Of the latest SMSF strategies available in the market place, the most flexible and sought after by members of SMSFs are superannuation contributions splitting and the transition to retirement pensions (or non-commutable pensions) (‘NCP’).
These strategies provide members of SMSFs with the flexibility to draw an income stream while they continue to work and to split eligible contributions made to their SMSF with a spouse.
However, while these planning opportunities are now law and are being recommended by advisers, the ability to take advantage of these opportunities may be thwarted by not checking the governing rules of the SMSF. This can make for an unhappy client in the future if it is later discovered that their deed does not actually provide the required flexibility or worse still, does not comply with current superannuation laws.
From 1 January 2006, contributions made to a superannuation fund by or in respect of a member can be split for the benefit of the member’s spouse. This may be advantageous where, eg, the member is close to their reasonable benefit limit or to assist a spouse with a lower account balance. After each 1 July, a member can request the trustee that their contributions be split as follows:
- for taxed splittable contributions (very generally, contributions for which a tax deduction is allowed), 85% of the contribution received in the prior financial year can be allotted to their spouse; and
- for untaxed splittable contributions (ie, where no tax deduction is allowed), 100% of the contribution received in the prior financial year can be allotted to their spouse.
Note, however, that in respect of the 2005/2006 financial year, a request may be made on 1 July 2006 only in respect of eligible contributions made from 1 January 2006 and up until 30 June 2006. Existing contributions made prior to 1 January 2006 cannot be split. When a member’s contributions are split, the payment to the spouse’s account is called a ‘contributions splitting eligible termination payment’. This payment is not regarded as a contribution to the spouse’s account and contribution’s tax is collected prior to the split. That is, the member splitting their contributions pays the contribution’s tax.
Contributions cannot be split in favour of a spouse who has either attained age 65 or has attained their preservation age and has retired.
SMSFs do not have to offer contributions splitting. However, where this flexibility does exist, members need to forward a request to the trustee specifying details about the desired split after the end of the relevant financial year and before 31 October after the end of that financial year. Upon receipt, the trustee then has 90 days to effect the split.
While contributions splitting only came into effect on 1 January 2006, a member of an SMSF may still be able to undertake contributions splitting where the deed for the fund was put in place prior to 1 January 2006. Depending on the drafting of the particular deed, a deed which permits the transfer of benefits within the fund (including to other member accounts within the fund) may be relied on to undertake contributions splitting to a spouse who is also a member of the same fund. Many deeds, however, only provide for transfers of a member’s benefits to another fund and do not provide for transfers within the same SMSF.
Transition to Retirement
Since 1 July 2005, a member who has reached their preservation age has been able to commence an NCP, even if they have not satisfied a cashing restriction on attainment of preservation age. Broadly, there are two types of NCPs that can be paid from an SMSF: a non-commutable allocated pension (‘NC-AP’) and a non-commutable market linked pension (‘NC-MLP’) (these are similar to standard allocated and market linked pensions, except that there are certain restrictions on the cashing of commutations from them).
An NCP enables a person to access a pension without retiring or to supplement or replace their salary with a rebatable pension stream while they reduce the number of hours they work leading into retirement.
Subject to the deed, if the pension is an NC-AP, then it can be commuted and rolled-back into the fund if, for instance, the income from the NC-AP is no longer needed. Further, an NC-AP can be commuted if the person satisfies another condition of release with a nil cashing restriction or if the funds could have been cashed out prior to the commencement of the NC-AP (ie, they were unrestricted non-preserved benefits).
On the other hand, if the pension is an NC-MLP, generally, it cannot be commuted unless the commutation is rolled-over to commence another NC-MLP, eg, one with a different term. However, an NC-MLP may only be cashed if:
- the pension was started less than six months ago; and
- the member has satisfied a full condition of release.
An existing allocated pension or market linked pension power in an SMSF deed will not, by itself, be sufficient to commence an NC-AP or NC-MLP. In certain cases, the deed may be supplemented with detailed pension documentation outlining the additional rules required to govern payment of the NCP. Generally, however, the deed should be upgraded to ensure the provisions reflect the current rules.
As noted, the ability of a member to roll-back an NCP will be dependent on the wording of the deed. The deed should contain an express power permitting internal roll-overs of pensions back into the fund. Many deeds still do not contain the power to do internal roll-overs and consequently, the NCP will not be able to be rolled-back into the fund unless the deed is first upgraded to a deed that does provide such flexibility.
SMSF Deed & Product Disclosure Statement (‘PDS’)
Advice should be sought if there is any uncertainty as to the ability to undertake contributions splitting or commence an NCP under the terms of an SMSF deed.
Naturally, the DBA SMSF deed and PDS have been updated for these latest changes.
For further Information please contact:
DBA News contains general information only and is no substitute for expert advice. Further, DBA is not licensed under the Corporations Act 2001 (Cth) to give financial product advice. We therefore disclaim all liability howsoever arising from reliance on any information herein unless you are a client of DBA that has specifically requested our advice.