There are myriad SMSF rules to follow. Following on from my earlier ‘common mistakes’ article, here are more potential pitfalls.
1. Adding contributions to pensions
There are strict rules about what can be added to a pension account once it has commenced. You cannot add contributions or transfers from other superannuation funds after a pension has started. To add these amounts, the pension must be stopped and a new pension commenced based on a new set of calculations.
Each pension in an SMSF must be established under a separate account as well as any amount a member has in accumulation phase. There are tax benefits of keeping pension and accumulation accounts separate.
2. Withdrawing lump sums or pensions incorrectly
Superannuation can be accessed after the age of 65 or as a transition-to-retirement income stream once you reach preservation age, currently 57, even if you have not retired.
The type of benefits that can be paid from an SMSF are described in the trust deed. The deed may authorise payment of lump sums, account-based pensions, transition-to-retirement pensions or a combination to be paid to you or, on your death, to your dependants. In some circumstances, you may wish to direct your superannuation benefits to your surviving spouse, children, other dependants or to your estate.
A cap of $1.6 million applies to the amount you can transfer into retirement phase. Depending on how your pension is drawn down, you can maximise use of the cap and the amount you can ultimately transfer into retirement phase.
If you take your money from your SMSF earlier than the superannuation rules permit, the amount withdrawn can be taxed at penalty rates, the fund loses its tax concessions and the trustees face penalties for allowing the money to be released early. Early release of money from superannuation can be approved if you are experiencing severe financial hardship or for compassionate purposes.
3. Making contributions the correct way
Accepting contributions to an SMSF using the correct techniques is essential and helps to avoid penalty taxes if the amount contributed is more than the tax deductible and non-deductible caps.
A contribution to an SMSF can be anything that directly or indirectly increases the value of the fund to provide benefits to members. It excludes income and capital gains that the fund earns from its investments.
Most contributions are made to an SMSF as cash, by cheque or the electronic transfer of money. However, it is possible for some approved investments to be transferred to the fund and the value at the time of transfer is treated as a contribution. A contribution can also include expenses paid by a member on behalf of the fund which are not reimbursed, or government payments such as the co-contribution or low-income superannuation fund tax offset. These amounts are usually credited to a member’s accumulation account in the SMSF.
When accepting contributions to the fund a trustee should check:
- who has made the contribution
- the age of the member
- whether the member satisfies the work test if they are under 18 or older than 65
- whether they have quoted their tax file number.
If a member intends to claim a tax deduction for a superannuation contribution, an election must be provided to the fund which is required to be acknowledged.
While there is no limit to the amount of contributions that can be made to superannuation, a tax penalty may apply to any excess over certain amounts. The excess depends on the member’s age, the type of contribution and the amount of the member’s total superannuation balance on 30 June in the previous tax year.
4. Paying death benefits and your will
People often think that the payment of superannuation benefits is covered by their will. Generally, this is not the case as superannuation benefits are paid as authorised by the trust deed of the superannuation fund and any nominations the member may have made for the distribution of their death benefits.
If you wish to have your superannuation paid to your estate, make a clear direction to the fund trustee that on your death any benefit will be paid to your legal personal representative who will include the amount in your estate. If no clear direction is provided to the trustee for the payment of the benefit, it is possible that it may not be paid in accordance with the member’s wishes.
5. Making binding death benefit nominations
Death benefits can be paid to your surviving spouse, children, other dependants or to your estate via your legal personal representative.
It is possible for your spouse to receive a continuing pension on your death as a reversionary pension. However, you may provide instructions for the payment of death benefits in a binding death benefit nomination. The nomination will require you as trustee to pay your death benefit to your spouse, dependants or even the legal personal representative of your estate as you choose.
If there are no reversionary pensions or binding death benefit nominations, the rules of the SMSF’s trust deed will provide information on how and to whom the benefits can be distributed. If death benefits are paid to your estate, superannuation benefits will be distributed as provided in your will.
The trustee of an SMSF is obliged to ensure that benefits are paid in accordance with the member’s or dependant’s instructions or the SMSF’s trust deed. It is essential that the binding death benefit nomination is valid and properly witnessed. If it is not valid, the trustee may be bound to follow the provisions of the trust deed which may not be consistent with the wishes of the deceased.
Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Cuffelinks. This article is for general information only and does not consider any individual’s investment objectives.