Deed Dot Com Dot Au Pty Ltd

trustdeed.com.au  e-newsletter

Deeds Created in 20 Minutes 24 /7

Emailed Instantly

In This Issue
Will your SMSF pay tax when you are in Pension Phase?
Book for our Seminar: Transfer Wealth to next Generation without paying tax
Free Ticket to Home Buyer Expo
Quick Links
  
  
  
  
  
$ 110 SMSF Deed
  
  
  
  
  
  
  
  
Trust Deed
  
$110 Unit
Trust Deed
  
  
Previous newsletters                                                                      
 
www.trustdeed.com.au provides online service for creating, storing & managing legal documents for Companies and Trust deeds for SMSF, Family, Unit & Fixed Trusts, SMSF related documents click here for more information.

Click here  to book our Seminar: Transfer Wealth to next generation without paying tax

 

Will your SMSF pay tax, when you are in pension phase?   Unfortunately, YES

  

 

Will your SMSF pay tax, when you are in pension phase?   Unfortunately, YES

 

ATO has issued a draft ruling on 13 July 2011 to apply from 1 July 2007. This draft Ruling considers when a superannuation income stream commences and when it ceases.

 

In pension phase, Subdivision 295-F of the ITAA 1997 provides mechanisms for exempting from the assessable income of a superannuation fund, income from those assets of the fund that support the payment of a superannuation income stream(s) by the fund. Exemption from income tax applies when income stream commences and continues till it ceases. There are many events which lead to ceasing a pension, this ruling detail those events.

 

 

Click here to learn how to commence a pension in a SMSF

 

 

When does an income stream commences

 

First, let us look at when an income stream commences, this date is crucial because from that date onwards any income from assets supporting an income stream becomes tax free.

 

Pension commencement date must be determined by the terms and conditions (Pension Agreement) of the superannuation income stream agreed by the trustee and member, the rules of the superannuation income stream as set out in the superannuation fund's trust deed and the SISR 1994.

 

This draft ruling suggests that proper documents are necessary to commence a pension and these documents must include:

 

    Application form by the member to the trustee. In this form, the member has to request commencement of income stream from a certain date and provide proof that preservation age has been achieved or other events have happened, which entitles him / her to an income stream;

    The trustees must issue a product disclosure statement to the member outlining the benefits and details of the income stream;

    The member must agree to frequency of income stream payments and the date of first payment;

    The pension agreement must specify if there is a reversionary beneficiary of the income stream, in case of death of the member, the name of the dependant and how the dependant is related to the member. On death of the member, this dependent is then considered to be automatically entitled to receive income stream;

    The member must mention the amount to be used from the accumulation account to commence a pension and correctly identify the tax free and taxable components of the accumulation account;  

    The documents must mention the minimum amount that must be withdrawn in the first year before the pension can be commuted as per Reg 1.07D of SISR 1994. This amount must be at least the minimum payment as per Schedule 7 of SISR 1994 and the proportion of tax free and taxable component included in benefit payment. 

 

 

 

Click here to update your SMSF Trust Deed

 

 

A superannuation income stream ceases

 

Pension ceasing date is important as income from assets supporting the pension will no longer be tax free. There are events which trigger income streams to cease, such as  

 

1)       When there is no longer a member (death) who is entitled, or a dependent beneficiary of a member who is automatically entitled, to be paid a superannuation income stream benefit;

2)       Exhaustion of capital; the amount in the relevant superannuation interest is exhausted;

3)       Failure to comply with pension rules and the payment standards of the SISR 1994; such as withdrawing an amount that is less then the minimum annual payment required as superannuation income stream for the income year;

4)       Commutation; a member has commuted their superannuation income stream if,  they consciously exercise their right to exchange some or all of their entitlement to receive future, periodic (including annual) superannuation income stream benefits for an entitlement to be paid as a lump sum.

 

This ruling has made it clear that the pension ceases when the member dies and not when the pension payments stop. It is possible for the super fund to continue making pension payments long after the member has died for example if there is a set automatic debit arrangement from SMSF bank account,. Even Centrelink government pensions are sometimes paid to the pensioner after the pensioner has died.

 

If assets are sold soon after death of the member whilst income streams are being paid by the SMSF, any capital gains realised will be taxable. On lighter tone, this means that you should die only after selling assets which have grown in value or have the fund in cash only status at the time of death.

 

 

---------------------------------------------------------------------------------------------------------------------------------------------

 

 

 

S E M I N A R : 3rd August 2011 Wednesday 6 PM at Homebush - see below for details

 

Cutting edge advanced SMSF Strategies which you can implement to mitigate this ruling



 Click here to book  

 

 

--------------------------------------------------------------------------------------------------------------------------------------------- 

 

 

 Click here to learn how to convert Allocated Pension to the new Account Based Pension  

 

 

 

Only one accumulation account

 

At the commencement of the income stream the member can specify what percentage of the accumulation account will be used to commence a pension. Regulation 307-200.05 of the ITAR 1997 provides that once a superannuation income stream 'commences', an amount that supports the superannuation income stream is always to be treated as a separate superannuation interest.

 

The proportioning rule in section 307-125 of the ITAA 1997 requires the tax free and taxable proportions of a superannuation interest to be determined at the time of commencement of the pension. When any benefit is paid from the superannuation interest, the trustees must ensure that the benefit contains the same proportions of tax free and taxable components as the superannuation interest from which it is paid.

 

Further, when there is an increase in pension assets, due to income, such as interest, dividends, realised or unrealised gains, it increases the tax free and taxable component of the capital of the income stream in the same proportion. This means that whatever is the proportion of taxable and tax free components at the time of commencement of income stream, it remains "locked in" till the income stream ceases.

 

When an income stream ceases, the balance of the superannuation interest (if any) joins the accumulation account of the member. When the two accounts merge, Subsection 307-125(3) of the ITAA 1997 refers to the time at which the value of the tax free and taxable components of the resulting accumulation superannuation interest must be re-determined. If any lump sum is paid from this accumulation account, the superannuation fund must report correctly the two components and withhold the correct amount of PAYG tax if necessary.

 

Once the pension commences, any further contributions or rollovers must add to the accumulation account because of the explicit requirement in subparagraph 1.06(1)(a)(ii) of the SISR 1994 that you cannot add to an existing pension account. This accumulation account however can be used to commence another pension or second pension account for the member. This means that a member can have several pension accounts in a SMSF but only one accumulation account.

 

 

Click here to learn how your SMSF can borrow

 

 

Who can be a reversionary pensioner?

 

If the entitlement to a superannuation income stream is automatically transferred to a "dependent beneficiary" on the death of the member the superannuation income stream does not cease. There is a continuing liability to make the payments under that superannuation income stream albeit the beneficiary of those payments has changed.

 

The term 'dependent beneficiary' refers to a dependant of a member who commences to receive a pension after the member's death. That is, a spouse; a child under 18 years of age or a financially dependent child that is under 25 years of age; or a child of a member who has a disability of the kind described in subsection 8(1) of the Disability Services Act 1986 (see subregulation 6.21(2A) of the SISR 1994).

 

For a superannuation income stream to be considered to have automatically transferred to a dependent beneficiary on the death of a member, the "pension agreement" must specify this will occur. This agreement must specify both the person to whom the benefit will become payable and that it will be paid in the form of a superannuation income stream.

 

The pension agreement may also specify how the dependant is related to the member (for example, spouse) to whom the benefit will become payable. The pension is not automatically transferred to a beneficiary of a deceased member only because of a discretion (or power) granted to the trustee by the trust deed or governing rules.

 

A superannuation income stream is also considered to have transferred on the member's death if a valid binding death benefit nomination is in place at the time of the member's death that entitles a dependent beneficiary to receive a superannuation income stream. The nomination must be binding on the trustee, in respect of both the beneficiary who will receive the benefit, and the form of the benefit. If the trustee may, or is required to, exercise discretion in respect of either of these conditions, the superannuation income stream is not considered to have been automatically transferred.

 

If there is no entitlement for a superannuation income stream to automatically transfer to a beneficiary on the death of a member, for example, if the trustee has the discretion to pay either a superannuation lump sum or a superannuation income stream to a dependent beneficiary, the superannuation income stream ceases on the member's death.

 

If the trustee ultimately decides to pay the relevant dependent beneficiary a superannuation income stream (that is, a pension that complies with regulation 1.06(1) of the SISR 1994) from the remaining amount in the deceased's interest then at that time a new superannuation income stream commences. It is a good idea to re-visit binding death nomination form at the time of commencement of pension and ensure that they are contradicting (binding death nomination requires payment of lump sum).

 

 

Lump Sum payments at the time of death of a member

 

If a lump has to be paid upon the death of the member, you cannot make several payments, only a maximum of two payments are allowed. Paragraph 6.21(2)(a) of the SISR 1994 states that the lump sum may be a single lump sum or an interim lump sum followed by a final lump sum.



Seminar: Transfer wealth to next generation, without paying tax

When: 3rd August 2011 Wednesday at 6 PM

Where: 25 The Crescent Homebush NSW 2140 (phone 8065 3001)

Cost: $65 Incl. GST (Tax Deductible)

   How to Book: www.trustdeed.com.au/seminar

 

ATO has issued a draft ruling on 12th July 2011, this ruling outlines "when a pension commences and ceases" in a self managed super fund. The effect of this ruling is that once the pensioner dies, all the assets supporting the pension move back to accumulation phase.

 

Once assets move to accumulation phase, all income earned by these assets are taxed at 15% and if sold, to pay a lump sum to adult children, subject to capital gain tax. Further, any death benefit lump sums paid to adult children (over 25 years old) are taxed to them at 16.5% Including Medicare Levy.

 

Imagine your $1M SMSF on death will pay 15% Capital Gain Tax and your kids will pay another 16.5% on the balance or about $290,250 tax will be paid from your inheritance. Fortunately, there are cutting edge advanced SMSF Strategies which you can implement to mitigate this tax.

 

We will presenting these strategies on 3rd August 2011 at 6 PM at Homebush, should you want to book, please visit www.trustdeed.com.au/seminar.  

 

 

Free $18 Ticket to Home Buyer Expo - 5th to 7th August Sydney
 
Click here  for a free $18 ticket to the Property investor show (www.propertyinvestorshow.com.au) on 5th - 7th August 2011.

 

WWW.TRUSTDEED.COM.AU 

 

HOW IT WORKS

 

Our oline ordering system is very simple, once you are registered with us, log in and answer to our smart and easy structured questions - clues and explanations are provided. Once you pay our low fee, perfectly customized legal documents are emailed to you, instantly.

The whole process takes not more than 20 minutes!



 

 

 

Every legal document purchased from us is reviewed by our support team for all structural issues, mergers, apparent spelling inaccuracies, address problems etc.

 


Sales Team
Deed Dot Com Dot Au Pty Ltd