SMSF Paying Benefits
SMSF can pay a member’s super benefits when a member reaches his or her preservation age or meet one of the conditions of release like retirement. The SMSF benefits may be paid through an income stream or pension or through a lump sum, depending on the circumstances. If a benefit is unlawfully released, significant penalties apply to trustees, SMSF and the recipient of the early release. Operating standards, investment restrictions and other rules or regulations that apply to SMSFs continue to apply even if the members start receiving pensions.
I. Preservation of Super Annuation
The super held in the SMSF are usually in the form of preserved benefits. They must be preserved in the fund until the time the law and the trust deed allow them to be paid to the members.
SMSF benefits can only be paid to members who have reached their preservation age. This preservation age ranges from 55 to 60 depending on their date of birth.
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 30 June 1964||60|
Preserved SMSF Benefits
Contributions made by or on behalf of a member and earnings since June 30, 1999, are considered preserved benefits. Preserved SMSF benefits may be cashed if a condition of release is met. However, cashing restrictions apply as part of the condition of release. Cashing restrictions tells members on what form the benefits could be taken in.
Restricted Non-preserved Benefits of SMSF Members
These SMSF benefits come from employment-related contributions other than employer contributions made before July 1, 1999. They cannot be cashed until the member meets release conditions.
Unrestricted Non-preserved SMSF Benefits
These SMSF benefits do not require any conditions of release to be met and may be paid to the member when he or she demands them. These include benefits that has satisfied a condition of release and that the member decided to keep the money in the super fund. Some employer termination payments received by the SMSF before July 1, 2004, are also included in this category.
II. Conditions of Release
One of the conditions of release should first be satisfied to cash preserved or restricted non-preserved SMSF benefits of members. Unrestricted non-preserved benefits can be cashed any time.
Some conditions restrict the form of the benefit or the amount that can be paid. These are also known as ‘cashing restrictions’ like through a lump sum or pension.
Conditions of release for paying SMSF benefits that should be complied with by the member. This include:
- That the member has reached his or her preservation age and retires.
- That the member has reached his or her preservation age and begins a transition to retirement income stream
- That the member ends an employment arrangement on or after the age of 60 or 65 years of age
- That the member has died.
Part of the member’s SMSF benefits can be released before he or she reaches preservation age if he or she’s been terminated from a gainful employment, permanently incapacitated, temporarily incapacitated, having a severe financial hardship, on compassionate grounds or if he or she has a terminal medical condition.
SMSF trustees must ensure that the member has met a condition of release before the fund is released. They must also check if the governing rules of the fund allow the release. SMSF benefits may be payable under super laws but may not be under the SMSF rules.
Rollovers to other super funds do not require members to satisfy release conditions but are subject to governing rules of the SMSF. If payments of benefits were made to members without any conditions of release may result in penalties for the trustees and to the fund. These will not be treated as SMSF benefits but will be taxed as ordinary income at marginal tax rates.
Retirement Under Super Laws
For members under 60 years of age, preserved benefits are accessible only once they have reached their preservation age, end gainful employment and have no intention of becoming employed in the future. For those who are at least 60 years of age, they can access their preserved benefits once they leave their job. SMSF benefits can be taken in any form, no restrictions apply to retirement benefits.
Transition to Retirement (TRIS)
SMSFs can pay transitions to retirement pension or income streams to members who have reached preservation age even if they are still working if the fund’s trust deed allows it. The account based pension paid must meet a minimum and not exceed 10% of the account balance on the start of a TRIS for the year it starts or on July 1 for each subsequent year. Measures for TRIS are complex. We suggest that you get advice from an SMSF auditor Melbourne, financial adviser, or tax professional about it.
Ending an Employment Arrangement on or after the age of 60
A 60-year-old member or over, who gave up an employment arrangements but continues another employment relationship may:
- Cash benefits that have accumulated up to that time
- Not cash any preserved or restricted non-preserved benefits which have accumulated after the condition of release occurs. These SMSF benefits cannot be cashed until a fresh release condition occurs.
Turning 65 years old
Members who turn 65 may cash their SMSF benefits any time. Cashing restrictions do not apply which means that they can be paid through an income stream or lump sum.
Fund members are not compelled to withdraw their super once they reach a particular age. Their SMSF benefits can be kept in the fund indefinitely. But when a member dies, it is compulsory for an SMSF to pay out the benefits of the deceased member through his or her beneficiaries.
Terminating Gainful Employment
When a member ceases to be employed by an employer who has contributed to the member’s fund on termination:
- Preserved SMSF benefits may be paid but they must be taken as a lifetime pension or annuity and cannot be commuted into a lump sum unless they are less than $200, which the member can cash without restrictions.
- Unrestricted non-preserved benefits can be cashed out on the member’s request. There are no cashing restrictions to do so.
Once a member ends an employment arrangement because of ill health and that he is already unable to engage in gainful employment, the member can cash his or her SMSF benefits without restrictions.
If a member has temporarily stopped working because of physical or mental ill health but is not permanently incapacitated, benefits may be paid to him or her. Temporary incapacity benefits are paid from the insured or voluntary employer-funded benefits.
If a member receives sick leave benefits, they are not eligible for provisional temporary incapacity benefits. For the period of incapacity, the benefit must be paid as an income stream for the period when the member is incapacitated to perform work and it cannot be commuted to a lump sum.
Severe Financial Hardship
To release SMSF benefits to members who are under severe financial hardship the fund must be satisfied that the member:
- Cannot meet reasonable and immediate living expenses
- Has been receiving government income support for a continuous period of 26 weeks and has been receiving this support at the time they applied to the trustees.
The payment to be given to the member is a lump sum of not more than $10,000 and not less than $1,000 (this may be lesser if the member’s benefit is less than $1,000) within a 12 month period. Only one payment is allowed.
If the member has reached his preservation age plus 39 weeks, the fund must be satisfied that the member:
- Has been receiving government income support for a period of 39 weeks since reaching preservation age.
- And that he was not employed on a full-time or part-time basis at the time of applying to the trustees.
No cashing restrictions apply in releasing SMSF benefits under these circumstances.
SMSF benefits can be released on compassionate grounds or the following conditions are met:
- A member does not have the financial capacity to meet expenses
- Release allowed under the governing rules of the fund
The amount that can be paid under compassionate grounds is limited and is paid in lump sum.
Terminal Medical Condition
A member with a terminal medical condition and that two medical professionals certify that it will result in the death of the member in the next 24 months, their super account balance may be paid as a tax-free lump sum benefit. Cashing them is free from any restrictions.
Improper early access to the SMSF is illegal. If a member accesses a super before he or she is entitled to do so, there are severe consequences to be faced which include:
- Disqualification of trustees
- The fund becomes non-compliant with laws
- Administrative penalties will be imposed
Any money accessed illegally are included in the assessable income of an individual and will be taxed at applicable marginal tax rates.
III. Death of A Member
SMSF generally pays death SMSF benefits to dependents or other beneficiaries of a deceased member. This benefits should be given as soon as possible after the death of the member.
The death benefit can be paid in lump sum or income stream to a dependent of the deceased. The income stream can be a new one or a continuation of an existing one. If the beneficiary is not a dependent, the death benefit should be paid in lump sum.
A person is considered a dependent of the deceased member if:
- He or she was the deceased’s spouse.
- Child of the deceased. This includes a child who is less than 18 years old, who is financially dependent on the deceased and less than 25 years old or if the child has a disability.
- If an interdependency relationship with the deceased existed. Interdependency is when a close intimate relationship between two people living together where one or both provide for the domestic, financial, and personal support of the other.
For income tax purposes, a person is a beneficiary of a deceased if, at the time of death, that person was:
- The spouse or former spouse of the deceased,
- Child, who is less than 18, of the deceased,
- Another person whom the deceased had an interdependent relationship
A death benefit to a dependent is when beneficiaries receive a lump sum because the member died in the line of duty as a:
- Member of a defence force
- The Australian Federal Police
- The police force of a territory
- A protective service officer
- Deceased member’s former spouse or de factor spouse.
Who To Pay The Death Benefit To
In most cases, SMSF trustees nominate beneficiaries to whom their death benefit will go to. The nomination may either be binding or non-binding. SMSF trustees must ensure that the beneficiaries nominated are entitled or allowed to receive death benefits under the super laws and trust deed.
If there were no nominated beneficiaries, the trustees may put the benefit to the deceased’s estate and distribute it according to the instructions in his or her will.
Calculating tax on super death benefits
Death benefits paid in lump sum to the dependents of the deceased are tax free. SMSF do not withhold tax from its payment and the recipient does not include it on their income tax return.
However, if the death benefit is paid in an income stream to a non-dependent or the trustee of the deceased estate, some taxes have to be paid. The SMSF has to determine the taxed and untaxed elements of the benefit, calculate the applicable tax and withhold tax from payments if needed.
Tax saving amount
A tax saving amount is an additional lump sum that increases the deceased member’s lump sum death benefit and negates the effect of tax while the member’s benefit was accumulating. It can be made to a trustee of the deceased estate, spouse or former spouse of the deceased and child, including adult children of the deceased. SMSFs can claim income tax deductions for this payment.
From July 1, 2019, tax saving amounts will no longer be available for fund members, regardless of when the member died.
IV. Lump Sum and Income Stream
SMSF can pay benefits either in the form of a lump sum or income stream (or pension) or a combination of both. The payment should be allowed by the super laws and the fund’s trust deed.
Tax should be withheld form payments of SMSF benefits if the members are:
- Under 60 years old
- Under 60 years old and if the member receives a reversionary capped defined income stream, where the deceased was 60 years or over when he or she died
- 60 years old or over if the benefit is from a capped defined income stream benefit
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.