Online S390 Application Form Help
To assist with completing the online S390 tax exempt
percentage application form we have compiled a list of common questions asked
by users and solutions to those queries.
If you have a question which is not answered in this
document, or if there is something you do not understand please do not hesitate
to call us on free call 1800 203 123 for further assistance.
Actuarial Certificate
Application Questions
General
Do I need an actuarial certificate?
Can I have an actuarial certificate for part of the year?
What do I do if my Fund contains segregated assets?
Is
it worthwhile to fully segregate my SMSF?
How do I apply for an amendment?
How do I save my data and how do I reload a saved file?
How do I enter transactions correctly in Step 5?
How can I ensure I get the most accurate tax exempt percentage?
Will a change to the balancing item or closing balance affect my tax exempt percentage?
How is the tax exempt percentage calculated?
Fees and Payment
How do I pay for my certificate and what is the cost?
Pension Commencements
and Roll Backs
How do I correctly show a pension commencement or roll back in Step 3?
Why is the pension commencement value required as ‘before market revaluations’?
Member Exits and Fund
Wind Ups
How do I correctly show a member exiting on the application form?
Errors
I am getting errors on the application form, how do I fix my errors?
General Questions
Is an actuarial certificate required if I have negative investment returns?
What if
my SMSF cannot meet the minimum annual pension payment requirements?
How
do I apply the tax exempt percentage?
Can
capital losses be carried forward?
Why can’t contributions be directly added to a pension account?
What are
the rules regarding the commutation of an account-based type pension?
Questions on Segregation
What is
the ATO’s point of view on segregation?
What
are the requirements for segregation?
What
are some reasons for and against the use of segregation?
Can I use
segregation for funds which contain a defined benefit pension?
How do I treat income and expenses where the fund contains segregation?
Do I need an Actuarial Certificate?
If you are unsure whether your SMSF requires an
actuarial certificate this section will assist you in determining if an
actuarial certificate is required. Most
super funds with a combination of pension and accumulation assets will require
a tax exempt percentage certificate, however there are many circumstance where
the ‘segregated approach’ can be used and so no certificate is required. The
common SMSF circumstances and whether a certificate is required in each case
are outlined below.
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A Fund entirely in
accumulation mode converts to entirely in pension mode during the year |
Combination of Pension and Accumulation Assets
If you wish to receive some exemption from income tax and
your Fund is un-segregated and has a combination of pension and accumulation
assets at ANY point during the financial year then you will require an
actuarial certificate. An actuarial
certificate will give you a tax exempt percentage for your Fund. This will tell you the proportion of the Fund
which was, on average, backing pensions during the year and therefore is tax
free.
A Fund with Defined Benefit
(Complying) Pensions
If your Fund contains defined benefit pensions then you will
need an actuarial certificate. You will
require a certificate that gives the adequacy opinion for the Fund and the tax
exempt percentage. These certificates
cannot be applied for using the online system.
Please visit http://www.bendzulla.com/smsf/adequacy/adequacy.aspx for more information and to download
the application form.
Fully segregated Funds
If your Fund has all accumulation assets FULLY segregated
from all pension assets then an actuarial certificate is not required. You can use the ‘segregated method’ for the
tax exempt percentage. You will know the
income on the pension assets – this will be tax free, similarly the income on
the accumulation assets will be taxable.
Funds with only Pensions
If your Fund is entirely in pension (i.e. all balances for
all members are in pension mode) from 1 July and the members make no
contributions and no transfers in during the year, this means there are no
accumulation assets at any point during the year to earn taxable income. This Fund will be 100% tax exempt and you do
not require an actuarial certificate.
Funds which convert to pension on 1
July
If your Fund has accumulation assets at 1 July but these are
converted to pension mode on 1 July so that the entire Fund is in pension after
this, and then if no further contributions or transfers in are made during the
year, then this Fund will not require an actuarial certificate. There are no monies in accumulation during
the year to earn taxable income. The
Fund will be 100% tax exempt.
Contributions/Transfers In immediately converted to pension
If the Fund is entirely in pension mode from 1 July and monies
are contributed/transferred into the Fund during the
year, but all such accumulation monies are immediately converted to pension mode
on the date of contribution, then the Fund will not require an actuarial
certificate.
A Fund entirely in accumulation mode
converts to entirely in pension mode during the year
If your Fund is entirely in accumulation mode on 1 July then
at some date during the year all the members start pensions with their entire
balances (all on the same date) and no contributions or transfers in are made
by any member after this date then the Fund will not require an actuarial
certificate.
Due to the market revaluation completed when the pensions
were started you will know the income up to that date – this will be
taxable. Then income from that date
until the end of the financial year will be tax free.
A Fund with this situation may still wish to apply for a tax
exempt percentage certificate if, for example, they receive income in the first
part of the year (before the member’s commence pension) for which they wish to
claim an exemption from income tax.
Interim percentage
It is possible to use our online system to calculate an
interim tax exemption percentage.
Interim percentages may assist when a member commences a pension during
the year and you want to know how to allocate the income up to that point. An interim percentage (a percentage for only
part of the year) does not require formal actuarial certification. The interim crediting of income is at the
discretion of the Fund. Clients may use
our online system to determine the interim percentages by filling out the form
up to a particular date to access the draft percentage. Please make sure to press ‘Exit Without Ordering’ so that no order is made for this
certificate.
Can I have an actuarial certificate for part of a year?
Section 295-390 of the ITAA 1997
makes it clear that an un-segregated actuarial certificate is the average value
of the current pension liability for a full financial year. Consequently,
irrespective of how some SMSFs software providers construct their systems it
would be contrary to the legislation to issue such a certificate for part of a
financial year. The exception is if the
Fund winds up in the financial year (we can issue a certificate for this part
year situation).
The
desire for a part year percentage might be generated by a wish to associate a
large realised capital gain with solely the pension liabilities and hence have
no tax liability for the gain. In this case, it would be worthwhile to carry
out the extra accounting work to fully or partially segregate the assets you
want associated against the pension liabilities. Where the pension liabilities
are fully segregated at all times during the financial year, this does away
with the need for an actuarial certificate. Where only partial segregation is
affected (i.e. only part of the assets and liabilities are excluded) the
actuarial certificate is simply based on the un-segregated pool of assets.
Another
way of explaining it is that the un-segregated approach is designed to be a
full tax year spread over pension and non-pension liabilities by the use of a percentage.
The segregated approach (on the other hand) allows greater control of how gains
and tax liabilities are taken into account - at the cost of a lot more
accounting work. Some care is still needed, for example if the fund goes into
pension mode just before the capital gain (hence totally tax-free) but reverts
back to accumulation mode soon after - it could raise in the ATO's mind the
issue of aggressive tax planning.
Is an actuarial certificate required
if I have negative investment returns?
If
a fund has net realised capital losses,
then these losses are carried forward. That is, net capital losses are not offset against other (positive) investment income such as
dividends or interest. The capital losses are carried forward until they
can be offset against a capital gain; eventually, the net capital gain will be added to the investment income.
So
for tax purposes, the fund is highly likely to have positive investment income in every year, even if they have had
horrendous realised capital losses in that year.
See
the ATO website page on Self-managed super funds and tax exemptions on
pension assets for further
information.
How do I pay for my certificate and
what does it cost?
This section outlines the payment methods offered
for the tax exempt percentage certificates and how to proceed with payment when
completing an online application. The
different prices associated with each payment option are also outlined below.
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Order invoice
To pay by invoice, select the ‘Order by Invoice’ button after
validating the data. You can select for the invoice to be made out either to
the fund administrator or to the trustee. Invoices are attached to the emailed
final report.
Pay with PayPal
To pay via PayPal, click on the ‘Order with Card/PayPal’
button. This will transfer you to the secure PayPal website where you can use a
Visa or Mastercard to pay for your certificate. This
method of payment attracts an $11 discount, reducing the certificate cost to $176. You do not need to be a member of
PayPal to pay via credit card on their website. A tax receipt will be emailed
with the final report.
Pay with pre-registered card
To pay with a pre-registered card, click the ‘Order via PreRegistered Card’ button, and enter your authorisation
password. This option is particularly useful for those clients submitting many
certificate requests, since payment details only need be submitted once. In
order to pre-register a card with us, fill out the form located here and fax it back to us. The
‘authorisation password’ is a password of your choosing. After faxing us the
form, it is possible to select to use this payment method immediately. This
method also attracts an $11 discount, reducing the certificate cost to $176. A tax receipt will be emailed to
you with the final report.
Amendment
All
amendments are provided free of charge.
When
selecting the ‘amendment’ payment option you will be asked to enter the
reference number from the original certificate.
This can be found on both the original certificate and the invoice/receipt.
Exit
Once you select a payment option you will be taken to the
thank you page and will not be able to go back to your data. Please remember to review your data, save
your data, print your application, and download your draft report etc before you select a payment option. Once you have selected the payment option, we
arrange processing and review of your submission.
What do I
do if my Fund contains segregated assets?
Funds with segregated assets are required to fill
out the online form so that all information relating to segregated assets is excluded from the application form. Details on how to complete the application
form for various segregated Fund circumstances are outlined below to assist you
in completing the online form. Segregation requires that the particular assets
are completely separate from other assets; simply keeping separate accounting
records does not represent segregation.
Full Segregation
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Partial
Segregation
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Examples
of Segregation occurring during the year
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Sale
of Segregated Assets
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With all segregated asset cases it is
a good idea to make a small note in the comments section of the form explaining
the segregation for your Fund.
Full segregation
If your Fund has all pension assets FULLY segregated from all
accumulation assets then an actuarial certificate is not required. You can use the ‘segregated method’ for the
tax exempt percentage i.e. you will know the income on the pension assets –
this will be tax free, similarly the income on the accumulation assets will be
taxable. Please note that the assets
backing the pension(s) must be completely separate from the assets backing accumulation.
EXAMPLE:
Say there is a Fund with three members. One member is in pension mode and two are in
accumulation. The member in pension has
their assets which back the pension completely separate from the other two
members’ accumulation assets. The
pension member has $100,000 in shares segregated to support their pension, and
has $10,000 in a bank account. The other two members who are in accumulation
mode have $50,000 in shares and $12,000 in a bank account which is separate
from the pension member’s bank account.
This is an example of a fully segregated Fund. All pension assets are completely separate
from all accumulation assets. If this segregation has been in place throughout
the year an actuarial certificate is not required.
Partial segregation
If your Fund has partial segregation or hybrid segregation
then you may still require an actuarial certificate for the un-segregated pool
of assets. In this case if the un-segregated
assets are backing both pension liabilities and accumulation liabilities then
you will require an actuarial certificate.
For partially segregated Funds we can issue a tax exempt
percentage for the un-segregated pool of assets. For the segregated pool (i.e. where the
assets are backing entirely pension liabilities or entirely accumulation
liabilities) the income will be entirely tax free or entirely taxable and no
actuarial certificate is required.
To fill out the form for this type of Fund please include
only the un-segregated assets on the Form and do NOT include any information
relating to the segregated assets. Also
make sure to select yes to the
question ‘Are there also segregated assets?’ in Step 2. Please leave a comment
in Step 6 stating that all segregated assets have been removed from the
application form.
EXAMPLE:
Say there are two members in the Fund. Member one has a
segregated asset.
Member one has a pension which at 1 July was worth
$1,000,000. However, $500,000 of this is
a property which is segregated to that member’s pension. During the year this property has income
associated with it of $50,000 which goes into a separate bank account. All pension payments for the Fund come out of
the un-segregated pool of assets. This
Fund has a total Net Income of $40,000. Remember the Balancing Item (net
income) will include all realised and unrealised capital gains, contributions
tax and any other income and expenses relating to the Fund other than the
transactions already shown on the form. When completing the form, Net Income
should not include Income Tax.
Here’s how to fill in the online form for this Fund:
1. Select yes to ‘Are there also segregated assets?’ at the bottom of Step 2
2.
Fill out the
form as usual but make sure to NOT include information relating to the
segregated asset.
In Step 5 Member one will be shown as
having an opening balance of $500,000 in pension (the un-segregated part of her
pension). The segregated property is NOT included.
3. All pension payments are shown on the
form as they come from the un-segregated pool of assets.
4. The balancing item figure is the
Fund’s Net Income. This will not include any income relating to the
segregated asset. So the balancing item here will NOT include the $50,000
income from the segregated asset. The balancing
item is therefore $40,000 - $50,000 = -$10,000.
5. The ‘Pre Tax Yr End Assets Available
to Pay Benefits’ is the Closing Balance of the Fund before income tax. This should simply be opening balance minus
pension payments minus net income. This
will not include the value of the segregated asset.
Examples of Segregation occurring during the year
General Rule of Thumb
·
When an assets is segregated during
the financial year, show these monies as a withdrawal from the Fund
·
Exclude from the form any income or
loss relating to the segregated assets, and any pension payments which are made
from the segregated assets
Consider a Fund with two members. Member One has a pension worth $525,000 at 1
July and an accumulation balance of $27,000.
Fund which commences a pension and
immediately segregates the entire pension
During the year Member Two has opening accumulation balance
of $400,000. On 1 Feb this member commences
a pension for $400,000 and immediately segregates this entire pension. At 1 July this asset was worth $400,000, at 1
Feb it is worth $370,000. Member One makes $100,000 in
pension payments during the year. Member
Two makes $30,000 in pension payments from his segregated account.
Here’s how to show this situation on the application form:
1. In Step 3 enter a pension commencing
for Member Two on 1 Feb. The amount used
to start the pension was the members entire balance:
In Step 5 show a withdrawal from the pension
on 1 Feb for the entire pension amount.
This is showing the monies moving from the unsegregated pool of assets
to the segregated pool of assets.
All income and transactions relating to this segregated pension should be excluded
from this form. The closing balance will
therefore not include the segregated pension assets. That is, income/losses on the asset from 1
July to 1 Feb WILL be included in the balancing item. However any income/loss
after 1 Feb to 30 June will NOT be included in the balancing item.
Income on the segregated assets from 1 July until it is
segregated on 1 February will have a tax exempt percentage applied to it as
calculated by the report. The income on
the asset from 1 February to 30 June will be 100% tax exempt as this is
segregated pension income.
Fund which commences a pension and
segregates part of the pension immediately
General Rule of Thumb
·
Show those assets which are
segregated as being withdrawn from the Fund
·
Do not include any income or pension
payments associated with the segregated asset on the form
Consider a case where Member Two decides to commence a
pension on 1 Feb with his accumulation balance, and segregates part of this pension immediately.
·
At 1 July, the asset
was worth $400 000, and at 1 Feb it is worth $370,000.
·
$200 000 of the
asset is segregated at 1 Feb.
·
Member One makes $100 000 in pension payments during the year, and
Member Two makes $60 000 in pension payments all from the un-segregated
account.
·
The before income
tax total fund value at 30 June is $862,000, the value of the segregated asset
at 30 June is $320,000.
Here’s how to show this situation on the application form:
1. In Step 3, enter a pension commencing
for Member Two on 1 Feb with the member’s entire balance.
2. In Step 5, show a withdrawal from the
pension account on 1 Feb for $200 000. This is showing that $200,000 has been
moved from the un-segregated pool of assets to being a segregated pension
asset.
·
The pre-tax year-end
balance will not include the segregated assets I.e. it will be $862,000 – $320,000
= $542,000
·
All pension
payments are shown on the form in this case as they all come from the un-segregated
pool of assets
Income on the segregated asset from 1 July until it is
segregated on 1 February will have a tax exempt percentage applied to it as
calculated by the report. The income on
the asset from 1 February to 30 June will be 100% tax exempt as this is
segregated pension income.
Sale of segregated assets
General Rule of Thumb
·
Show assets that become un-segregated
during the financial year as transfers in to the super fund (also show a
pension commencing with the transfer in monies if those assets are backing
pension)
In this example, we consider a Fund where the segregated
assets are sold during the year and the proceeds come back into the un-segregated
pool of assets.
Consider a two member Fund.
Member One has $525,000 in pension mode and
$27,000 in accumulation mode at 1 July and Member Two has $400,000 in pension
mode at 1 July. Member Two has $300,000
of their pension assets segregated at 1 July.
However, on 15 March 2009 he sells his segregated assets for $360,000. Immediately after the sale the proceeds are
transferred back into the un-segregated pool of assets. On 3 April Member One makes $100,000 in pension payments and Member Two makes
$50,000 in pension payments from the un-segregated pool of assets. The total
net fund income is $110,000; however $60,000 of this was earned on the pension
asset while it was segregated.
To show this scenario:
·
In
Step 5, show a pension payment entry at 1 July of $300,000 for Member Two. This
shows the money being transferred out the un-segregated pool of assets into the
segregated pool of assets.
·
In
Step 5, show transfer in of $360,000 for Member Two at 15 March. This shows the
proceeds of the sale of the segregated assets being transferred back into the
un-segregated pool of assets.
·
Do
not include the income or loss associated with the segregated asset (i.e.
before 15 March) in the balancing item on the form. Do include income on this asset between 15
March and 30 June as at this stage the asset is un-segregated. The $60,000 profit made on the segregated
pension asset will be entirely tax free as it was income on segregated pension
assets.
·
Show
Member Two’s pension payments as they are made from the un-segregated pool of
assets.
·
We will also need
to tell the calculator that the transfer in of segregated assets is a transfer
in of pension assets by showing a pension commencement in Step 3 of the
form. Show a pension commencing for
Member Two on 15 March 2009 for $360,000.
Is it worthwhile to fully segregate my assets?
Normally segregation requires a lot more administration work
– keeping two sets of accounts – consolidation – identifying and recording
separate assets – separate bank accounts – allocation of each transaction (eg audit fees) in a manner that will satisfy the regulator
etc. The un-segregated approach is a lot easier – just a percentage to apply.
However with large realised capital gains or losses the extra work may be
worthwhile.
How do I show a pension commencement or roll back in Step 3?
If pensions are started or rolled back during the financial year, it is
important to ensure the correct commencement or roll back value is entered into
the online form as this may greatly affect your final tax exempt percentage. The values we require are before market
revaluations and adjustments. To help you, the examples below explain more
about how to enter the pension commencements and roll backs on the application
form.
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Explanation of
correct pension start amount or roll back amount |
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Pension roll back
and re-commencement |
Explanation of correct pension start
amount or roll back amount
·
Pension
commences with a value less than their entire balance: show this on the application form by
selecting ‘specific value’ then enter the amount of money that was moved from
accumulation to pension on this date excluding any income/expenses allocated to
that member up to the pension commencement date.
The pension commencement value entered on
the actuarial application form will usually be different to the actual pension
commencement value as we require the value excluding income, all income and
expenses should be listed under the balancing item on the form.
The amount to be entered should be the
‘entire balance’ multiplied by the ‘pension commencement ratio’.
Entire Balance
opening
accumulation balance
plus transfers
in (rollovers) and contributions net of contributions tax up to the pension
commencement date
minus accumulation
account withdrawals
plus any
pension roll backs prior to and including the pension commencement date
minus any
pension commencement prior to the pension commencement date
Pension Commencement Ratio
Pension commencement value / Available
accumulation balance at pension commencement date
E.g. If the pension commenced with $52,140 out of a total
available balance in accumulation for that member of $65,000 then the ratio
would be 80.22%. I.e. 80% of the member’s accumulation balance was
converted to pension. I would then multiply this by the Entire Balance
figure calculated in the first step above.
Alternatively simply give us the pension commencement ratio, or
the figures required to work this out in the comments section of the form and
we will enter the appropriate pension commencement
value for you. Be aware that if you use this option then the draft
percentage will be incorrect.
·
Pension commencing with entire available
balance: If starting a pension with the entire accumulation
balance at a particular date, on the online form this should be shown by
selecting ‘Entire Balance’ from the drop down box.
·
Entire pension balance rolls back to accumulation: If
all pensions held by the member are rolled back to accumulation on a particular
date select ‘Entire Balance’ from the drop down box.
·
Only part of the total pension balance rolls back to
accumulation: show this on the application form by selecting
‘specific value’ then enter the amount of money that was moved from pension to
accumulation on this date excluding any income/expenses allocated to that
member up to the pension rollback date.
The
pension rollback value entered on the actuarial application form will usually
be different to the actual pension rollback value as we require the value
excluding income. All income and expenses should be listed under the balancing
item on the form.
The
amount to be entered should be the ‘entire balance’ multiplied by the ‘pension rollback ratio’.
Entire Balance
opening
pension balance
plus any pension commencements prior to
the pension roll back date
minus pension payments and withdrawals
prior to the pension roll back
minus any pension rollbacks prior to the
pension rollback date
Pension Rollback Ratio
Pension rollback amount / Total pension
balance at pension rollback date
E.g. If a member rolled back $50,000 out of a total available
balance in pension for that member of $76,120 then the ratio would be
65.69%. I.e. 66% of the member’s total pension balance was converted to
accumulation. I would then multiply this by the Entire Balance figure
calculated in the first step above.
Alternatively simply give us the pension rollback ratio, or the
figures required to work this out in the comments section of the form and we
will enter the appropriate pension rollback value for you. Be aware that
if you use this option then the draft percentage will be incorrect.
If the member has more than one pension and not all of these
pensions were rolled back into accumulation please state this in the comments
section of the form. The total pension balance in this case is the sum of
all pensions for that member.
If the roll back was simply a partial commutation of an existing
pension then please state this in the comments section of the form.
·
Pension Commencement Value where the member rolled
back their existing pension and recommences with their entire
balance: Where the Member rolled back an entire pension balance
and re-commenced with the entire accumulation balance, on the online form this
should be shown as:
‘Yes’ to Pension roll back in Step 3 with value as ‘Entire
Balance’
and ‘Yes’ to Pension
commencement in Step 3 with value as ‘Entire Balance’
You
will notice that no market revaluations or other income and expenses are
included in the pension commencement or roll back figures.
Pensions starting 1 July with accumulation monies
To
show this on the form:
·
In
Step 3, select ‘yes’ to ‘Did Pensions Commence in the Year.’ Select 1 from the
drop down box.
1. Put the date as 01/07/yyyy in the first row.
2. Put the amount
used to start the pension in the member’s column. This is ‘Entire Balance’ if the member
commences pension with their entire accumulation account, or ‘Specific Amount’
if the member commences pension with an amount less than their entire
accumulation balance, in this case enter the specific value in the box
provided.
·
In Step 5, show
the monies used to commence the pension in the ‘Non Pension’ opening balance
NOT in ‘Pension’. We require the opening
balances of the Fund in Step 5 as they were before any pension commencements or
rollbacks.
·
Our calculator will
automatically look in the Non Pension balance to find the monies to move into
pension at 1 July.
·
Do NOT show a
transfer in/accumulation withdrawal of these monies in Step 5. This is not required as our calculator
automatically moves the stated monies from accumulation to pension for you.
Pension starting during the financial year
To show this on the form:
·
In Step 3, select
‘yes’ to Did Pensions Commence in the Year.
·
Select the number
of new pensions commencing for this member from the drop down box.
·
Enter the date(s)
of the pension commencement(s)
·
Select either
‘Entire Balance’ or ‘Specific Amount’ as the commencement value of each new
pension (see above for explanations of the pension start value required).
·
There is space on
the form for pensions commencing on 12 different dates per member. If there are more than 12 pension
commencements for any member please list these in the comments section of the
form.
·
Do NOT show a
transfer in/accumulation withdrawal in step 5 to represent these pension
commencements. The calculator will
automatically move the monies from accumulation into pension for you.
Pension roll back in the year
To show this on the form:
·
In Step 3, select
‘yes’ to Did Pensions Roll Back in year
·
Select the number
of pension roll backs that occurred in the year
·
Enter the date(s)
the pension monies rolled back from pension into accumulation
·
Enter the amount(s)
the member rolled back into accumulation (see explanation of the pension roll
back value we require above)
·
There is space on
the form for pension rollbacks to accumulation on 12 different dates per member. If there are more than 12 pension rollbacks
please list these in the comments section of the form.
Pension roll back and re-commencement
To show this on the form:
·
In Step 3, select
‘yes’ to Did Pensions Commence in the Year AND ‘yes’ to Did Pensions Roll Back
in the Year.
·
Select the number
of pensions and roll backs commencing for each member from each drop down box.
·
Pension roll back:
Enter the date of the pension roll back and amount which was rolled back from
pension into accumulation (see explanation of the amount required above).
·
Pension
commencement: Enter the date of the pension re-commencement (which may be the
same date as the roll back) and enter the amount which was used to recommence
the pension (see explanation of the amount required above).
Pension roll back due to a member passing away
To show this on the form:
·
If
a member passes away during the financial year and the pension is not
reversionary to another member in the Fund, show a pension roll back for the
deceased member on the date of death. This will show the pension monies falling
back into accumulation where they will sit until paid out.
Why is the pension commencement and roll back value required as ‘before market revaluations’?
It is correct to complete a market revaluation of the assets
when you commence a pension, you will use this value to determine your minimum
pension requirements. For the actuarial
certificate we require the pension commencement value before market
revaluations as all these items, including investment income or losses, are
excluded from the calculation of the tax exempt percentage. For an un-segregated fund income is treated
the same as taxes, expenses etc which are allocated at year end – therefore
receive a zero weighting. This is why
the ‘balancing item’ and ‘closing balance’ on the form has no impact on the tax
exempt percentage you receive. To take the timing of income into account you
would need to use the segregated method for the calculation of the tax exempt
percentage.
How do I correctly show a member
exiting on the application form?
A member can exit the fund under a number of circumstances, for example
due to death or simply withdrawing their money from the Fund. When completing the application form for a
member exit it is important to show this on the application form as the tax
exempt percentage can be greatly affected by what happens to monies within the
Fund when a member exits. The details of
how to complete the form in the different cases of a member exit are outlined
below.
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Member exits due
to death, their monies are reversionary to another member from this date |
Member exits by withdrawing their entire balance
This is the case where the member exits the super fund by
withdrawing their entire balance from the fund during the financial year, and
is no longer a member of the super fund.
1.
Select ‘yes’
to Member Exit in Year in Step 3 and enter the date the member exited the Fund
as well as the reason of exit:
2.
Show the
member withdrawing their entire balance from the Fund using Step 3 and Step 5
of the form. If the member has pension
monies in the Fund that they withdraw this can be shown in two ways.
a. as a pension payment (monies come out of pension), or
b. if the member commuted this pension back to
accumulation and then withdrew the monies from accumulation this will need to
be shown by rolling back the pension monies into accumulation before they are
withdrawn, e.g.
Please note that the tax exempt
percentage will not be shown on the final summary page as we like to check
these member exit situations very carefully before issuing a percentage.
In the situation above to calculate
the correct percentage we would remove interim crediting from the withdrawal.
Member
exits due to death, their monies are reversionary to another member from this date
This situation occurs where a member in the super fund passes
away during the financial year and their pension is reversionary to another
member, or their monies are used to commence a death benefit pension for
another member in the super fund.
1.
Select ‘yes’
to Member Exit in Year in Step 3 and enter the date the member exited the Fund
as well as the reason of exit, e.g. Jane Smith passed away on 15 April 2009 and
her pension was reversionary to John Smith her husband.
2.
Complete Step
3 of the form to show Jane Smith’s pension rolling back into accumulation on
his date of death, simultaneously show a pension commencing for John Smith on Jane’s
date of death. E.g. the pension roll
back value would be equal to the member’s entire balance at the date of death
and the pension commencement value would equal member one’s entire balance
(excluding any market revaluations or other adjustments).
If the deceased member had only a pension then the roll back
and recommencement values would be the same.
If the deceased member had other assets in accumulation which formed
part of the death benefit pension then these would be included in the pension
commencement value. E.g. if Jane also
had $50,000 in accumulation at 1 July then the pension commencement value would
be $150,000 for John. Remember that Jane
might have earned income on her assets up to her date of death but we do not
want this included in the pension commencement value.
3.
Complete Step
5 by entering all transactions for the final year. Also enter a withdrawal from accumulation for
the deceased member equal to the amount of monies that were used to commence
the reversionary/death benefit pension.
This value should be before any market revaluations and other adjustments,
simultaneously enter a negative withdrawal of the same amount for the member
who will receive the benefits (this will act as a positive into accumulation
for that member but will mean the values cancel out and will not appear on the
final report) e.g.
Please note that the tax exempt percentage
will not be shown on the final summary page as we like to check these member
exit situations very carefully before issuing a percentage.
Member exits due to death, their monies are paid out of the
Fund wholly or in part during the financial year
This is the case where a member passes away during the
financial year and their monies remain in accumulation for all or part of the
financial year waiting to be paid out.
1.
Select ‘yes’
to Member Exit in Year in Step 3 and enter the date the member exited the Fund
as well as the reason of exit, e.g. Jane Smith passed away on 15 April 2009 and
her pension was reversionary to John Smith her husband.
2.
If the member
has a pension which is not reversionary to another member (if this is the case
see the case for reversionary pension above) then
show a roll back of this pension on the date of death. Unless the pension is reversionary it will
revert back to accumulation on the date of death of the pensioner.
3.
Complete Step
5 showing all transactions for the financial year. After the date of death show any withdrawals
from the deceased member’s accounts as accumulation account withdrawals.
Please note that the tax exempt
percentage will not be shown on the final summary page as we like to check
these member exit situations very carefully before issuing a percentage. In the situation above to calculate the
correct percentage we would remove interim crediting from the withdrawal.
What if my SMSF cannot meet the
minimum annual pension payment requirements?
Account based pensions are required to meet minimum annual pension
payments. The minimum factors depend on the
opening balance of the pension and the age of the pensioner. If a Fund does not meet the minimum pension
requirements the payment may
not be considered to be a pension and therefore there is no entitlement to the
exempt current pension income deduction.
In the ATO Superannuation technical minutes,
September 2009 the following question
was raised regarding meeting the minimum pension payments:
If a fund trustee fails to physically pay
sufficient pension payments to meet the minimum pension obligations under SIS
Regulation 1.06, is it acceptable for the fund to accrue the shortfall in its
financial statements and ensure that this additional amount is paid in the
following year?
Previously
it was considered that accruing any underpayments for payment in the following
year is treated as an acceptable approach where the minimum amount has not been
paid in a particular financial year. The Tax Office ruling was that this
approach is not acceptable.
This
may have a significant impact on clients as a failure to pay the minimum pension
in a given year is not only a breach of SISR 1.06 but also results in the loss
of the fund’s tax exemption on its pension income for that financial year.
In
the September 2009 minutes the initial Tax Office response cited that trustees
‘must meet the requirements both in form and
effect. It is not enough for the rules of the pension to state a payment
will be made in each year if the payment for a particular year is not actually
made. Where a trustee does not pay the pension benefits as required by the
SISR, the payment will not be regarded as a superannuation income stream
benefit for the purposes of the ITAA 1997, and the fund will not be
entitled to the exemption for income relating to their current pension
liabilities. There is no scope within sub-regulation 1.06(9A) of the SISR
whereby the definition of a pension would be met if a pension payment was made
in the following year. The definition of a pension will only be satisfied where
the total payments in any year meets the SISR standards.’
The
Tax Office has recently published material on their website to provide guidance
for trustees on issues which may arise during the economic downturn. The economic downturn and self-managed
super funds includes
information for trustees who are unable to meet their minimum pension
requirements, in particular:
·
where a fund fails to meet its minimum
pension payment requirements, the payment is not considered to be a pension and
therefore there is no entitlement to the exempt current pension income
deduction
·
where
the minimum pension requirements are not met due to factors beyond the trustees
control, like not being able to liquidate assets due to current economic
conditions despite taking all reasonable steps, it is generally unlikely that
an offence against the operating standards in the super laws will occur. An
offence against the operating standards will only occur where the contravention
is intentional or reckless.
It
is important to note that the Government has recently amended the SISR to halve
the minimum payment amounts for account-based pensions for the 2008–09 and
2009–10 financial years. These amendments reduce the pressure on trustees in
meeting minimum pension requirements during the economic downturn.
Some
possible solutions to meeting the minimum requirements may be:
It
may be possible to reallocate some pension payments from another pension member
who exceeded their minimum to the pension member who did not meet the minimum
in a manner that would ensure both members meet the minimum pension
requirements.
Roll back some of
the pension into accumulation at 1 July so minimum pension payments can be met
based on the new 1 July pension balance.
This will decrease the monies in pension but at least may allow the
minimum pension payments to be met so a tax exemption will still be
allowed. E.g. a 65 year old expects to
make $2,000 in pension payments, so needs at
most $80,000 in pension at 1 July 2008.
If there was more than this in pension at 1 July then the minimum
pension payments would not be met.
How do I fix my errors?
When the online form finds inconsistencies in your data it will display
errors in pink at the top of the screen.
You will not be able to complete your submission until these errors are
resolved. This section will examine the most common errors and explain how to
fix them.
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Rounding
The online system requires amounts to be entered in whole
dollars. If cents are entered, you will
see an error message. For example, the
error may say ‘Please correct: Member 1: Pension Start Balance, a whole dollar
rounded amount required.’
Please show all amounts on the form in whole dollar values, e.g. $425 NOT $424.75
Transactions not adding up
The online system checks that transactions sum
appropriately. If they do not, the error
message will say which transaction type and member
for which the error is occurring, for example:
‘Concessional
Contributions for Member
1: The sum of Non Uniform transactions equals $X and does not equal the entered Total of $Y’
This is saying that the total does not equal the sum of the
individual transactions. Check that the totals in step 5 have been entered –
the yellow boxes should contain the total for each transaction type – this is
not automatic.
‘Sum of Pension and Non Pension
Start Balances equals $M and does not equal the Fund Start Balance of $N’
This is saying that opening balances + contributions +
transfers in – accumulation withdrawals – pension payments +/- net income
(balancing item) DOES NOT EQUAL the closing balance before income tax (pre tax
year end assets).
Uniform Transactions
If you have started a pension during the year you will need
to enter in all transactions using step 4 of the form. If you haven’t done this, an error message
will be displayed which specifies
the transaction type and member for which the error is occurring. For example:
‘Member 1 must enter non-uniform Pension payments’
If the pension started after 1 July but pension payments were
uniform from the start of the pension then show the total with a date that is
half way between the start date of the pension and 30 June.
E.g. Start pension 1 September 2008 and make 10 monthly
pension payments of $1,000 from September to June.
Put the total of $10,000 in step 5 with a date of 1 Feb 2009
as this is halfway between 1 Sept and 30 June.
Sum does not equal Total
On the form, the sum of the pension and non-pension amounts
at the start of the year must equal the total shown. If not, you may see an error message such as:
‘Sum of Pension and Non Pension
Start Balances equals $X and does not equal the Fund Start Balance of $0.’
To fix this error check that the green box for the total
start balances (on the right hand side at the top of Step 5) has the total start balance entered. This is not automatically entered in the box.
No percentage is showing on the Summary Page
If
you have completed the form incorrectly or the Fund contains a Member Exit or Fund
Wind Up then the tax exempt percentage result will be withheld. These cases need to be individually
reviewed before a tax exemption percentage can be determined. In
this case please select a payment option at the bottom of the summary page and
our team will know to carefully examine the application. Nevertheless, you will receive the final copy
of the certificate via email, or be contacted for further clarification within one
working day.
If
your fund contains a complex situation please make use of the comments section
of the form to explain it to us.
How do I apply for an amendment?
After submitting an application you may realise that
the data you had provided contained an error.
If so, it is easy to amend the certificate and receive an updated
certificate free of charge. How you can
apply for an amendment is outlined below.
There
are several ways to apply for amendments:
·
If you have saved a copy of the application
simply upload this file, make the necessary changes and submit it by selecting
the ‘amendment’ payment option
·
If you have not saved a copy of the
application you can email us and ask for a copy of the file to upload and
change, or you can re-do the application from scratch – again submit it by
selecting the ‘amendment’ payment option
·
Lastly, you can email us the changes you
require and we will complete the amendment for you. Make sure to mention
in the email the name of the fund and reference number if possible. This option
may take a little longer than the above two options. Email to act@bendzulla.com.
All amendments are free of charge.
How do I save my data and how do I
reload the saved file?
It is often handy to save a copy of your data as a
template for future submissions, as a copy on file for your records or simply
as a work in progress for you to come back to at a later date. The online
application form allows you to save a copy of the data as a special file which
you can upload on our website to repopulate the dataform
and review or continue your application.
Explanation of saved file
To save a copy of your data press
‘Save to File’ either on the Data Input Screen or on the Summary Page. The file that you save will be a special
file type used by our online system.
This file type cannot be opened on your computer using Word etc. This is because the file is designed to be
used by our website system to repopulate the dataform
with your saved information. To view
your saved data you will need to go to our website and upload the file. This will re-populate the application form to
where you were up to when you saved the file.
It is a good idea to keep a saved copy of your application
form in case you need to apply for an amendment.
Saving with Internet Explorer or Google Chrome
These internet browsers appear to save the application file
correctly. If you open this on your
computer (it will open in notepad or similar) it will look like a piece of
code. Keep the file as a .fs3 extension, do not change the file type otherwise the
upload of this file will not work correctly.
Saving with Firefox
The Firefox internet browser appears to be having
difficulties downloading the file type.
In some cases it is saving as a .txt file. You will need to change the file type manually. To do this open the file in
notepad and select ‘save as’. Save the file with a different name with the extension .fs3 (e.g.
SmithSF.fs3). This should
override the file type to call it a .fs3 file and it
should now work when uploading at our website.
Uploading and continuing
To upload your saved file and continue your application, go
to our website http://www.bendzulla.com/AspCalc/S390/default.aspx and select the ‘load certificate
file’ button. This will ask for your application
file. Simply browse your computer and
upload the saved application file. Select ‘Edit Certificate’ to continue your
saved application.
How do I enter transactions correctly
in Step 5?
The size and timing of transactions can
significantly affect the final tax exempt percentage. It is important to correctly list all
contributions, pension payments, accumulation account withdrawals and transfers
in on the application form. The main difficulties clients encounter when
entering transactions on the form are discussed below.
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Uniformity
Totally Uniform transactions: These are made evenly over the
entire financial year in approximately equal amounts. For example, consider a situation where a
member receives $5,000 a month for the entire financial year. In step 5 this would be shown as $60,000 in
the yellow box for contributions. Step 4
would show contributions as Totally Uniform.
Combination of uniform and
non-uniform transactions: You may have a situation where some transactions are uniform but there
are also a few non-uniform transactions.
For example, pension payments of $1,000 a month plus a payment of
$40,000 on 1 March 2009 and $25,000 on 25 June 2009. In this case you should select 3 transactions
using the pension payments drop down box in Step 4. Then put $12,000 (the uniform total) with a
date of 1 January 2009 in step 5 – this will distribute the total evenly over
the financial year. The other two
payments will be listed in Step 5 with their own date and amount. The total payments of $77,000 will be shown
in the yellow box.
If one member has totally uniform transactions but another
member has non-uniform transactions then show this in step 5 by putting the
total uniform transactions with a date of 1 January and the other member’s
contributions listed separately with their own dates and amounts, similar to
the above situation.
Part Year Uniform Transactions: You may have uniform payments over
part of the financial year. For example,
$100 a month contributions from July until December inclusive, in this case we
can show this total of $600 with a date of 1 October as this is the middle of 1
July to 31 Dec. This will distribute the
$600 evenly from 1 July to 31 Dec.
Many Non-Uniform Transactions: You may have a situation where the
Fund receives many (greater than 20) contributions over the year but they are
not of any uniform amount. In this case
you can group the contributions per month and list each monthly total with the
date shown as the 15th of that month – this will distribute the
total evenly over each month. When using
this technique please remember to list any relatively large transactions
separately with their own date and amount as these will have a greater effect
on the percentage calculation.
Remember:
·
If there were
uniform transactions over part of the year put the total of the uniform
transactions with a date half way between the start date and final date of the
transactions.
·
If you commence a
pension during the year or roll back a pension during the year the form will
require that you give all transactions with a date.
This is VERY important as where ‘entire balance’ is
selected as the pension commencement value all accumulation based transactions
shown on the form up to and including the pension commencement date will be
included in the pension commencement value.
If any transactions are shown on a date before or after the pension
commencement that represent uniform transactions this will result in an
incorrect pension commencement value and therefore incorrect tax exempt
percentage. We need to know the dates
and amounts of monies which came into/out of the fund before and after each
pension commencement or roll back.
Importance of listing dates
The timing of transactions can have a significant effect on
the final tax exempt percentage you receive.
For the most accurate percentage it is important to list all non-uniform
transactions with their dates and amounts, and to list uniform totals with their
correct date (see uniformity above).
For example, consider a Fund with one member. This member has $0 in accumulation mode at 1
July and $100,000 in pension mode at 1 July.
The member makes a $100,000 contribution during the year.
1. If this contribution came in on 1 July then the tax
exempt percentage for the Fund would be around 50%
2. If this contribution occurred uniformly over the year
($8,333.33 per month) then the tax exempt percentage for the Fund would be
around 66%
3. If this contribution came in on 30 June then the tax
exempt percentage for the Fund would be around 99%
Consider another Fund with one member. This member has $50,000 in accumulation at 1
July and $100,000 in pension at 1 July.
The member makes $50,000 in pension payments during the year.
1. If the pension payment occurred on 1 July the tax
exempt percentage would be around 50%
2. If the pension payment occurred uniformly over the
year ($4,167 per month) then the tax exempt percentage would be around 60%
3. If the pension payment occurred on 30 June then the
tax exempt percentage would be around 66%
The larger the transactions are relative to the size of the
opening balances the greater the effect they will have on the percentage. Make sure to list all non-uniform
transactions separately on the form.
Insurance premiums
If your Fund makes insurance premium
payments during the year these should come from the accumulation account. They should be shown on the form under
‘accumulation withdrawals’. However, if
the Fund has insufficient monies in accumulation to make the insurance payment,
and they have been paid out of the pension account, it should be shown on the
form under ‘pension payments and withdrawals’.
How do I
apply the tax exempt percentage?
Once a superannuation fund commences to pay an
income stream or pension, it should be possible to claim a tax exemption in the
annual return (Section C-K) for certain income backing the current pension
liabilities. This income is called the Exempt Current Pension Income (ECPI). It
does not include income assessable contributions or non-arm’s length income.
Expenses and Income
Losses
The tax exemption percentage is applied to ordinary
assessable income (excluding assessable contributions and non-arm’s length
income). This same percentage is also useful with regard to expenses.
Generally, expenses which the superannuation fund has incurred in deriving
exempt current pension income cannot be claimed and must not be included as
part of the deductions claimed in the SMSF annual return. Certain specific
deductions can be claimed in full, if they provide assessable income – for
example, tax related expenses such as the supervisory levy and life insurance
premiums. Where the expense relates to both accumulation and super income
stream based income, it can be proportioned with the calculated percentage.
Tax losses (not capital losses) must be offset against
exempt current pension income first. Once the assessable income is reduced to
zero, any further losses can be carried forward. Taxation Ruling TR93/17
provides further advice.
Will a change to the balancing item or closing balance affect
my tax exempt percentage?
The balancing item includes all realised and unrealised
capital gains, contributions tax, and any other income and expenses of the
Fund. All these items, including
investment income or losses, are excluded from the calculation of the tax
exempt percentage. For an un-segregated
fund income is treated the same as taxes, expenses etc which are allocated at
year end – therefore receive a zero weighting.
This is why the ‘balancing item’ and ‘closing balance’ on the form has
no impact on the tax exempt percentage you receive.
How can I
ensure I get the most accurate tax exempt percentage?
Discussed below are some simple concepts relating to
getting the most accurate tax exempt percentage. Filling out the form incorrectly may result
in an inaccurate or lower percentage than the best possible percentage.
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List pension
commencements and rollbacks with the correct value |
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Make sure to list dates
The size and timing of transactions can significantly affect
your tax exempt percentage. Make sure to
list any relatively large transactions separately on the form. If you list a large contribution, transfer in
or pension payment as uniform when it actually occurred after 1 January then
the tax exempt percentage you receive will be less than the actual tax exempt
percentage for the Fund. (See ‘Importance of listing dates’ above in the
‘Entering Transactions’ section)
Show correct pension commencement date
Pensions can be commenced before the first pension payment is
made. In general, the earlier you
commence a pension during the financial year the higher your resulting tax
exempt percentage will be (all other things equal). So commencing a pension on 1 July (even if
the first pension payment is made in March say) will lead to a higher
percentage than commencing the pension on the date of the first pension
payment. When choosing a pension commencement date remember that the minimum
pension requirements must be met, otherwise the ATO might disallow the tax
exempt status of the pension. There can
also be other important considerations that may impact on the decision of when
to commence a pension, and you should obtain professional advice on these
matters.
List pension roll backs and recommencements with the correct
value
With many funds experiencing losses we are seeing a number of
clients giving pension commencement values which include some negative market
revaluations. Remember, the value we require on the form is before any market
revaluations. Stating a lower pension
commencement value on the form results in a lower average pension value, and
therefore a lower tax exempt percentage. See the help section on pension commencement values for further information.
How is
the tax exempt percentage calculated?
The tax exempt percentage is the total average
pension assets divided by total average Fund assets. This gives the average proportion of assets
in the SMSF which were backing pension during the financial year, and therefore
gives the proportion of net ordinary assessable income which is exempt from
income tax.
The Tax Exempt Percentage
The tax exempt percentage is calculated for the unsegregated
pool of assets in the Fund. In most
cases the Fund will have no segregation so this will be the whole fund.
·
Tax exempt
percentage = average pension assets / average total assets
This is a weighted average so the size and timing of
transactions throughout the year will affect the final tax exempt percentage.
Assuming we are considering a Fund which exists for the
entire financial year, the calculator gives each transaction a weighting out of
365 (days in a year). So the opening
balances receive 365/365 weighting. A 1
Aug transaction receives a 334/365 weighting i.e. the number of days it will be
in the Fund divided by total number of days in the year. All transactions, pension start values and
pension roll back values are given a weighting.
The resulting figure is their ‘average’ balance over the financial year.
So for example:
·
A $100,000 1 July
balance has an average balance over the year of $100,000
·
A $100,000 31 Dec
non concessional contribution has an average balance of $50,000
·
A $100,000 1 June
non concessional contribution has an average balance of $8,219
We then determine the
average pension balance as the sum of all the pension related weightings:
·
Opening pension
balance – sum of weighted pension payments + sum of weighted pension starts –
sum of weighted pension roll backs.
We then determine the average
accumulation balance as the sum of all the accumulation related weightings:
·
Opening non
pension balance + sum of weighted non concessional contributions + sum of
weighted concessional contributions + sum of weighted transfers in – sum of
weighted accumulation account withdrawals – sum of weighted pension
commencements + sum of weighted pension roll backs.
The percentage is then:
·
Average pension
balance / (average pension balance + average accumulation balance).
Investment income is ‘excluded’, this makes it the same as
taxes, expenses etc which are allocated at year end – therefore receive a zero
weighting. This is why the ‘balancing
item’ on the form has no impact on the tax exempt percentage you receive.
Concessional contributions are shown as gross on the
application form however that calculator takes into account the fact that in
effect only 85% of these contributions are added to the member’s accumulation
account due to 15% contributions tax owed on each concessional contributions.
Can capital losses on pension assets
be carried forward?
The capital losses cannot be carried forward for
assets which are solely used to produce exempt income (solely pension assets).
Therefore in cases where all assets are pension assets, (no accumulation monies
in the Fund), whether you treat the Fund as segregated or unsegregated all
assets are still in pension and capital losses on these assets cannot be
carried forward.
The following is from the ATO website document: Introduction
to Capital Gains Tax
Capital losses you must disregard
You must disregard any capital loss you make:
·
from a personal
use asset
·
from a lease
(whether the result of expiry, forfeiture, surrender or assignment) unless it
is used solely or mainly for producing assessable income, for example, a lease
on a commercial rental property or a car
·
from paying
personal services income if the income is included in an individual's
assessable income under the alienation of personal services income provisions,
or any other amount attributable to that income
·
as an exempt (from income tax) entity – this rule
ensures that if the status of an exempt entity changes and it becomes taxable,
its losses are not carried forward to become deductible from assessable capital
gains.
It is the last point above which relates to capital losses
from pension assets. The following technical update from Cavendish
Superannuation (particularly p3 – p6) has some useful examples and explanations
on the topic of capital losses: Technical Update - Capital Losses
Why can’t contributions be directly
added to a pension account?
The SIS Regulations
clearly state that the capital supporting a pension cannot be added to by way
of a contribution or rollover after the pension has commenced. To move contributions into pension a new
pension must be commenced with the contribution monies.
The Superannuation Industry
(Supervision) Regulations 1994 section 1.06 states:
1.06 Meaning
of pension (Act, s 10)
(1) A benefit
is taken to be a pension for the purposes of the Act if:
(a)
it is provided under rules of a superannuation fund
that:
(i) meet the standards of subregulation (9A); and
(ii) do not permit the capital supporting the pension to be added
to by way of contribution or rollover after the pension has commenced; and
(b) in the case of rules to which paragraph (9A) (a) applies
—the rules also meet the standards of regulation 1.07D; and
(c) in the case of rules to which paragraph (9A) (b) applies— the
rules also meet the standards of regulation 1.07B.
It is therefore clear under
the legislation that contributions cannot be added directly to a pension
account. The member must commence a new account based pension with the
contributions. Alternatively, the member could commute the existing
account based pension and recommence a new account based pension with the total
monies – meaning there is still only one pension in existence.
SIS Regulations 1994: http://www.comlaw.gov.au/ComLaw/Legislation/LegislativeInstrumentCompilation1.nsf/0/22C44A0DA5836401CA2575E00000AA6D/$file/SupIndSuperv1994Vol1.pdf
What are the rules regarding the
commutation of an account-based type pension?
The
most common requirement for the commutation of a pension is that the pro rata
minimum pension payment for the period 1 July to the date of commutation must
be paid before the pension can be commuted.
The Superannuation Industry
(Supervision) Regulations 1994 section 1.07 states the rules for the
commutation of pensions for allocated pensions, market linked pensions and
other pensions.
In most cases the annuity or pension
cannot be commuted, in whole or in part, unless:
·
the commutation
results from the death of an annuitant or pensioner or a reversionary annuitant
or reversionary pensioner; or
·
the
sole purpose of the commutation is:
(i)
to pay a superannuation contributions surcharge; or
(ii) to
give effect to an entitlement of a non-member spouse under a payment split; or
(iii) to
meet the rights of a client to return a financial product under Division 5 of
Part 7.9 of the Corporations Act 2001; or
·
the annuity or pension has paid, in the financial year in
which the commutation is to take place, at least the minimum amount under subregulation (3).
For most pension commutations it is the final dot point that
will be required. That is to commute a
pension in a given financial year, even if the commuted pension is immediately
recommenced as part of a new pension, the minimum pension payment for the
period the pension was in existence must be met.
For example, consider a pension that was in existence at 1
July 2008, then was commuted on 1 January 2009, and then recommenced on 1
January 2009 to include some contributions. The member would be required to
make a pension payment in the period 1 July – 1 Jan equal to about ½ the annual
minimum pension payment (i.e. the pro rata payment for period 1 July to 1 Jan)
before the commutation can take place.
The member would then need to make a pension payment in the period 1 Jan
– 30 June equal to about ½ the annual minimum pension payment (i.e. the pro
rata payment for the new pension from 1 Jan to 30 June).
In the extreme case it could be argued by the ATO that for
pensions that were commuted on 1 July, only to recommence on the same day – a
reboot strategy, a pension payment of 1/365 the annual minimum pension payment
needs to be paid on 1 July before the pension can be commuted. Then on the recommencement of the pension, a
pension payment equal to the minimum pension payment based on the new opening
balance would need to be paid at some point during the financial year. Completing the commutation of the pensions on
30 June in the previous financial year and then commencing the pension on 1
July in the new financial year would avoid this issue.
There are also rules relating to a commutation in part, see
the Regulations for further details: http://www.comlaw.gov.au/ComLaw/Legislation/LegislativeInstrumentCompilation1.nsf/0/22C44A0DA5836401CA2575E00000AA6D/$file/SupIndSuperv1994Vol1.pdf
What is Segregation?
An asset or pool of assets
is said to be segregated if it is
solely backing pension or accumulation, or solely backing a member or pool of
members. Where a Fund contains
segregated assets solely backing pension or accumulation these should be
excluded from the calculation of the tax exempt percentage as the income on
these assets would be known and entirely tax exempt or taxable. Where the segregated assets are backing a
member or group of members an actuarial certificate may still be required for
the segregated pool of assets.
In the ITAA 1997 Section 295.385 the meaning of segregated
current pension assets says a fund’s assets will be segregated current
pension assets if (among other things) they are 'invested, held in reserve or
otherwise dealt with at that time solely to enable the fund to discharge all or
part of its liabilities (contingent or not) in respect of superannuation income
stream benefits' (extracted from section 295-385(3)(a)).
The above can be interpreted to mean that an asset can be
said to be segregated to the pension if it is solely backing pension. Similarly an asset could be segregated to
accumulation if it is solely backing accumulation.
ITAA 1997 Section 295.390 gives the tax exempt proportion as:
Average
value of current pension liabilities / Average value of superannuation liabilities
where:
"average value of current
pension liabilities" is the average value for the income
year of the fund's current liabilities (contingent or not) in respect
of superannuation income stream benefits that are payable by the fund
in that year. This does not include liabilities for which segregated
current pension assets are held.
"average value
of superannuation liabilities" is the average value for
the income year of the fund's current and future liabilities
(contingent or not) in respect of * superannuation benefits in
respect of which contributions have, or were liable to have, been made. This
does not include liabilities for which segregated current pension
assets or segregated non-current assets are held.
Again this can be interpreted to say that if a Fund contains
segregated assets these should not be included in the calculation of the tax
exempt proportion in the case where the Fund contains other assets which are
not segregated.
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s295.385.html and http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s295.390.html
What is the ATO’s point of view on
segregation?
It was recognised recently
in the National Tax Liaison Group meeting that neither current or former
legislation, explanatory memorandums nor other key ATO publications provide
examples or guidance on exactly what will or will not constitute
segregation. They did however mention
that they would be unlikely to allow part of an asset to be segregated, even a
bank account.
On the ATO website they say that if you intend to use the
segregated method, you need to consider whether the SMSF’s income stream assets
meet the requirement of being ’segregated‘. You need to determine whether:
·
these assets are
clearly identified as the assets dedicated to funding the super income stream
benefit
·
there is a clear relationship established between the
relevant assets and the member’s account.
There are no descriptions or examples on the ATO website of
the ever increasing partial segregation where some assets in the super fund are
segregated – therefore use the segregated method and do not require an
actuarial certificate, and the remaining assets are un-segregated – therefore
do require an actuarial certificate.
NTLG Superannuation Technical Minutes March 2010: http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00239517.htm&page=10&H10
In this help document we endeavour to provide some examples
of segregation.
What are the requirements for
segregation?
There is little
information available regarding the rules surrounding what is required for an
asset/s to be segregated. The following dot points may be helpful.
·
Assets need to be
completely separate
o
The ATO is
leaning towards the view that ‘part’ of an asset’ (e.g. property or even a bank
account) cannot be segregated. The asset
or pool of assets must be entirely separate.
o
Where the
segregation considers separate member assets each pool of assets must be
entirely separate. E.g. Member 1 and
Member two might each have their own pool of assets.
·
The segregation
of assets needs to be documented
o
E.g. A minute
noting that 10,000 BHB shares are allocated solely to Jim’s pension from 1 July
2010.
·
Cannot segregate
purely for tax avoidance
o
Segregation must
be properly documented in the Fund investment strategy and must be justifiable
based on various Fund and member considerations. These considerations must not
include a tax advantage.
o
E.g. segregating
a property to a pension the week before it is sold for a large capital gain,
then un-segregating the Fund after the gains have been received as tax exempt
looks suspicious!
·
The decision to
run segregated or un-segregated investment strategies is at the discretion of
the trustees.
o
The investment
strategy of the fund should give consideration to the decisions made regarding
segregation and any changes should be appropriately documented.
o By segregating 10,000 BHP to Jim he might take on a
different risk profile than the other members of the Fund. If the rest of the
Fund’s assets are conservative/balanced assets.
This means that although the Fund overall holds balanced assets, Jim
holds growth assets and this needs to align with the investment strategy
documented by the Trustee’s for the Fund.
The above list may not be a complete, it merely outlines some
of the requirements we have come across in our work with funds which contain
segregated assets.
What are some reasons for and against
the use of segregation?
The use of segregation can
mean more work in administrating the fund however it can also lead to tax
benefits or allow the use of different investment strategies between members in
the fund.
Reasons for segregation
•
Tax
benefits
–
All
income earned on segregated pension assets are tax exempt. Most commonly, capital gains on
shares/property segregated to pension will be 100% exempt from income tax
–
Include
higher income producing assets as part of the segregated pension pool and high
capital growth assets as part of the accumulation pool.
•
Different
investment strategies
–
Segregate
assets to a particular member(s) not a particular account (pension or
accumulation), this will allow each member to have separate investment
strategies:
E.g. A 40 year old in accumulation
might want higher risk assets than a 70 year old in pension phase. In this case the members might decide to
segregate the Fund’s assets not between pension and accumulation but between
members effectively creating two ‘sub-funds’, a pool of assets for each member.
Reasons against segregation
•
Segregation
can be complicated and is more work! There are greater administration and
documentation requirements due to keeping track of separate pools of assets
–
Many
SMSFs are setup because Mum and Dad (and sometimes the kids) wish to ‘pool’
their money and make investment decisions as a family.
•
Capital
Gains Tax issues on death of a segregated pension member
–
If
a member has segregated pension assets and passes away during the financial
year, where there is no beneficiary to receive this pension the monies will
fall back into accumulation and any capital gain will be taxed at 10%. If the Fund were treated as un-segregated the
fund could receive a tax exempt percentage giving the proportion of the year
the Fund was in pension and only the taxable proportion of the capital gain
would have the 10% tax applied:
E.g. Jim was receiving an account based pension and passed
away on 1 Feb 2010. His account balance was $600,000. The cost base
on the $600,000 of assets was $400,000. His nominated beneficiaries were
his adult children (no dependants) who were also fund members. Jim’s benefits
were transferred to the estate on 1 Feb 2010. Where the assets are segregated
to Jim’s account there will be a capital gain of $200,000 taxed at 10% = $20,000
tax. Where the assets remain un-segregated (pooled with the other Fund
assets for the financial year), if an actuary determines that say 50% of all
fund income (including CGT) would be exempt for the financial year, this would
mean that only 50% of the capital gain ($100,000) would be taxed at 10% = $10,000.
This would provide a tax saving of $10,000.
Examples of Segregation
The following examples
consider only account based, allocated, term allocated (market linked) and
transition to retirement pensions.
Defined benefit pensions will be considered later.
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Fully segregated assets
1. All
monies in the Fund are pension assets – the Fund implicitly contains segregated
pension assets as all assets are solely backing pensions.
E.g. All members in the Fund are
entirely in pension at 1 July and make no contributions or transfers in to the Fund
during the financial year. The Fund is
100% tax exempt and no actuarial certificate required.
2. All monies in the Fund are in
accumulation at 1 July and at some date during the financial year all members
in the Fund move all their monies into pension (on the same date). After this date no further contributions or
transfers in are made.
E.g. John and Jane have $150,000 each in accumulation at 1
July. On 1 October they both revalue
their assets ($160,000 each) and commence pensions with their entire
balance. They make no contributions or
transfers in from this date to 30 June when their balances are $185,000
each. In this case the assets are
segregated pension assets after 1 October and income from 1 Oct to 30 June is
tax exempt ($25,000 each). The income
from 1 July to 1 Oct ($10,000 each) is entirely taxable. Again, no actuarial certificate will be
required. For this strategy to be
successful the assets must be re-valued at the pension commencement so the
income in the two distinct periods is known.
Segregation between members
One group of members have their own pool of assets and
another group have their own pool of assets.
1. If each pool of assets is
solely backing pension or accumulation it will be 100% tax exempt (solely
backing pension) or entirely taxable (solely backing accumulation). In these instances no actuarial certificate
is required.
E.g. Mum and dad are entirely in pension and have their own
pool of assets. Their two children are in accumulation with their own pool of
assets. No actuarial certificate
required as each pool of assets is completely separate and solely backing
pension or accumulation.
2. If each member or group of members have
their own pool of assets and one or more of these pools contain pension and
accumulation monies, an actuarial certificate will be required for each ‘un-segregated’
pool of assets. That is, any pool of assets which is not solely pension or
accumulation is an un-segregated sub pool within the super fund and will
require an actuarial certificate to gain an exemption from income tax.
E.g. Mum and dad have their own pool of assets as they wish
to invest in a conservative/balanced portfolio of assets and the two kids have
their own pool of assets which are in a growth strategy. Mum and dad have a combination of pension and
accumulation assets within their pool of assets but no particular assets are
allocated to each account. The kids have
all their monies in accumulation.
In this case the children’s pool of assets is solely backing
accumulation and will be entirely taxable.
Mum and Dad’s pool of assets is backing both pension and accumulation so
this pool of assets is un-segregated between the accounts. An actuarial
certificate is required to determine the tax exempt proportion for this pool of
assets.
Segregation between accounts
All pension assets in the Fund are pooled and all
accumulation assets in the Fund are pooled.
Each pool of assets is solely backing pension or accumulation and so is
100% tax free or entirely taxable.
E.g. consider a two member fund; at 1 July the Fund has
shares and a bank account. Member one
commences pension 1 July and allocates some of the shares to the pension, they
also set up a separate bank account to hold some cash relating to the
pension. Member two remains in
accumulation with their monies in the original bank account. If member one makes contributions or
transfers in they will put these into the original bank account (which is now
the accumulation bank account). All
dividends received from the segregated shares go into the pension bank account
and all pension payments are made from the pension bank account.
In this case the shares and the pension bank account are
solely backing pension and therefore 100% tax exempt. The original bank account is solely used for
accumulation monies and is 0% tax exempt.
No actuarial certificate will be required.
Partial Segregation
This is where some assets in the super fund are segregated
and some assets are not. The fund will
therefore have a combination of segregated and un-segregated assets within the
super fund. Care needs to be taken in
these situations to ensure that the segregated assets remain separate from the
un-segregated pool of assets.
Partial
Segregation of Property
Consider a fund where a pension member segregates a property
which is an asset of the Fund to their pension (or to a pension pool). This will allow any capital gain upon the
sale of this asset to be 100% tax exempt.
E.g. Tony and Jane have a SMSF, Tony commences pension 1 July
with his entire balance of $500,000. A property worth $400,000 at 1 July is
segregated to the pension. Jane has
$100,000 in accumulation at 1 July. The
entire property is solely backing pension and any earnings on this property are
100% tax exempt. The remaining pool of assets which backs both Tony’s un-segregated
pension assets ($100,000 at 1 July) and Jane’s accumulation ($100,000 at 1
July) will require an actuarial certificate to claim an exemption from income
tax.
Any earnings on the property should strictly fall into a new
‘pension’ bank account so these are not mixed in with the un-segregated pool of
assets.
An even better solution would be to move Tony’s $100,000 in
cash at 1 July into the new pension bank account, leaving Jane’s $100,000 of
accumulation in the original bank account.
We now have a fully segregated fund and no actuarial certificate would
be required. Any accumulation monies
coming into the Fund should go into the original bank account (now our
accumulation bank account) and any pension payments or income should come from
or go into the pension bank account.
Partial Segregation of Shares
Shares are easy
to segregate as each unit is separate and its value (and therefore
income/losses) can be easily determined. Particular shares can be allocated to
members, groups of members or particular accounts.
E.g. Sam
commences pension 1 July with his entire balance, Susan remains in
accumulation. When commencing pension
Sam segregates 12,000 BHP shares to his pension account (only part of his total
pension starting balance).
The shares are
solely backing Sam’s pension and are 100% tax exempt. The remaining assets in the Fund are pooled
and an actuarial certificate will be required to claim a tax exemption on these
pooled assets.
Segregated assets with a shared bank account
The ATO specified
in the March 2010 NTLG Superannuation Technical meeting that they are unlikely
to accept partial segregation of a bank account, i.e. keeping separate
accounting records of what is pension/accumulation within the bank account
would not be considered segregation.
If you have a
situation where particular assets are segregated to pension or accumulation
however there is a general bank account being used by the members which has
both pension and accumulation monies washing through it there are a couple of
options.
If the bank account has not earned much
interest, or is mainly accumulation assets it may be worth treating the bank
account as 0% tax exempt (not trying to claim a tax exemption on the
unsegregated bank account). This would
save you the requirement of an actuarial certificate and will save
complications relating to the calculation of a tax exempt percentage based on
income on segregated assets.
If the shared account does contain assets
relating to pension and accumulation, as well as the income relating to the
segregated assets we can calculate a tax exempt percentage for you, in this
instance the income on the segregated assets has already been claimed as tax
free income (if from segregated pension assets) or taxable income (if from
segregated accumulation assets) so this income will be excluded from the tax
exempt percentage calculation as we do not want to count this twice. E.g. If you claim $10,000 in tax exempt
income on the dividends from segregated shares we do not want to again count
this towards the exempt percentage calculation in the shared bank account (as
the ATO may see this as claiming an exemption on these monies twice).
The exception being if a segregated asset
was SOLD and fell back into the unsegregated pool of assets. The gain on the assets up to that point would
be tax exempt (if backing pension).
However, the value of the assets from the date they are unsegregated
onwards would count towards the tax exempt percentage in the unsegregated pool
of assets as their value from this point onwards is not already being counted
towards a tax exemption elsewhere.
Can I use segregation for funds which
contain defined benefit pensions?
A fund which contains a
defined benefit pension can employ segregation in a similar manner to the
examples described above. Just remember
that any pool of assets which contains assets backing a defined benefit pension
requires an actuarial certificate as defined benefit pensions are not entirely
tax exempt pensions.
An actuarial certificate will be required for any pool of
assets that contains a defined benefit pension.
This is because defined benefit pensions in most cases are not entirely
tax exempt, unlike account based, allocated, market linked and transition to
retirement pensions, which are 100% tax exempt pensions.
ATO ID 2002/368 states that:
The amount of assets held by a complying superannuation fund
that can be classed as segregated current pension assets under section 273A of
ITAA 1936, for the purposes of claiming the tax exemption available under
section 282B of ITAA 1936, may not exceed the value placed on the
superannuation fund's current pension liabilities by an actuary as determined
on a 'best estimate' basis.
This means that only the ‘best estimate’ value of the assets
backing the defined benefit pension are tax free, any monies above the best
estimate are taxable.
E.g. A defined benefit pension worth
on average $200,000 with a best estimate value of $150,000 would have a 75% tax
exempt percentage.
It is not practical in a defined benefit
pension to segregated the value of the best estimate from the reserves (in
order to avoid the need for an actuarial certificate). The value of the best estimate will change
each year and it is not realistic to adjust the segregation of assets each year
to keep up with these changes. This may also be seen as tax avoidance as it is
unlikely there is another more sensible reason for attempting to do this.
Therefore, although a pool of assets can be
segregated to back a defined benefit pension.
An actuarial certificate will be required for this pool of assets as it
will contain both taxable and tax free components.
The exception would be if the value of the
defined benefit pension fell below the value of the best estimate. In this case the defined pension would be
100% tax free but it would face other issues in that it would be classed as
‘unsatisfactory’ and would need to be commuted.
How do I treat income and expenses
where the fund contains segregation?
The income on segregated
assets will be 100% tax free or 0% tax free dependent upon whether the assets
are backing pension or accumulation. Any
income on an un-segregated pool of assets will receive a tax exempt proportion
given by the actuarial certificate.
In this context ‘income’ is the ordinary assessable income -
excludes assessable contributions and non-arms length income.
Expenses incurred in claiming exempt current pension income
(ECPI) i.e. relating to pension assets, cannot be claimed as a deduction in the
tax return.
Expenses which provide for assessable income e.g. tax
expenses and insurance premiums, can claim a full deduction in the tax
return.
Expenses which relates to both accumulation and pension based
income can claim a deduction as given by the tax exempt percentage.