In what proved to be one of the most popular sessions at the Money Management Retirement Incomes workshop, MLC Technical senior technical manager Peter Hogan provided planners with a very case-focused presentation on ‘Strategies in Superannuation Income Streams’.
As part of his presentation, Hogan discussed how planners could maximise the benefits of a self-managed superannuation fund (SMSF) income stream.
According to Hogan, paying an income stream from a SMSF has many advantages for the retiring member. Importantly, the commencement of a pension is itself not a taxable event. Any accrued but unrealised capital gains tax liability is reversed which is credited to the member’s account. Thereafter, there is no tax liability at the SMSF level on income and realised capital gains of those assets allocated to support the pension liabilities of the SMSF. A full cash refund of unused franking credits makes the investment in Australian shares an attractive one for members in pension phase when added to the cash dividend received.
The formal commencement of the pension is very important as this marks the date from which the above benefits apply.
In order to start a pension, it is necessary to put in writing a request by the member to the trustees of the SMSF to start the pension on a particular day, outlining the frequency and size of the payment, details of the bank account to be paid into, tax file number of the member and whether the pension is to be reversionary. This commences the pension, even though the first pension payment may not be made until later in the financial year.
The trustees must meet to consider the member’s request, be satisfied a condition of release has been met, and that the SMSF can pay a pension under the fund rules and resolve to formally pay the pension. This should all be minuted.
Hogan added that a number of other procedural matters need to be dealt with by the trustees. However, one other important matter is the review of the SMSF’s investment strategy. As the fund’s liabilities now include pension payments, the trustees must ensure the investment strategy takes these new liabilities into account. The trustees have an obligation to invest within the investment strategy, but also to ensure that all of the fund’s liabilities can be met as they fall due. Sufficient cash should be held to meet those pension payments. If the trustees are of the opinion that the current investment strategy does not give them sufficient latitude to accommodate this change in fund circumstances, they should formally resolve to change the investment strategy to allow them to do so.
A similar course of action, said Hogan, should also be followed by trustees where a request by a member to purchase a specific investment on behalf of that member is made, which members of SMSFs are allowed to make.
The trustees are obliged to be satisfied that the specific investment requested is within the current investment strategy (and is otherwise allowed under the general investment rules of superannuation legislation). If it is not, the trustees must refuse to acquire the investment unless the investment strategy is amended to accommodate the investment. Any change should be formally minuted.
Hogan warned that any person, including investment advisers as well as trustees, who is involved in recommending or making an investment that is not within the investment strategy of the SMSF is liable for any loss which may result from making that investment under superannuation law.
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