or expiration of their eligible temporary residence visa. Differing levels of proof are required by the person leaving Australia depending on the amount of superannuation benefits being paid out.
Where the benefit is under $5,000 the super trustee if requested must be able to produce a copy of the visa, or other evidence, that shows the member’s visa has either been cancelled or has expired. In addition a copy of the member’s passport showing they have left Australia would have to be produced.
Where the benefit is $5,000 or over the trustees must be able to produce a statement provided by the Department of Immigration stating that the member had held a visa that had either expired or been cancelled, and that they have left Australia permanently.
Transition To Retirement pensions (TTR)
This condition of release has applied since July 1, 2005. These new pensions allow people to receive a pension despite them not having satisfied any of the other conditions of release.
To satisfy this condition of release the following extra conditions must be met:
- the person receiving the pension must be at least 55 or have attained preservation age,
- they must continue working part time but, as there is no definition of what working part time means, a transition to retirement pension can be accessed and the member remain working full time, and
- the pension must be paid as a non-commutable pension, in other words the super fund member can only access a pension income and does not have access to lump sum payments.
A transition to retirement pension can be ceased at any time by commuting the pension and rolling the funds back into an accumulation account in the superfund. The member’s funds can either then remain in accumulation phase or be paid out once they meet any of the other conditions of release.
A TTR pension can only be paid as a non-commutable pension, with the maximum amount payable not being greater than 10% of the member’s total benefit at the time of commencing the pension.
To pay an excess contributions tax assessment
When the limits for maximum concessional and/or non-concessional super contributions were exceeded a penalty tax was payable. When this occurred the ATO issued a release authority for the super fund to pay the penalty. In this situation the trustees of the SMSF can pay the ATO the penalty but must retain the authority issued.
The amount paid out by the super fund must be the lesser of:
- the amount stated by the member issued with the release authority;
- the amount of excess contributions tax stated on the release authority; or
- the total of the superannuation held by the fund for the person.
To meet the requirements of an excess concessional contributions release authority
As a result of the excess concessional contributions penalty tax system ceasing members of a super fund that receive a notice of excess concessional contributions determination from the ATO can elect to release up to 85% of the amount of the excess concessional contribution.
The election to release must be made by the member within 21 days of receiving the excess concessional contributions notice and must be made on the approved form specifying the amount to be released. Once the election is made it cannot be revoked and the amount elected to be received can cannot be altered.
When the election to release has been received by the ATO it will issue a release authority to the super fund detailing the amount to be released. The amount specified in the release authority must be paid to the ATO within seven days. The payment cannot be made to the member.
The amount received by the ATO is first used to meet any tax payable on the excess concessional contribution. Where the amount released exceeds the extra tax payable on the excess contribution the Commissioner must refund the excess to the individual without unreasonable delay.
The amount paid out by the super fund must be the lesser of:
- the amount specified in the release authority; and
- the total of the amounts that can be released from the superannuation held by the fund for the person.
Paying a Division 293 tax assement
From July 1, 2012 people who earned more than $300,000, including amounts salary sacrificed as extra super contributions, paid an extra 15% on the amount that their low tax super contributions exceed the $300,000 limit. From July 1, 2017 the threshold at which the extra 15% tax is payable is reducing to $250,000.
Low tax super contributions are effectively SGC and salary sacrifice contributions. They also include self-employed tax-deductible super contributions.
In calculating the $300,000/$250,000 limit a person’s taxable income is adjusted for reportable fringe benefits and negatively geared investment losses.
When the Div 293 assessment is issued taxpayers will also receive an offer to have the Division 293 tax paid out by their super fund.
This offer is in the form of Division 293 tax release authority. A member can use the release authority and have the amount paid either to themselves or directly to the ATO.
SMSF trustees need to receive the Division 293 release authority within 120 days of the date printed on it and the payment must be made within 30 days of receiving the authority. A release authority cannot be actioned more than 120 days after its date of issue.
The amount paid out by the super fund must be the lesser of:
- the amount specified in the release authority; and
- the total of the amounts that can be released from the superannuation held by the fund for the person.
Excess Pension Transfer Balance cap Commutation Authority
Hopefully trustees of SMSFs will not receive a commutation authority from the ATO. If they do this will mean they have failed to deal with a breach of the $1.6 million pension transfer balance cap.
The process starts with the ATO issuing an excess transfer balance determination that advises the member of they have an excess transfer balance and what that excess is. This is the first step in the process that effectively forces a member to remove the excess they have in an SMSF pension account.
Where a member has more than one pension account, and they receive an excess transfer balance determination, they can elect the income stream or streams that will be commuted or partially commuted to deal with the excess. The election must be made in the approved form within 60 days of a determination being issued by the ATO.
If a member receives an excess transfer balance determination that is incorrect they can object against it under the standard objection regime for taxation matters.
If the breach is still not corrected after the determination, the ATO issues a commutation authority to the superannuation fund stating that the income stream must be brought back to the required transfer balance cap limit.
An SMSF receiving a commutation authority has 60 days within which it must commute the excess as either as a lump sum payment or a roll over into an accumulation account.
If the amount is paid out, and the member aged 60 or over, there will be no tax consequences. If the member is under 60 tax could be payable depending on the taxable and tax-free components and whether they have had any lump sum superannuation payments previously.
What are the Different Types of Pensions?
Before the passing of the Fair and Sustainable Superannuation bill in November 2016 there was only one difference between the two types of pensions, or income streams as they are known in tech speak, that an SMSF can pay. They are Account Based Pensions (ABP) and Transition To Retirement (TTR) pensions.
Both of these pension accounts received the same tax benefit of the income earned to support the pension not being taxed. As a result of the changes there is now a clear difference between pensions paid when a member has met a condition of release that is not the transition to retirement pension condition of release.
From July 1, 2017 where the condition of release allows a person to receive an account based pension they will be receiving a superannuation income stream. Only superannuation income streams from July 1, 2017 will receive the benefit of having the income earned to support the pension not being taxed.
Just as there are two types of pensions there are two types of account based pensions namely a non-reversionary ABP and a reversionary ABP. Under a reversionary ABP upon the death of the member the pension automatically transfers to their spouse. Under a non-reversionary ABP it ceases upon the death of a member, but the spouse can still be paid a death benefit pension effectively resulting in the pension continuing.
Prior to the introduction of the current super system members were forced to take a pension once they reached 70 years of age. Now a member can remain in accumulation phase for as long as they want.
There are three standards that each pension must meet, with the TTR pension having one extra standard. The common standards require:
- the pensions to be paid at least annually at a minimum rate depending on a person’s age,
- no amount or percentage of the pension can be prescribed as being left-over when the pension ceases; and
- the pension can only be transferred on the death of the pensioner to either a dependant or as a lump sum to their estate.
The minimum pensions that must be paid differ depending on broad age groups. As the member gets older and another age group applies they are required to take a higher minimum pension.
In addition to the income earned to support a TTR pension being taxed there is an extra standard that applies to TTR pensions. Unlike ABPs that have no maximum limit on what can be withdrawn, TTR pensions have a maximum limit of 10% that can be paid as a pension. TTR pensions can therefore be paid at somewhere between the minimum pension rate, and up to 10% of the total value of the member’s account balance.
Meeting the minimum pension payment requirement
The minimum pension payable is calculated by multiplying the value of a member’s super pension account balance at the start of each year, or the balance of the member’s account when the pension commences, by the percentage shown in the following table:
|Age Range||Minimum Pension|
|55 to 64||4%|
|65 to 74||5%|
|75 to 79||6%|
|80 to 84||7%|
|85 to 89||9%|
|90 to 94||11%|
|95 and over||14%|
Guidance notes were issued by the ATO during the 2013 financial year that clarifies when a super fund fails to meet the minimum pension requirements. The tax effect of an SMSF not meeting the minimum pension requirement is disastrous. This is because the fund is not regarded as being in pension phase and therefore loses the tax exemption on income it earns.
The guidance notes issued by the Commissioner of taxation details when he will use his powers of general administration (GPA) when assessing whether a super fund fails to meet the minimum pension requirements.
In general terms trustees can self assess when there has been a small pension shortfall or where the failure to take the minimum was outside the control of the trustees, and the matter is rectified as soon as practicable after the shortfall has been identified.
However for SMSF trustees to self assess the following four conditions must be met:
- The failure to meet the minimum pension requirements was an honest mistake or was outside the control of the trustees; and
- the underpayment is only small (that is, does not exceed one-twelfth of the minimum annual pension payment); and
- all of the other GPA conditions have been met; and
- the trustee has not previously been granted the Commissioner’s concession for failing to meet the minimum requirements.
You could be forgiven for thinking that these guidance notes make it clear that where an account based pension is paid as a lump sum at the end of a financial year, and a member dies during that financial year, the trustees will not be able to self assess and therefore the pension income stream requirements will not have been met. In actual fact this is not the case.
The ATO has confirmed that if a member dies before they have received an annual pension payment, which often occurs at the end of each financial year, the minimum pension payment standard is not applied.
Also in an example on its website, explaining when a super fund does not meet the minimum pension payment standard, the ATO states that in the event of the death of a member it will not require a minimum pension payment to be made in the year the member dies.