The peace of mind of a retiree happily taking a pension from their SMSF could be shattered by the news that their pension was in fact not commenced properly and both they and their fund owe the tax office a lot more money.
This is a real prospect if SMSF trustees and their advisers don’t ensure that pension documents are created fully, efficiently and effectively.
“We continue to be surprised by the poor quality of documentation relating to SMSF pensions, including no or defective pension applications and agreements, no or defective trustee minutes and even trust deeds that don’t empower the trustee to pay account-based or transition to retirement pensions,” said Peter Townsend, Principal of Townsends Lawyers .
In the ill-conceived but constant demand by SMSF trustees for lower administration costs, they and their advisers are using short cuts that could have disastrous tax consequences.
The most common error is of course not bothering to check what the trust deed says. As with almost every aspect of the administration of a SMSF, it is crucial to check the trust deed and then follow it to the letter as comprehensively as possible. If there are problems with the contents of the trust deed it may be possible to amend the deed or governing rules.
Then there is the mistaken belief that the creation of pension documentation is just ‘form-filling’ which can be done by anyone and should cost nothing. This dismissive attitude can land all concerned in plenty of hot water.
Tax Office Ruling TR 2013/5 makes clear that pension entitlements must be locked in from a legal perspective. If the pension documents are not correct and in place the pension may not have been effectively created in which case the fund may still be in accumulation phase with the accompanying tax consequences.
The ruling makes clear that:
the commencement date of a pension must be determined by reference to the terms and conditions of the superannuation income stream agreed by the trustee and member, the rules of the superannuation income stream as set out in the governing rules of the superannuation fund and the relevant regulations of the SISR 1994.
Without documents which adequately evidence the terms and conditions of the income stream, the agreement between trustee and member and the fact that the agreement complies with the governing rules of the fund and the SIS regulations, the pension cannot be proven to have commenced.
It is advisable for pension documents to be prepared before the pension commences, with the opening balance confirmed later if necessary once the fund’s accounts have been finalized for the relevant period.
If the pension has been paid for a number of years the Commissioner might have a field day with the additional tax payable by both the fund and the member.
The key to getting the right strategies in place, and being flexible in those strategies to accommodate changed circumstances, is having the appropriate documentation in place.
It is also important to understand that pension documents are part of a client’s overall estate planning and should not be created independently of that estate planning. The pension arrangements should be synergistic with the client’s plans for passing their estate to their family.
Finally there’s the problems that arise when the death benefit nomination and the pension documents are inconsistent.
Now more than ever trustees must ensure the necessary inter-relationship of all their superannuation arrangements. Saving money by cutting corners on these documents is a false economy.
Media enquiries
Peter Townsend
Principal
Townsends Business & Corporate Lawyers
02 8296 6266 | 0419 44 88 44
Twitter: @TownsendsLaw
peter[at]townsendslaw.com.au
townsendslaw.com.au