The member’s ability to receive a benefit normally depends on:
- the type of benefit the member has accumulated in the SMSF;
- the member’s age and whether any preservation restrictions apply to the benefit; and
- whether the rules of the SMSF permit the benefit to be paid at the time.
The trustees are required to maintain the members’ minimum benefits until the benefits are paid out, rolled over or transferred.
Payment of Benefits
Generally, benefit payments are triggered due to a condition of release being met. The approved form auditor’s report states that the auditor’s procedures include testing “that no preserved benefits have been paid before a condition of release has been met”. Conditions of release are specified in the SISR and may be further restricted by the SMSF’s governing rules. Conditions of release include retirement, reaching age 65, death, permanent or temporary incapacity, terminal medical condition, attaining the prescribed preservation age for a transition to retirement benefit, severe financial hardship and compassionate grounds which are assessed by the ATO in accordance with regulatory requirements.
For pension payments, the auditor ensures that any payments meet the minimum and maximum, if required, payment conditions as stipulated in the SISA and SISR and an appropriate condition of release has been met. In particular, funds paying account based pensions are required to pay an annual minimum pension amount which is calculated by applying a percentage rate, dependent on the member’s age, at the 1st July of the reporting year being audited, to the member’s account balance. The auditor confirms that a series of payments have been made over the life of each pension account. Subsequent pension payments are reviewed to confirm that a series of payments has been made.
Where pension payments are less than the required minimum, the pension is taken to have ceased at the beginning of that year and the income from assets that support the pension will not be tax exempt for the year. The ATO guidelines for SMSFs Funds – starting and stopping a pension [superannuation income stream] outlines exceptions whereby the Commissioner may exercise discretion in allowing a SMSF to treat income as exempt pension income even though the minimum pension standards have not been met. Furthermore, the guidelines outline the circumstances under which the ATO will allow a trustee to self-assess their entitlement to this concession.
In the year of death, reversionary pensions continue to be paid based on the minimum pension factor of the primary beneficiary. Thereafter, the pension factor that applies to the age of the beneficiary applies. If the minimum pension is not paid in the year of the death, the trustee can self-assess to treat the fund as continuing to pay the pension if the shortfall is small, or resulted from an error. In all other cases, the pension is deemed to have stopped and, accordingly, the trustee must ensure the death benefit is paid as soon as is practicable. The options available for the payment of the death benefit include commencing a death benefit pension, paying the death benefit as a maximum of 2 lump-sums, or rolling over the death benefit to another superannuation fund for immediate cashing as a new death benefit pension. However, the trustee is required to consider the terms of the fund’s trust deed, together with any member nominations that are on file, when determining how the death benefit is to be paid.
For lump sum payments, the auditor ensures that the fund’s governing rules permit such payments and that an appropriate condition of release has been satisfied.
In relation to testing the compliance of both lump sum or pension-type benefits, the auditor considers whether:
- the circumstances of the individual in triggering the payment of the benefit are consistent with a condition of release;
- the member has satisfied the payment criteria;
- the benefit has been calculated correctly in accordance with the method provided in the governing rules; and
- in the case of a retirement phase pension, the capital amount used to commence the pension was no more than the member’s transfer balance cap.
Ordinarily, the auditor tests the validity of the payment by checking to source documents that the benefit payment is bona fide, such as sighting a signed letter to the trustees requesting the benefit be paid and that retirement is evidenced by a member declaration, or similar document stating that the individual has retired and will not be seeking paid employment in the future. Further substantiation could include employment separation documentation such as an employer letter.
Total and permanent disability generally requires at least two appropriately qualified medical practitioners to certify that the individual is unlikely to work in paid employment or meets such similar definition as may be contained in the governing rules of the SMSF. The SMSF may or may not have insurance for total and permanent disability.
With respect to death benefits, the auditor checks the trust deed obligations, and whether a binding death benefit nomination form has been completed by the deceased and that it complies with the requirements in the fund’s trust deed. The auditor ascertains where the death benefits have been paid, to confirm that they have gone to either a dependant(s) or to the legal personal representative (LPR) of the deceased member. The auditor enquires as to whether any additional insurance benefit is payable.
A binding death benefit nomination for a SMSF must be made in accordance with the provisions of the trust deed for it to bind the trustee in the making of the death benefit payment decision. In circumstances where a SMSF has paid a death benefit during the period under review, procedures may include checking the form of any binding nomination on file against the terms of the trust deed and making enquiries to ensure that the benefit was paid according to the stated direction, and that the nominated beneficiaries are entitled to receive death benefits under the trust deed and superannuation law.
If the SMSF has an insurance policy covering total and permanent disability, total and temporary disability or death, or a combination of these benefits, ordinarily, the auditor enquires to see if a claim has been made or paid to support the benefit. If the proceeds of any such claim have been paid, ordinarily, the auditor checks to see that the benefit has been applied either to the member’s account or paid to the legal personal representative or beneficiaries.
Retirement phase income streams are pensions paid to a member following their satisfaction of a trigger event with a nil cashing restriction. The level of capital that can be applied to a retirement phase pension is restricted by the individual’s transfer balance cap (TBC). The commencement of a retirement phase pension as well as a commutation (partial or full) is required to be reported against the individual’s transfer balance account (TBA) within specific time periods. The review of the fund includes checking the reporting has been undertaken appropriately.
Assignment of Members’ Interests and Charges over Members’ Benefits
The trustees are not permitted to recognise, or in any way encourage or sanction, an assignment of a superannuation interest of a member or beneficiary, or a charge over, or in relation to, a member’s benefits. Audit evidence is obtained by receiving a signed trustee representation letter confirming these requirements have been met throughout the period.
More information is available on the ATO’s website at www.ato.gov.au/(search under ’paying benefits’).
See regulation 5.08 of the SISR.
Conditions of release are listed in Schedule 1 and detailed in Part 6 of the SISR.
Members need to reach their preservation age before commencing a transition to retirement benefit. This is age 55 for those born prior to 1 July 1960 and increasing up to age 60 for those born after 1 July 1964.
Regulation 6.19A SISR .
Maximum payments exist for transition to retirement income streams (TRIS)s.
See sub-regulation 1.06(9A)(a) of the SISR.
See schedule 7 of the SISR.
ATO Taxation Ruling TR 2013/5 explains when a superannuation income stream commences and ceases and, consequently, when a superannuation income stream is payable.
See sub-regulation 1.06(9A) and Schedule 7 of SISR.
See ATO’s guidelines for SMSFs – Funds: starting and stopping a pension which can be found on the ATO’s website www.ato.gov.au/Super/Self-managed-super-funds/(webpage only).
See regulation 13.12 of the SISR.
See regulation 13.13 of the SISR.