Alex Denham Head of Technical Services December 2009

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

2. Steps 1 and 2 • Member decides to start a pension on a certain date and requests the Trustee to inform them of their entitlements. • 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. Step 2Managing 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. 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. Step 5Product 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. Step 5Product 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. Step 5Product 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. 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 If affecting a recontribution strategy, funds must be physically withdrawn.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. Step 6Proportional 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. Step 6Proportional drawdown and separate interests Recontribution strategy to SMSF, 60 year old: • $450k recontribution “pollutes” the newly created tax-free amount with taxable component: • Tax-free: $538,000 (63%) • Taxable: $312,000 (34%) • $850,000

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

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. 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. 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. Step 15Non-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. Step 15Non-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: $500,000 71% • Mary: $200,000 29%

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

20. SMSF John Mary Property (50%) Cash (50%) Shares Property (50%) Cash (50%) - Dividends - Rent - Interest - Rent - Interest - Growth - Growth - Growth Step 15Segregated current pension assets • 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. 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. 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