Advanced Pension strategies & Auditors Role

1. Advanced Pension strategies & Auditors Role Manoj Abichandani SMSF Specialist Advisor SMSF Specialist Auditor ASIC Approved SMSF Auditor

2. Our Objective Today • 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

3. Disclaimer Material contained in this presentation is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of Deed Dot Com Dot Au Pty Ltd that this presentation be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and onlinesmsfaudit.com.au & trustdeed.com.au will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded). This presentation has been prepared for general information and not having regard to any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendations (express or implied) or other information should be acted upon without obtaining specific advice from an authorised representative. Deed dot com dot au Pty Ltd

4. 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

5. Issues - Eligibility to commence a Pension What is the age of the pensioner’s and of their partner or spouse? Has the member satisfied a condition of release and turned 60? 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? Does the pensioner need to top up their employment income with pension income?

6. Issues - Pension commencement Issues: • 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? • Does the retiring member intend to withdraw their superannuation interest and re-contribute the amount as *non-concessional contribution to the fund?

7. Issues - Pension Calculation Issues • What are the tax components of the member’s accumulation pension account? • What is the member’s taxable income from non-super sources during the year? • Can a member use a salary sacrifice strategy in conjunction with the pension, to reduce their taxable income?

8. Issues - Pension Payment issues • Does the member’s benefit contain an unrestricted non-preserved component? • Should the member’s accumulation account be split into two pensions, one containing the unrestricted non-preserved benefit and one containing the preserved component? • When to pay the pension so that the minimum pension payment requirement is met. • Can we pay the minimum or maximum pension amount in cash or in assets of the fund?

9. Issues - Estate planning issues • 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? • 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)?

10. Issues - Other Pension issues • Does the member have the capacity to make further concessional contributions to the fund and are we going to segregate these assets? • What is the member’s investment strategy and will it produce sufficient cash flow to meet pension obligations and minimum pension payment standards? • Is the pension fund going to borrow?

11. Commencement of a pension in a SMSF • Preservation Age • Net Market Value • Taxable and Tax Free Components • Documents required to commence a pension

12. What type of Pensions can be commenced from a SMSF Income Stream Only Account Based Pensions Reg 1.06 (9A) Must satisfy SISA and SISR Regular Payments from a separate superannuation interest Annual Payment – but – not Lump Sum

13. Account Based Pensions SISR 1.06(9A) Major Issues • Loss of Exempt Pension Income Deduction • Taxable component being paid to a non-dependant • Net Market Value to convert 100 % or Part of accumulation account (SISR Sch. 7 (2) (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 1st June (SISR Sch 7 (1) (4))

14. The Money in the SMSF are Preserved up to Retirement Age A Persons Preservation age depends on their Date of Birth Year 1960 + 55 years = 2015

15. How Pension Payments are taxed

16. Market Value of Assets at Pension Commencement (SISR Sch. 7 (2) (2))Mid – Year Pension Commencements Value of property $1M All assets must be at NMV to work out minimum pension amount Purchased Property $400K Pension Commencement date

17. Each superannuation interest hasTwo components • Taxable = tax deductible (concessional) • Tax Free = un – deductible (non-concessional) (Pre 1983)

18. SMSF Structure - Every Superannuation Interest has its own proportion Member 2 Member 1 Member Accumulation Account TF/ T Accumulation Account TF/T PensionAccount1 TF/T Pension Account TF /T PensionAccount2 TF/T

19. Multiple Pensions Each Superannuation Interest has its “Tax Free” and “Taxable Component” X Can’t Pick Once mixed cannot be un-mixed Taxable Accumulation Tax Free Tax Free Pension Pension Account Pension Account Taxable Pension

20. 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

21. Income in Accumulation phase

22. Income in pension phase – Proportionate rule

23. 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

24. How to document account based pensions Steps have to be followed - to claim Exempt Pension Income • Member to apply for pension • Application has to be accepted by Trustee and PDS to be issued • Schedule of Pension payments “Taxable” & “Tax Free” components • Pension Conditions have to be decided • Pension Agreement executed

25. 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

26. Superannuation Interests • Every member gets only one accumulation account • No new contributions in pension account • Income in Accumulation phase Increases “Taxable Component” but proportionately in pension account • When a pension is commenced – all the assets of the superannuation interest are to be valued at market value

27. 2.What are the Pension Standards • Minimum payments • Add to an existing pension

28. Other Pension StandardsAccount Based Pension 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 (9A) (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))

29. Pensioner has reached preservation age or other conditions of release (Reg 1.06 (9A) • How often the payments will be made (at least once in a year) – No payments if pension commences after 1st June (SISR Sch 7 (1) (4)) • In case of death of member – who should get the reversionary pension (SISR 1.06(9A) (C )) • Before commuting the pension during the year – withdraw the minimum amount (SISR 1.07D (1) (d))

30. 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

31. 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

32. 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 Member Spouse Roll over Other NEW Contributions Pensions SMSF Lump Sums Member

33. 3.Transition to Retirement Pensions

34. 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 $100K Limit - Gone) Assets of accumulation phase moving to pension phase pay no CGT

35. Transition to Retirement Income Pension Pension Account No Tax on Income SMSF New contributions Pensions Accumulation Account Tax on Income Member Segregated (Actuarial Determination) OR un segregated Super Fund

36. Tax Saving by being on TRIP$500K Fund – 6% income

37. Secrets of a Good TRIP Maximise Tax free component (un-deducted) in super The sooner super is in pension phase – the sooner it will pay NIL tax – AGE 55 Imputation Credits are refunded to pension funds = high contribution = no tax Actuarial Certificates Not Suitable only when high income of pensioner and low income of SMSF

38. 4.Reversionary Pensions - No Reversionary pensioner nominated - Reversionary Pensioner nominated

39. Reversionary Pensions 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

40. No reversionary pensioner nominated Assets of the SMSF Sold to pay lump sum SMSF Accumulation phase SMSF Accumulation phase SMSF Pension phase Pension Commencement Date of Death Lump Sum Paid to Dependant or non-dependant Tax Free Both Tax 17% components Taxable Comp.

41. Reversionary pensioner nominated Reversionary Pension phase SMSF Accumulation phase SMSF Pension phase Pension Commencement Date of Death Dependant will join the SMSF as a member if not already a member or will get two pensions if already on pension

42. 5. When does a pension cease • Capital exhausted • Pension /Commutation • Partial Commutation

43. 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

44. 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

45. 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

46. 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

47. Commutation of a Pension • Before commutation • Must pay the minimum amount • Pro-rata withdrawal from 1st 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

48. Rebooting Pensions Un realised Gain Accumulation Account End of Financial Year Pension Payment Existing Pension

49. Merging Pensions – good idea? Pension 1 Taxable Tax Free Pension 2 Taxable Tax Free

50. Merging Pensions Commute Pension 1 & Re-contribute To accumulation = Commence a new pension Pension 1 Taxable Tax Free Pension 2 Taxable Tax Free Pension 3 instead of Pension 1 Tax Free