Paying Benefits to Members with a Self Managed Super Fund

The payment standards contained in the super laws, the sole purpose test and the preservation rules, ensure money in your Self Managed Super Fund is paid to members only when they are legally allowed to have it. Penalties apply in circumstances where these requirements are not met.

CASHING OF BENEFITS

There are two forms of cashing of benefits.

1 Compulsory cashing of benefits

The only circumstance where compulsory cashing of benefits is required is when a member dies. Your member’s benefits need to be paid out as soon as possible after the members death. vThere is no compulsory cashing out rule of super payments because a member has reached a particular age.

2 Voluntary cashing of benefits

Your member’s benefits will be classified as one or more of the following:

  • Preserved benefits
  • Restricted non-preserved benefits
  • Unrestricted non-preserved benefits

 

Regardless of their source, all contributions made by, or on behalf of a member and all earnings for the period after 30 June 1999 are preserved benefits. Employer eligible termination payments (before 1 July 2007) rolled over into a super fund, are also preserved benefits.

Preserved benefits may be cashed voluntarily only if a condition of release is met and then subject to any cashing restrictions imposed by the super laws. Cashing restrictions tell you what form the benefits need to be taken in.

Restricted non-preserved benefits can’t be cashed until the member meets a condition of release. They are subject to the same cashing restrictions as preserved benefits with one exception.

Unrestricted non-preserved benefits don’t require a condition of release to be met, and may be paid upon demand by the member. For example, where a member has previously satisfied a condition of release and decided to keep the money in the super fund.

PRESERVATION AGE

Preservation age is generally the age that you can access your super benefits, unless other extenuating circumstances occur that permit access the benefits early and legally.

A person’s preservation age depends on their date of birth, as set out in the following table.

Date of Birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
After June 1964 60

PAYMENT OF BENEFITS

Providing the governing rules of your fund allow it, member benefits may generally be paid for in any of the following forms:

  • A single lump sum
  • One or more pensions or the purchase of one or more annuities

CONDITIONS OF RELEASE

Conditions of release are the events your member needs to satisfy to withdraw benefits from their super fund. The conditions of release are also subject to the rules of your SMSF (as set out in the trust deed). It is possible that a benefit may be payable under the super laws, but can’t be paid under the rules of your Self Managed Super Fund.

Preserved benefits and restricted non-preserved benefits may be paid out for the following reasons:

1. RETIREMENT

Actual retirement depends on a persons age and, for those less that 60 years of age, their future employment intentions. A retired member can’t access their preserved benefits before they reach their preservation age.

For people aged less that 60

A member who is aged less than 60 who has reached their preservation age, retired when the arrangement under which they were gainfully employed ceases and the member does not intend to be gainfully employed for at least 10 hours a week, in the future.

When a member reaches 60

When a member as reached 60 years of age, their retirement occurs when an arrangement under which they were gainfully employed ceased on or after they reached age 60 or the member does not intend to be gainfully employed on a full time or part time basis. There are no ‘cashing restrictions’ for retirement.

For members aged 60 or more

If a member who is aged 60 or more gives up one employment arrangement but continues in another employment relationship, they may:

  • Cash all preserved and restricted non-preserved benefits accumulated up until that time.
  • Not cash any preserved or restricted non-preserved benefits accumulated after that condition of release occurs.

 

They can’t cash those benefits until a fresh condition of release occurs. If a member aged 60 or more starts a new employment arrangement after satisfying a condition of release, such as retirement from a previous employment arrangement at or after age 60, benefits related to the new employment remain preserved until a further condition of release is satisfied.

2. ATTAINING AGE 65 OR MORE

If a member has reached age 65, they may cash their benefits at any time. There are no cashing restrictions on attaining age 65 or more.

3. TERMINATING GAINFUL EMPLOYMENT AFTER 1 JULY 1997 – BENEFITS LESS THAN $200

A member may voluntarily cash their benefits where they have terminated employment with a standard employer-sponsor of your fund and their preserved benefits are less than $200. There is no cashing restrictions on payment of these benefits.

4. TERMINATING GAINFUL EMPLOYMENT – BENEFITS OR $200 OR MORE

Subject to the governing rules of your fund, where a member has terminated employment who has contributed to the member’s fund, preserved benefits may be paid, but the benefits need to be taken as a non-commutable lifetime pension or annuity. On termination, all restricted non-preserved benefits become unrestricted non-preserved benefits and therefore can be cashed out on request from the member (no cashing restrictions).

5. PERMANENT INCAPACITY

A member’s benefits may be cashed if they cease gainful employment and you are satisfied that the member is unlikely, because of ill heath, to engage in gainful employment that they are reasonably qualified for by education, training or experience. There are no cashing restrictions on payment of benefits.

6. TEMPORARY INCAPACITY

A member’s benefits may be paid where you are satisfied that the member has temporarily ceased work due to physical or mental ill health that does not constitute permanent incapacity. In general, temporary incapacity benefits may be paid only from the insured benefits or voluntary employer funded benefits.

It is not necessary the member’s employment to fully cease but, generally a member would not be eligible for temporary incapacity benefits if they were receiving sick leave benefits. The cashing restriction is that the benefit needs to be paid as a non-commutable income stream for the period of the incapacity.

7. SEVERE FINANCIAL HARDSHIP

Different conditions for release and cashing restrictions apply depending on the age of the member.

Where the member is under their preservation age plus 39 weeks, you need to be satisfied that the member:

  • Can’t meet reasonable and immediate family living expenses
  • Has been receiving relevant government income support payments for a continuous period of 26 weeks and was receiving that support at the time of applying to the trustees.

 

The cashing restriction is that the payment needs to be a single gross lump sum of no more than $10,000 and no less than $1,000 (or a lesser amount if the member’s benefits are less than $1,000). Only one payment is permitted in any 12-month period.

Where the member has reached their preservation age plus 39 weeks, you need to be satisfied that the member:

  • Has been receiving government income support payments for a cumulative period of 39 weeks since reaching their preservation age
  • Was not gainfully employed on a full-time or part-time basis at the time of applying to the trustees.

 

If releasing benefits under these circumstances, there are no cashing restrictions.

8. COMPASSIONATE GROUNDS

Benefits may be released on specified compassionate grounds where:

  • A member does not have the financial capacity to meet an expense
  • Release is allowable under the governing rules of your fund
  • APRA determines, in writing, that release is permitted.

 

There are specific grounds for release and, one APRA has approved the release, the final decision to release the benefits lies with you and your fellow trustees.

9. TEMPORARY RESIDENTS DEPARTING AUSTRALIA

People who have entered Australia on an eligible temporary resident’s visa and who permanently depart Australia can be paid any super they have accumulated. The member will have to prove their eligibility under this condition of release.

The payment is subject to special withholding tax. You are required to issue a withholding payment summary to the individual and report details of the amounts withheld annually to us.

10. TRANSITION TO RETIREMENT (ATTAINING PRESERVATION AGE)

Members who are under the age of 65 and have reached preservation age, but remain gainfully employed on a full-time or part-time basis, may access their preserved benefits and restricted non-preserved benefits as a non-commutable income stream.

11. TERMINAL ILLNESS OR INJURY

If a member has a terminal medical condition and two medical professionals certify that the condition is likely to result in the member’s death in the next 12 months, you may pay them a limp sum benefit.

12. ROLLOVERS AND TRANSFERS

Generally, rollovers or transfers to other super funds don’t require a condition of release to be satisfied, subject to the governing rules of your Self Managed Super Fund. However, money rolled over from an employer into a super fund (before 1 July 2007) is preserved and can only be cashed once the member reaches preservation age and meets a condition of release.

A Rollover benefit statement needs to accompany all rollover.

As a trustee, you have very important responsibilities in working out if (and when) a member can receive their benefits. If you fail to comply with the payment standards, you may be subject to significant penalties.

All of the conditions of release are subject to your fund’s rules. You need to ensure that trust deed of your fund allows members to be paid benefits in the above circumstances.

EARLY ACCESS TO BENEFITS

Early access or release of preserved benefits and restricted non-preserved benefits is permitted only in the following cases:

  • Sever financial hardship
  • Terminal illness or injury
  • On tightly restricted compassionate grounds
  • In the event of permeant incapacity

 

These situations occur only in very limited circumstances.

Setting up or using a Self Managed Super Fund to gain improper early access to super is illegal. If a benefit is unlawfully released, the ATO will apply significant penalties to you, your Self Managed Super Fund and the recipient of the early release.

Be aware of promoters who claim they can help you access your retirement benefits, such as for buying a house, car or holiday or for solving financial problems. These schemes are illegal. If you access your super before you’re legally entitled to, there are severe penalties.

TYPES OF PENSION BENEFITS

Benefits from a super fund may generally be paid as a lump sum, income stream (pension) or annuity, provided the member has satisfied a condition of release (for example, retirement).

There are new rules for paying income streams and annuities. There are also restrictions about what money can be used to purchase an income stream and restrictions of reversionary beneficiaries.

From 20 September 2007, all new income streams and annuities need to meet the new rules.

SUPER INCOME STREAMS

From 20 September 2007, any new income stream needs to fall into one of the following classes:

  • Account-based
  • Non-account bases

 

Account-based income streams have the following generally characteristics:

  • They require a minimum annual payment to be made with no maximum amount stipulated
  • They can only be commuted in particular circumstances
  • They can’t have a residual capital value
  • They can’t be paid to a non-dependant beneficiary

 

A new account-based transition to retirement income stream may be started on or after 1 July 2007. These income streams need to meet the standards of ordinary account based income streams but are also required to have a maximum annual payment limit of 10% of the account balance. Commutations of these pensions can’t be taken in cash except in limited circumstances.

Non account-based income streams have the following general characteristics:

  • They may be paid for life or for a fixed term or years
  • They can only be commuted in particular circumstances
  • Certain non account-based income streams may have a residual capital value
  • They can’t be paid to a non-dependant beneficiary

 

Income streams started before 20 September 2007 that meet the SISR pension rules as they existed immediately before 1 July 2007, will generally be taken to be super income streams for the purposes of the super law.

Self Managed Super Funds can’t pay a defined benefit income stream unless they were paying a defined benefit pension to a member before 12 May 2004.

Before starting to pay any income stream, we recommend that you seek the advice of a professional such as an accountant, financial planner or actuary.

ADMINISTRATIVE OBLIGATIONS

There are administrative obligations that you need to meet when paying benefits to members or rolling over benefits between funds.

REPORTING A REGISTERING REQUIREMENTS

When paying a benefit, you’ll need to consider the following administrative obligations:

1. REGISTER FOR PAY AS YOU GO (PAYG) WITHHOLDING

If you are required to withhold an amount from a payment, you need to be registered for PAYG withholding. You need to register as soon as you know you’ll be making payments from which you need to withhold an amount from.

What types of payments do you need to withhold from tax?

You’ll need to withhold tax from a payment that is made to a member less than 60 years of age. If the payment is paid as any of the following:

  • An income stream or annuity, the rate that you need to withhold tax is detailed in Schedule 34 – Tax table for superannuation income streams (NAT 70982)
  • A lump sum, the rate that you need to withhold tax is detailed in Schedule 33 – Tax table for superannuation lump sums (NAT 70981)

 

If a member is 60 years of age or more and the benefit is from an untaxed source, you’ll also need to withhold an amount. Your fund will be making a payment that contains an amount from an untaxed source where your fund pays a death benefit lump sum and your fund has received proceeds from an insurance policy that they have claimed a deduction for either of the following

  • A part of the premium for the life policy
  • An amount based on your funds future liability to pay the death benefit

 

A super death benefit is a payment from your fund to a person because of the death of a fund member.

What types of payments do you not need to withhold from?

You don’t need to withhold tax when paying a benefit is the following applies:

  • The benefit is from a taxed source
  • The benefit is being paid as either a super income stream or lump sum
  • The member receiving the benefit is 60 years old or over at the time of the payment
  • The benefit is being paid as a lump sum because the member has a terminal illness or injury

 

You don’t need to withhold tax or report these payments to the ATO, because these payments are tax-free.

2. OBTAIN A TAX FILE NUMBER DECLARATION FROM THE MEMBER

The Tax file number declaration (NAT 3092) allows your member to quote their TFN and supply information to workout the withholding rate.

If you are required to withhold from a payment and your member does not quote their TFN, you’ll need to withhold from the payment 46.5% for residents and 45% for non-residents.

3. ISSUE PAYMENT SUMMARIES

If you have withheld tax from the payment of a benefit to a member, you need to issue a PAYG payment summary form.

If the payment was:

  • An income stream or annuity, you need to issue a PAYG payment summary – superannuation income stream (NAT 70987)
  • Lump sum, you need to issue a PAYG payment summary – superannuation lump sum (NAT 70947)

 

You need to provide payment summaries to the person you made they payment to for payments of:

  • Income streams and annuities (the PAYG payment summary – superannuation income stream form). by 14 July following the end of the financial year in which the payment is made
  • Lump sum payments (the PAYG payment summary – superannuation lump sum form), within 14 days of making the super lump sum payment.

 

If you have issued payment summaries, you also need to lodge a PAYG withholding payment summary statement (NAT 3447) with the ATO by 14 August.

You may be able to lodge your payment summaries and PAYG withholding reports using the electronic commerce interface (ECI) software.

If you provide your PAYG withholding payment summary annual report to us electronically, you don’t need to forward copies of payment summaries to us. You also don’t need to complete a PAYG payment summary statement.

OBTAINING AN ACTUARY’S CERTIFICATE

Requirements under the ITAA 1997 to claim a tax exemption

If you are paying an income stream, you may need to get an actuary’s certificate to qualify for exemptions from tax on your Self Managed Super Funds income from assets used to make current pension payments as they fall due. The assets being used to provide the current pension payments are classes as segregated or the income may be exempt under a proportional method.

Segregated current pension assets method

The income that is exempt from tax is derived from the assets of your fund that are used to pay current pension liabilities and are segregated from other assets in your fund. The assets are specifically identified as solely supporting the payment of pensions.

The tax exemption on income generated by these assets used to support the fund’s pension payments does not apply to income derived from assessable contributions or non-arm’s length income.

Proportional method (Unsegregated current pension assets)

A proportion of the fund’s income that is used to support the payment of the fund’s current pension liabilities is exempt from tax.

The proportion is based on the average value of the fund’s current pension liabilities to the average of the fund’s superannuation liabilities.

The calculated proportion of income that is exempt from tax does not include any income generated from segregated current pension assets, non-arms length income, assessable contributions or segregated non-current pension assets.

Actuary’s certificates

If your fund wants to claim a tax exemption on the fund’s income while it is paying a pension, you’ll need a certificate from an actuary to work out the amount of exempt income from assets that support the pension payments. An actuarial certificate is required in each year that the exemption is claimed.

However, an actuarial certificate is not required if, at all times during the financial year, the only super income stream (pension) benefits being paid by the fund are of a type prescribed by the ITAA 1997. These are allocated pensions, market linked pensions and account based pension types.

Other requirements In addition to the requirements for actuarial certificates, the following needs to be considered if you are intending to claim an exception on income received from your fund’s pension assets:

  • Before you start paying a pension, you should ensure that all assets of the fund are revalued to their current market value
  • If you are intending to use the segregated method, consider if your Self Managed Super Funds pension assets meet the requirement of being segregated. That is, can you clearly identify the assets dedicated to funding the super income stream benefit and there is a clear relationship between the relevant assets and the member’s account
  • If your Self Managed Super Fund is not just solely paying a pension, that is, there are members who are still in accumulation phase, make sure you are keeping records in a manner that allows you to clearly identify what expenses you have and how much is related to the income earned to pay pensions. The reason for this is, if you are entitled to a tax exemption on the income that is used to pay the current pension liabilities you won’t get a deduction for the expenses related to earning that exempt income and you can;t claim these expenses as a deduction in the fund’s income tax return

 

There are a range of administrative obligations imposed on Self Managed Super Funds under the law. You are responsible for ensuring all these obligations are met.

Rogerson Kenny Business Accountants Melbourne can assist you with your accounting and auditing requirements. If you would like to appoint Rogerson Kenny Business Accountants as your approved auditor, or would like to discuss this topic further, click contact us or call us on (03) 9802 2533.

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