If you are thinking of establishing an SMSF but know little about how pensions work in Australia, I hope this article will act as a starter for you.
The basic conceptThe basic concept of the Australian superannuation regime is straightforward: during your working life you can put sums and assets in a superannuation fund, subject to caps. If you are employed, your employer is obliged to make superannuation fund payments for you (you do not pay personal tax on this money). You can also make your own contributions and up to an annual cap you may deduct these from your income and therefore reduce your personal tax bill.
Generally you can't withdraw from the fund until you reach a certain age or retire. Whether you have to take a pension or whether you can withdraw all the money, and whether you have to pay any tax on the withdrawal depends on your age and whether you have retired. If you are between "preservation age" and your 65th birthday and still working you can take a "transition to retirement" pension with a minimum and maximum annual withdrawal, but if retired or aged 65 or over you can withdraw as much as you like as a lump sum or take a pension with a minimum annual withdrawal or you can take both. If you are not yet 60 when you take the money out, part will be taxable but significant tax concessions apply; after the age of 60 withdrawals are tax free. The basic aim is to provide you with a decent level of capital and income later on in life.
As for the internal tax treatment of the fund, before the fund starts to make any payments to you, it pays tax of 15% on its income. The fund also pays tax at 15% on contributions into the fund where the source of the contribution is untaxed money (except for high earners when it is 30%). After the fund starts making payments to you, provided you have retired or have reached 65, it will usually not pay tax on the income from the assets set aside to enable those payments to be made.
There will be a time in which in your personal circumstances, you can take a pension from your superannuation fund but at the same time make contributions to the fund. This is perfectly legitimate but the contributions must go into an accumulation account (they must not be added to the account from which your pension is being paid). The accumulation account can be used later to start a new pension, or added to your existing pension account.
I am a barrister practising in Australia and I am one of those people who manage all aspects of my own SMSF. This is of professional interest to me. My trust deeds, corporate constitution and guidance packs are on sale on this site. My aim is to provide these documents (and if necessary to provide further advice) at a reasonable cost to those who wish to set up and run an SMSF.
You may prefer to engage a professional to do some or part of the work. In Australia there is quite an industry in offering SMSF services - lawyers, accountants, financial planners, investment advisers, and SMSF administrators. But such professionals do not become trustees of the SMSF, nor take over the trustees' responsibilities - the responsibility will always remain with you.
You can start with the age table. This is because it is the age of the member of the superannuation fund which largely determines how the fund must operate with respect to that member, and what contributions and receipts are permitted.
Then move on to the contributions table. This explains how each type of contribution is dealt with for tax, and the caps which apply.
Then there is the pensions table. This shows how each type of pension is dealt with for tax, and the rules which apply to them.
Permitted contributions and withdrawals by age
|Age range||Permitted contributions||Permitted withdrawals|
|0 to preservation age||any (except downsizer contributions)||exceptional circumstances and employee's life pension only|
|preservation age to 59||
whilst still working, a transition to retirement (TTR) pension or
upon retirement, a lump sum or retirement phase pension
at this age, the taxable part of the income stream (or lump sum subject to a threshold) is taxable at a concessionary rate in the hands of the recipient
|60 to 64||
whilst still working, a transition to retirement (TTR) pension or
upon retirement or assumed retirement, a lump sum or retirement phase pension
at this age, all receipts are tax free in the hands of the recipient
|65 or 66||mandated employer, downsizer, non-mandated employer and member contributions||
lump sum or retirement phase pension.
all receipts are tax free in the hands of the recipient
|67 to 74||
mandated employer or downsizer contributions
if work test is satisfied: non-mandated employer and member contributions
see the work test exemption
|75+||mandated employer or downsizer contributions|
And the following events will enable part of the fund to be paid out to a member:-
|before 1 July 1960||55|
|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|
* This is planned to increase in staggered steps to 12% by 1 July 2025.
* The Government plans to reduce this to 60 - see 2021 Budget.
* The Government plans to abolish the work test for non-concessional contributions from 1 July 2022 (it will still apply to concessional contributions) - see 2021 Budget.
tax treatment and the caps
|Concessional contributions that is, employer contributions (both mandated and non-mandated) and member contributions.||Non-concessional contributions that is, member contributions for which deduction is not claimed.|
|Deductible from income?||Yes||No|
|Taxed on receipt in the fund?||Yes, at 15%. However, this is 30% for members earning more than $250,000 (Div 293 tax).||No|
|Annual cap||$27,500.* See also carry forward.||If the member's total superannuation balance as at 30 June the previous tax year is <$1.7m* then $110,000; otherwise nil. See also bring forward.|
* The Government plans to enlarge this to under age 75 - see 2021 budget.
the two pension types
|TTR pension||Retirement phase pension|
|Minimum pension (as percentage of pension or retirement account)*||
Age at later of start of pension or 1 July:-
|Same as TTR pension|
|Maximum pension (as percentage of pension or retirement account)||10%||None (the whole fund can be withdrawn)|
|Maximum value of pension or retirement account||Unlimited||
For new retirement phase accounts, $1.7m across all accounts (the general transfer balance cap).
For existing retirement phase accounts the cap will be between $1.6m and $1.7m depending on the amount of unused cap.
|Is the pension commutable to a lump sum?||No||Yes|
|Are the capital gains and income of the pension or retirement account chargeable to tax?||Yes see the internal taxation table.||No|
* Where the pension commences mid-financial year, the minimum payment is reduced proportionately.
† These minima have been halved for the years 2019-20, 2020-21 and 2021-22 but will then revert to the usual amounts.
|Type of receipt||Accumulation phase
(also includes a fund paying a transition to retirement pension)
(this does not include a fund paying a transition to retirement pension)
|Income from investments||15%||No tax on income from the sums and assets set aside to provide for the income stream. This income is called exempt current pension income (ECPI).|
|Capital gains from investments||15% of gain upon disposal of the asset: if the asset has been held for 12 months the rate is 10%.||Ignore any capital gain or loss arising from the disposal of sums and assets set aside to provide for the income stream.|
It is possible for a fund to be both in an accumulation phase (with an accumulation account) and paying a transition to retirement pension or in retirement phase at the same time. This is because the fund may receive contributions despite paying a pension. Such contributions must however, be paid in the accumulation account.
The procedures to be followed to identify these assets and the income derived from them are in the ATO document "Running a self-managed super fund", but are more precisely set out on the "tax professionals" area of the ATO site (search for "ECPI"). They include the need for a revaluation of all assets to their current market value before the pension payments start, and the need to follow proper accounting procedures.
Converting a pension or part of a pension into a lump sum is called a "commutation".
The pension regulations sometimes use the terms "benefits" to mean the member's account balance in the fund and sometimes to mean payments made to the member. This has the potential for confusion, so in my trust deed I have called the assets in the fund allocated to a particular member the "member's account balance". This closely follows those parts of the pension regulations which use the term "account balance". Some people use "member's accumulated benefit" or "member's account" to mean the same thing.
An SMSF therefore has a "members account balance" and an "account based pension" is a pension or income stream paid out of a fund which has a members account balance.
The following definitions are used in my trust deed to describe what happens to a member's account balance in different circumstances. These follow as closely as possible the use of these words and phrases in the superannuation legislation ("the SIS law"):-
"A member's account balance is:-Contribution splitting is where a member splits a contribution between the member's superannuation account and to someone else's superannuation account (eg. a spouse) but claims a deduction from income for the whole contribution.
- cashed if it is paid by the Fund to the member or to another person in accordance with the SIS law: when this happens this is called a release or an early release;
- transferred if it is paid to another superannuation fund or to a Retirement Savings Account where the member has not yet satisfied a condition of release or early release under the SIS law; or
- rolled over if it is paid to another superannuation fund where the member has satisfied a condition of release or early release under the SIS law."
Co-contributions are where the government adds a percentage to a contribution made by a member. This might be where the member is a low earner and so is paying less than 15% tax. This is because contributions are taxed at 15% on receipt into the SMSF instead of at the member's marginal tax rate. To be eligible you must have a total superannuation balance less than the general transfer balance cap and must not have contributed more than your non-concessional contributions cap.
Non-preserved benefits can be either restricted non-preserved benefits (RNPBs) or unrestricted non-preserved benefits (UNPBs). If you are starting a new SMSF and you rollover or transfer an existing superannuation fund into your new SMSF, then you may come across money or assets which need to be categorised in your accounts in this way. UNPBs can be released to the member at any time without condition. Employer's contributions made prior to 1 July 1999 will be RNPBs. On the cessation of employment with that contributing employer, the relevant RNPBs are converted to UNPBs. So from that date they can be released to the member at any time. Prior to the cessation of that employment, they cannot be released until a condition of release is satisfied in the same way as preserved benefits.
There are also some absolute restrictions under superannuation law as to how the account balance can be distributed, but assuming the trust deed allows it, the table below shows who can receive the member's account and in what form. This should be read whilst bearing in mind the definitions below the table.
|deceased member's estate||a lump sum|
|deceased member's spouse or de facto spouse||lump sum or income stream or both|
|deceased member's child aged below 18||lump sum or income stream or both, but an income stream must cease at 25 unless the child has a permanent disability|
|deceased member's financially dependant or permanently disabled child aged 18-25||lump sum or income stream or both, but an income stream must cease at 25 unless the child has a permanent disability|
|person with whom deceased had an interdependency relationship||lump sum or income stream or both|
|any person who was reliant on the deceased for financial maintenance at the time of death||lump sum or income stream or both|
|any other person||lump sum only|
spouse or de facto spouse can include same sex couples.
child includes an adopted child, a stepchild, an ex-nuptial child of the person, and a child of a spouse and a child as a result of artificial insemination or surrogacy agreement.
An interdependency relationship exists between two people where they have a close personal relationship, and they live together, even if they are not related by family, and one or each of them provides the other with financial suppoer and also domestic support and personal care. If one person provides another with domestic support and personal care but does not satisfy any of the other tests because of physical, intellectual or psychiatric disability, this will suffice.
Note also that in the case of the death of a member prior to 1 July 2017, in certain circumstances a lump sum payment made to a spouse, a former spouse or to a child (including an adult child) of the deceased member can be increased to compensate for the contribution tax that had been paid on the member's contributions. This is called an "anti-detriment payment".
a person who relied on the deceased for financial maintenanceAlthough this category of person does not appear in the superannuation law which defines a "dependant", the ATO accept it as a separate category because there is no exhaustive definition of dependant in the legislation. So it is said that a person who relied on the deceased for financial maintenance is also a "dependant". This liberal interpretation may at some point open to challenge but it is a generally accepted view.
23 July 2021
Copyright © Jeremy Gordon