1. Alex Denham Head of Technical Services December 2009 It’s time to start a pension… but how?

2. 2 Steps 1 and 2 1.Member decides to start a pension on a certain date and requests the Trustee to inform them of their entitlements. 2.Trustees record member’s request Ensure member: meets a condition of release OR has unrestricted non-preserved OR is eligible for Transition To Retirement (TTR) pension

3. 3 Step 2 Managing unrestricted non-preserved amounts The SIS Regulations require unrestricted non-preserved (UNP) benefits to be paid out first Scenario 1: –Member has UNP and Preserved (P) benefits –Wants to use just the P to commence a TTR pension Question over whether they can nominate P only to start the pension Possible solution: roll UNP to another fund, commence pension with P Scenario 2: –Member has both UNP and P and commences a pension with total balance under TTR –Pension payments coming from UNP until used up

4. 4 Steps 3 to 5 3.Check Trust Deed to ensure Fund can pay pension –If not, make necessary amendments (lawyers, actuaries and super consultants offer these services) 4.Trustees meet and resolve to pay a pension 5.Issue Product Disclosure Statement (PDS) if required

5. 5 Step 5 Product Disclosure Statements PDS required by trustee on issue of financial product Superannuation fund is taken to issue new financial product when: –it acknowledges receipt of member's election to take pension; or –it makes the first payment of the pension; –whichever occurs first

6. 6 Step 5 Product Disclosure Statements Exemption applies if: –Trustee believes on reasonable grounds that member has received or knowingly has access to all information that PDS would have been required to contain –Difficult to determine! Trustee responsibility but will most likely need help from adviser/accountant/lawyer

7. 7 Step 5 Product Disclosure Statements Examples of what must be included –Significant benefit entitlements –Risks and returns –Costs – e.g. admin, accounting, legal –Term and type of pension and features –Taxation and estate planning implications –Advantages and disadvantages of pension type

8. 8 Step 6 Member collects funds from other sources: –Roll money from other funds if applicable –Make final contributions ensure notices of intention to deduct have been lodged –Recontribution strategies WARNING! If affecting a recontribution strategy, funds must be physically withdrawn. Journal entries are not enough! –CGT small business contributions Ensure approved from has been received prior to, or at the time of, the contribution being received –Download form from www.ato.gov.au Consider proportional drawdown issues before transferring or contributing money

9. 9 Step 6 Proportional drawdown and separate interests Any withdrawal from “super interest” deemed to include both taxable and tax free component in same proportion as total interest ATO considers that multiple accumulation accounts in a SMSF are always treated as one; BUT Pension accounts are treated separately Think about this before implementing recontribution strategies, or making small business CGT contributions

10. 10 Step 6 Proportional drawdown and separate interests Recontribution strategy to SMSF, 60 year old: Super balance$850,000Tax-free (22%)$187,000 Taxable (78%)$663,000 Withdrawal-$450,000Tax-free (22%)$99,000 Taxable (78%)$351,000 Remaining super balance $400,000Tax-free (22%)$88,000 Taxable (78%)$312,000 $450k recontribution “pollutes” the newly created tax-free amount with taxable component: Tax-free: $538,000 (63%) Taxable: $312,000 (34%) $850,000

11. 11 Accumulation Step 6 Proportional drawdown and separate interests $450,000 Pension $400,000

12. 12 Steps 7 to 9 7. Obtain market values to calculate purchase price (Super Circular 2003/1) 8.Calculate member’s final balance and inform member of balance 9.Consider estate planning issues/reversionary beneficiary options –Any SIS dependent other than a child over 25, or between 18 and 25 and not financial dependant –No longer relevant for tax calculations (but is for Social Security) –CGT questions if no spouse or de facto on death –Binding nominations

13. 13 Steps 10 and 12 10. Identify the tax-free and taxable components –Determines tax-free proportion of the pension –This needs to be recorded in fund records 11. Calculate minimum annual payment amount –Account balance x payment percentage factor –Pro-rata for remaining days in year –If commencement day is 1 – 30 June, no payment required –Round to nearest $10 ($5 rounded up) 12. Calculate the maximum annual payment amount –10% x account balance –Only applicable to TTR pensions –Not pro-rated

14. 14 Steps 13 to 15 13. Trustee must register for PAYG withholding: –Only if any of the payees are under 60 14. Obtain and lodge TFN declaration form from payee 15. Segregate the assets if relevant –Open separate bank accounts –Actuarial certificate still needed for unsegregated assets

15. 15 Step 15 Non-segregated current pension assets The “pooled” approach for purpose of determining earnings Most common approach Only applies if not all members are receiving a pension and assets not segregated A portion of fund’s income that relates to current pension liabilities is exempt from tax Broadly : Fund’s current pension liabilities Total member liabilities

16. 16 Step 15 Non-segregated current pension assets Example: The Jones Family Super Fund John Jones: 62, Mary Jones: 58 John is retiring and commencing an account based pension. Mary is remaining in accumulation phase Assets: –Cash/Fixed Interest $200,000 –Shares $300,000 –Property $200,000 $700,000 John: $500,00071% Mary: $200,00029%

17. 17 Step 15 Non-segregated current pension assets Example: The Jones Family Super Fund –Fund’s current pension liabilities –Total member liabilities $500,000 / $700,000 = 71% of income attributable to current pension liabilities Annual actuarial certificate still required

18. 18 Step 15 Segregated current pension assets Where fund has both accumulation and pension members, assets can be segregated If a fund can specifically identify the assets backing its pensions, it is segregated If asset is used solely to produce exempt income, a capital gain or loss is disregarded Can use combination of segregated and unsegregated assets Actuarial certificate no longer required for segregated assets

19. 19 Step 15 Segregated current pension assets Cash $200K - Interest Shares $300K - Dividends - Growth John $500K SMSF Property $200K - Rental income - Growth No CGT on sale of shares Mary $200k

20. 20 Step 15 Segregated current pension assets Shares - Dividends - Growth Property (50%) - Rent - Growth Cash (50%) - Interest John Property (50%) - Rent - Growth Cash (50%) - Interest Mary SMSF Mary receives half the interest, half the rent and half the property growth; John receives remainder No CGT on sale of shares 50% of property subject to CGT if sold in accumulation phase

21. 21 Steps 16 to 18 16. Check the investment strategy and amend if necessary. –Cash flow needs –Pension payments cannot be made via in specie transfer of assets (but lump sums can) 17.Review insurance arrangements if applicable 18.Pay the pension: a. Advise member minimum payments and tax-free proportion b. Member nominates amount to be paid & frequency c. PAYG is withheld - pension payment is made net of tax d. Record PAYG and make payment to the ATO by 21 days after end of each quarter (monthly if PAYG is $25,000pa or more)

22. 22 Steps 19 to 20 19. Prepare Minutes to record the details and start date of pension(s) 20. Issue a “PAYG Payment Statement Summary – superannuation income stream form” to payee by 14 July –Lodge a PAYG withholding payment summary statement with the ATO by 14 August