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The trust deed for the fund must allow for the ABP to be paid. Trust deeds drafted before mid-2007 will not expressly allow for an ABP to be paid, as the legislation in relation to ABPs was only finalised at that time. If the existing trust deed was drafted before mid-2007, we would recommend that it now be upgraded for this reason alone (if requested, we can now arrange for the trust deed to be upgraded).
The trust deed for the fund must allow for the TRIS to be paid. Trust deeds drafted before mid-2007 will not expressly allow for a TRIS to be paid, as the legislation in relation to TRISs was only finalised at that time. If the existing trust deed was drafted before mid-2007, we would recommend that it now be upgraded for this reason alone (if requested, we can now arrange for the trust deed to be upgraded).
In each financial year, the total amount of pension payments that a pensioner may receive is not subject to a maximum limit, although it must be at least the minimum annual payment amount. Schedule 7 to the Superannuation Industry (Supervision) Regulations 1994 (Cth) sets out the minimum annual payment amount, which is determined by the pensioner’s account balance and the prescribed percentage factor for their age. The pensioner’s age at the commencement date and on each 1 July thereafter is used to determine the percentage factor.
In each financial year (unless the pension commences between 1 June and 30 June) the pensioner must receive at least one pension payment. If the pension commenced between 1 June and 30 June, there is no need for any payment in the financial year in which the pension commenced.
The minimum annual payment amount must be pro-rated when the commencement date of the pension is other than 1 July, having regard to the number of days the pension is payable in that financial year.
So long as the pensioner has a positive pension account balance, pension payments must continue throughout the pensioner’s lifetime.
Payments under an ABP can be paid as agreed by the trustee from time to time (i.e., annually, quarterly, monthly, etc).
Generally speaking, all investment income and capital gains earned within the pension account are tax free. In other words, earnings on assets supporting the ABP are tax free.
It should be noted, however, that certain types of income (eg, taxable contributions and certain private company dividends) are never exempt from tax, even in a pension fund.
Where the pensioner is aged 55-59 then the gross pension amount less the tax free component of the pension payment is assessable as normal income and subject to tax at the pensioner’s marginal tax rate plus the Medicare levy. These pension payments are (like salary or wages) subject to income tax, although the application of the 15% tax offset reduces the amount of tax payable.
That is, the taxable component of a pension payment attracts a 15% rebate (also known as an offset). For example, the maximum amount of tax that will apply to the taxable component of the ABP payment for a pensioner on a 30% tax rate is reduced to 15%. Note that the pension rebate does not result in a refund if tax is payable at less than a 15% rate (and the pension rebate is only applicable for pensioners aged 55 to 59.)
However, if the pensioner is aged 60 or over, the entire pension is received tax free and is not required to be included in the pensioner’s personal income tax return.
Yes, an ABP can be reversionary (although it does not have to be). This means that the pension continues to be paid after the death of the primary pensioner to another person (i.e., a reversionary pensioner). According to the ATO, where an ABP is reversionary, the Trustee generally should not have any discretion to determine the persons to whom the death benefit is to be paid or the manner of payment.
If an ABP is to be reversionary, it should ideally be documented as such before it is commenced. If permitted under the trust deed, an ABP can subsequently be made reversionary after it has commenced to be paid (see below). A reversionary ABP may override any current or future binding or non-binding death benefit nomination subject to the trust deed.
Upon the death of the pensioner, the ABP can only be transferred to:
If a reversionary pension is chosen, then the tax treatment of the reversionary pension is dependent on the age of the pensioner and the reversionary. If either or both of the pensioner and the reversionary beneficiary are aged 60 or over, then the reversionary beneficiary will receive the pension without paying tax on it, and PAYG is not required. However, if both the pensioner (when they died) and the reversionary beneficiary are under age 60 then the taxable component of the pension is taxable and PAYG must be withheld from the taxable component.
If it is permitted under the trust deed, an ABP may subsequently be made reversionary after it has commenced to be paid. You should check the trust deed to ensure that conversion of the reversionary nature of a pension following its commencement is allowed. If it is permitted, you may request that a ‘non-reversionary’ pension become reversionary to a reversionary beneficiary by notifying the Trustee and otherwise complying with the requirements of the trust deed.
Unfortunately, no. Depending on the pensioner’s life span, or the amount of income that is withdrawn under the ABP, there is a risk that the pensioner’s superannuation pension account could be exhausted prior to the pensioner’s death. Also, the pensioner’s pension account balance is subject to investment risk, meaning that its value may rise and fall, as it is not guaranteed. It may therefore be appropriate for members to consult a financial adviser before deciding whether or not to commence an ABP.
The main difference between these two pensions is that, unlike an ABP, a transition to retirement income stream (TRIS) may be commenced as soon as the member has reached their preservation age, even if they continue to be in the workforce.
Also, unlike an ABP, there is a maximum limit to the amount that may be paid under a TRIS each year (being 10% of the pension account balance for that financial year).
Note that where a TRIS is being paid, once the pensioner satisfies a condition of release with a nil cashing restriction (such as retiring after reaching preservation age or turning 65), the TRIS may then be ‘converted’ to an ABP (or to a lump sum).
Yes, provided the trust deed for the SMSF so allows, a pensioner can roll their ABP back into ‘accumulation’ phase at any age. However, once in the accumulation phase income will generally be taxed at 15%.
A pensioner can also roll-over their pension account balance to another complying superannuation fund to commence an ABP (though they must generally stop the ABP first).
When a pension is commuted within a particular financial year, the minimum annual payment amount of the ABP must be pro-rated and paid, having regard to the number of days the pension was payable in that financial year. For instance, if the ABP was commuted exactly half way through the financial year, then the minimum annual payment amount for that year would be half the amount that would otherwise apply.
No. Once an ABP has commenced, the superannuation law provides that the capital supporting the ABP cannot be added to by way of contribution or roll-over.
Contributions can continue to be made for the pensioner after the ABP has commenced, however, they would be paid into a separate accumulation account for the pensioner, rather than into the pension account.
Not necessarily.
More particularly, in order to calculate the proportion of an SMSF’s income that is exempt, there are two possible approaches that may be adopted.
First of all, the assets that will support the pension may be segregated, and held solely to enable a fund to discharge its pension liabilities (however, note that the ability for an SMSF to utilise segregation may be removed from 1 July 2017, if any one member of the fund has a total superannuation balance greater than $1.6 million). In this case, it is necessary for specific assets to be identified to ensure they are isolated from other assets. Gains and losses associated with those assets can then be traced via the accounting system. Typically, a trustee resolution may be used to document the list of segregated assets.
Alternatively, rather than segregating the assets, it is possible to pro-rate the pension exemption based on the balance of the assets applied towards the pension compared to the total fund balance.
An actuarial certificate will be required if some or all of the assets backing a pension are unsegregated. However, where all of the assets backing an ABP are segregated, an actuarial certificate is not required by the fund.
Expert advice should be obtained if there is any doubt in deciding whether or not to segregate assets, due to the complexities involved.
Yes, even for a pensioner aged 60 or over, the tax free component may still have some relevance. More particularly, the tax free component will again become relevant on the death of the pensioner in the event that the benefit then becomes payable to a non-dependant, such as an adult child. (I.e., the adult child, as a non-tax dependant, would receive the tax-free component tax free, whereas the taxable component would be subject to tax of 15%.)
Yes, a deceased member’s benefits in an SMSF may be paid to another member by way of a new ABP, although in that case the trustees of the SMSF should obtain detailed legal advice as death in an SMSF gives rise to many issues.
On the death of a member receiving an ABP, if there is no reversionary beneficiary nomination, any remaining amount in the pension account for the ABP (as well as any other benefits of the deceased member in the SMSF) may then be paid by the trustee of the SMSF in accordance with the SMSF’s trust deed, either to one or more dependants of the deceased member, and/or to the estate of the deceased member to be dealt with according to their Will.
‘Dependants’ include a spouse (including de facto partners and same sex partners), children, and any other person that was financially dependent on the pensioner at the time of death or any person who was in an ‘interdependency relationship’ as defined in the superannuation legislation with the pensioner.
A pensioner can make a binding death benefit nomination (BDBN) (provided that the trust deed for the fund allows for BDBNs to be prepared) during their lifetime and bind the trustee to pay benefits according to the pensioner’s direction. Otherwise, the decision of how to pay death benefits is by default left to the trustee’s discretion.
As stated above, if the ABP is reversionary, it will then continue to be paid after the pensioner dies to the reversionary pensioner. A reversionary beneficiary nomination may override any current or future BDBN or non-binding death benefit nomination subject to the trust deed.
Generally speaking, a condition of release with a nil cashing restriction must have been satisfied by the member after reaching their preservation age before they can commence an ABP from their SMSF.
A member’s preservation age is between 55 and 60, depending on when they were born (members born before 1 July 1960 have a preservation age of 55, whereas members born after 30 June 1964 have a preservation age of 60).
For example, a member may commence an ABP once they have retired (for the purposes of the superannuation law) after reaching their preservation age, or once they have attained the age of 65.
|
Date of Birth |
Preservation Age |
|
Before 1 July 1960 |
55 years |
|
Between 1 July 1960 and 30 June 1961 |
56 years |
|
Between 1 July 1961 and 30 June 1962 |
57 years |
|
Between 1 July 1962 and 30 June 1963 |
58 years |
|
Between 1 July 1963 and 30 June 1964 |
59 years |
|
After 30 June 1964 |
60 years |
Broadly, a member can commence a TRIS once they have reached their preservation age (even if they continue to work).
A member’s preservation age is between 55 and 60, depending on when they were born (members born before 1 July 1960 have a preservation age of 55, whereas members born after 30 June 1964 have a preservation age of 60).
|
Date of Birth |
Preservation Age |
|
Before 1 July 1960 |
55 years |
|
Between 1 July 1960 and 30 June 1961 |
56 years |
|
Between 1 July 1961 and 30 June 1962 |
57 years |
|
Between 1 July 1962 and 30 June 1963 |
58 years |
|
Between 1 July 1963 and 30 June 1964 |
59 years |
|
After 30 June 1964 |
60 years |
In each financial year, the total amount of pension payments that a pensioner may receive must be at least the minimum annual payment amount. Schedule 7 to the Superannuation Industry (Supervision) Regulations 1994 (Cth) sets out the minimum annual payment amount, which is determined by the pensioner’s account balance and the prescribed percentage factor for their age. The pensioner’s age at the commencement date and on each 1 July thereafter is used to determine the percentage factor.
Unless and until the pensioner satisfies a condition of release with a nil cashing restriction, then the amount of the pension payments each year cannot exceed 10% of the pension account balance on 1 July in the financial year in question (or on the commencement day of the pension, in the year in which the pension commences).
In each financial year (unless the pension commences between 1 June and 30 June) the pensioner must receive at least one pension payment. If the pension commenced between 1 June and 30 June, there is no need for any payment in the financial year in which the pension commenced.
The minimum annual payment amount must be pro-rated when the commencement date of the pension is other than 1 July, having regard to the number of days the pension is payable in that financial year.
So long as the pensioner has a positive pension account balance, pension payments must continue throughout the pensioner’s lifetime.
Payments under a TRIS can be paid as agreed by the trustee from time to time (i.e., annually, quarterly, monthly, etc).
Our TRIS kit has been drafted so that once the pensioner satisfies a condition of release with a nil cashing restriction (such as retiring or attaining age 65), then no maximum limit applies, and the TRIS then in effect automatically converts to a normal account-based pension unless otherwise agreed between the pensioner and the trustee.
As there is no maximum annual payment limit imposed for an account-based pension, the pensioner could, on satisfying a ‘full’ condition of release, withdraw the entire pension account balance. However, the minimum limits imposed by law on pensions will continue to apply to the account-based pension. The conversion to an account-based pension will allow income from the assets supporting the account-based pension to obtain a tax exemption (subject to the $1.6 million cap on the commencing balance of pensions from 1 July 2017).
Up to 30 June 2017, generally all investment income and capital gains earned within the pension account are tax free. In other words, earnings on assets supporting the TRIS are tax free. From 1 July 2017, the tax exemption on earnings supporting a TRIS will be removed, and earnings will generally be subject to a tax rate of 15% (effective for the 2017/18 financial year).
It should be noted, however, that certain types of income (eg, taxable contributions and certain private company dividends) are never exempt from tax, even in a pension fund.
Yes, a TRIS can be reversionary (although it does not have to be). This means that the pension continues to be paid after the death of the primary pensioner to another person (i.e., a reversionary pensioner). According to the ATO, where a TRIS is reversionary, the Trustee generally should not have any discretion to determine the persons to whom the death benefit is to be paid or the manner of payment.
If a TRIS is to be reversionary, it should ideally be documented as such before it is commenced. If permitted under the trust deed, a TRIS can subsequently be made reversionary after it has commenced to be paid (see below). A reversionary TRIS may override any current or future binding or non-binding death benefit nomination subject to the trust deed.
Upon the death of the pensioner, the TRIS can only be transferred to:
If it is permitted under the trust deed, a TRIS may subsequently be made reversionary after it has commenced to be paid. You should check the trust deed to ensure that conversion of the reversionary nature of a TRIS following its commencement is allowed.
If it is permitted, you may request that a ‘non-reversionary’ TRIS become reversionary to a reversionary beneficiary by notifying the Trustee and otherwise complying with the requirements of the trust deed.
Unfortunately, no. Depending on the pensioner’s life span, or the amount of income that is withdrawn under the TRIS, there is a risk that the pensioner’s superannuation pension account could be exhausted prior to the pensioner’s death. Also, the pensioner’s pension account balance is subject to investment risk, meaning that its value may rise and fall, as it is not guaranteed. It may therefore be appropriate for members to consult a financial adviser before deciding whether or not to commence a TRIS.
The main difference between these two pensions is that, unlike a TRIS, an account-based pension (ABP) generally can only be commenced once the member has satisfied a condition of release with a nil cashing restriction (such as retiring after reaching preservation age, or attaining age 65). That is, unlike a TRIS, it is not sufficient for the member to simply reach preservation age in order to commence an ABP – the member must also then retire for the purposes of the superannuation legislation.
Also, unlike a TRIS, there is no maximum limit to the amount that may be paid under an ABP each year – if the member so wishes, the entire pension account of an ABP can be paid at any time.
Yes, provided the trust deed for the SMSF so allows, a pensioner can roll their TRIS back into ‘accumulation’ phase at any age. However, once in the accumulation phase income will generally be taxed at 15% (note this will be the case for all TRISs after 1 July 2017, anyway).
A pensioner can also roll-over their pension account balance to another complying superannuation fund to commence a TRIS (though they must generally stop the TRIS first).
When a pension is commuted within a particular financial year, the minimum annual payment amount of the TRIS must be pro-rated and paid, having regard to the number of days the pension was payable in that financial year. For instance, if the TRIS was commuted exactly half way through the financial year, then the minimum annual payment amount for that year would be half the amount that would otherwise apply.
No. Once a TRIS has commenced, the superannuation law provides that the capital supporting the TRIS cannot be added to by way of contribution or roll-over.
Contributions can continue to be made for the pensioner after the TRIS has commenced, however, they would be paid into a separate accumulation account for the pensioner, rather than into the pension account.
Not necessarily.
More particularly, in order to calculate the proportion of an SMSF’s income that is exempt, there are two possible approaches that may be adopted.
First of all, the assets that will support the pension may be segregated, and held solely to enable a fund to discharge its pension liabilities (however, note that the ability for an SMSF to utilise segregation may be removed from 1 July 2017, if any one member of the fund has a total superannuation balance greater than $1.6 million). In this case, it is necessary for specific assets to be identified to ensure they are isolated from other assets. Gains and losses associated with those assets can then be traced via the accounting system. Typically, a trustee resolution may be used to document the list of segregated assets.
Alternatively, rather than segregating the assets, it is possible to pro-rate the pension exemption based on the balance of the assets applied towards the pension compared to the total fund balance.
An actuarial certificate will be required if some or all of the assets backing a pension are unsegregated. However, where all of the assets backing a TRIS are segregated, an actuarial certificate is not required by the fund.
Expert advice should be obtained if there is any doubt in deciding whether or not to segregate assets, due to the complexities involved.
Yes, even for a pensioner aged 60 or over, the tax free component may still have some relevance. More particularly, the tax free component will again become relevant on the death of the pensioner in the event that the benefit then becomes payable to a non-dependant, such as an adult child. (I.e., the adult child, as a non-tax dependant, would receive the tax-free component tax free, whereas the taxable component would be subject to tax of 15%.)
On the death of a member receiving a TRIS, if there is no reversionary beneficiary nomination, any remaining amount in the pension account for the TRIS (as well as any other benefits of the deceased member in the SMSF) may then be paid by the trustee of the SMSF in accordance with the SMSF’s trust deed, either to one or more dependants of the deceased member, and/or to the estate of the deceased member, to be dealt with according to their Will.
‘Dependants’ include a spouse (including de facto partners and same sex partners), children, and any other person that was financially dependent on the pensioner at the time of death or any person who was in an ‘interdependency relationship’ as defined in the superannuation legislation with the pensioner.
A pensioner can make a binding death benefit nomination (BDBN) (provided that the trust deed for the fund allows for BDBNs to be prepared) during their lifetime and bind the trustee to pay benefits according to the pensioner’s direction. Otherwise, the decision of how to pay death benefits is by default left to the trustee’s discretion.
As stated above, if the TRIS is reversionary, it will then continue to be paid after the pensioner dies to the reversionary pensioner. A reversionary beneficiary nomination may override any current or future BDBN or non-binding death benefit nomination subject to the trust deed.
We can provide documents completed with the fund details to start a new pension for an Account Based Pension (ABP) or Transition to Retirement Income Stream (TRIS).
Login using your email address and password. Click on SMSFs and then under the heading Tools to Manage a Fund select the pension you want to start (ABP or TRIS). Complete and submit the form and we will prepare the documents, simple!
For more information on starting an ABP or TRIS (new pension), see this news article from our in-house legal team.
