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5 SMSF pension mistakes that accountants make

5 SMSF pension mistakes that accountants make

The SMSF pension rules can be a minefield to negotiate and it is so difficult for accountants in public practice keep up with all the changes to GST, Tax, FBT, Etc. Etc. let alone pensions that you may not come across very often. I see mistakes when dealing with income streams all the time, below are five of the common SMSF pension mistakes that I come across.

1 Set up documents

SMSF Pension Documentation is important to ensure that the pension actually commences when you want it to commence. Typically, a income stream may start before an actual pension payment is made. For example, sometimes the income stream start date will be 1st July and the actual pension payment may be a yearly payment commencing the following June. The documentation should reflect this and include at a bare minimum such things as a request from the member to the trustee, minutes of the trustee, and notification from the trustee to the member (type of pension, when to be paid, if a reversionary pension is to be applied, etc.).

 

2 Minimum SMSF Pension Payments

In order to take advantage of the Tax Exempt Pension Income within the fund the minimum pension amount must be paid within the financial year. This means that the pension must leave the funds bank account by the 30th June. Pension payments cannot be accrued or just be added to the following year's minimum. As the fund accountant you should supply the minimum pension amount of SMSF pension payable each financial year. If the member is receiving a Transition to Retirement Pension the maximum amount of pension payments should also be supplied.

3. Making Contributions

Once a income stream has been started, contributions cannot be made to that SMSF pension account. Contributions can still be made to the SMSF; however these will be accounted for in a separate account (accumulation account). You may wish to stop the pension and add the contribution and then start a new pension. (Note: If this is the case you must first pay the minimum pension before stopping the pension and pay the minimum pension of the new pension after it starts - remembering that no minimum is required if started in June).

It is important that the documentation is completed to ensure that the fund maintains its tax exempt status. Also, if you have a pension account and accumulation account during the year (and you do not have segrated pension assets) you will need to obtain an actuarial certificate to be eligible for the tax exempt percentage of fund income. MSCJ superannuation Service can assist you with any questions that you may have.

4. Tracking the Tax Free Component %

At the start of the pension the Tax Free Component Percentage needs to be calculated and this percentage remains for the life of the pension. This is calculated by dividing the Tax Free Component by the total starting balance of the pension. It is important that you have tracked the Tax Free Component amount and you should report this on the members' statements.  Note: some accounting packages do not track this component and this could cost your future clients thousands! Accounting packages that do include BGL Simple Fund and Class Super

It is often said to me 'I thought that the pension payments are all tax free' - yes they are, the tax free component does not refer to the regular pension payments. The Tax Free Component percentage will come into play upon death of the member and can make significant difference to the tax paid by your dependents (particular adult children - your future clients!).

Members statements should detail your components. The members statements should have the tax free component percentage for pension accounts and the tax free component dollar amount for accumulation accounts. If you are in any doubt feel free to give us a call.

5. Entitled to a SMSF pension

In order to commence a SMSF pension the member must be over the preservation age. This means that the member must have reached the preservation age at the time the SMSF pension documents says the income stream starts, this does not necessarily mean at the time the first pension payment is made. For example, the member may be turning 55 (and meeting your preservation age) on the 3rd of September and you may think that the pension can start on the 1st of July but not pay any pension payments until after the 3rd of September and get the full year of tax free pension income. This is not possible, in order to commence the pension you have to have reached the preservation age at the 3rd of September and the documents described in 1 above must indicate this, regardless of what date the first pension payment is made.

At Discover Super we help accountants across Australia with their SMSF pension and other SMSF needs.

We can help your practice with SMSF audit or SMSF administration or even just a SMSF pension set-up document package. Feel free to give us a call on 1300 766 487.

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One thought on “5 SMSF pension mistakes that accountants make

  1. I am glad you share this very relevant article to all members Smsf as your input help them to understand more what kind of question they have to ask and give more clear view.

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