One of the significant issues for SMSFs has always been the level of audit evidence required for any transaction, whether investment or benefit related. This comes about because ultimately, the trustees of the SMSF are responsible for setting the requirements in conjunction with the auditor. However, unlike APRA funds, the trustees are not in the business of superannuation administration and only respond when requested by the auditors rather than pre-empt them.
Nowhere is this more obvious than with benefit payment transactions, including pensions payments.
This is mainly driven by the duality of the SMSF roles being both a trustee & the member and the fact that the trustees do not make the decisions to pay any amount to a member without the member initially requesting payment and the awkwardness in recognising that while you are both the member & the trustee the fund assets are owned by the trustees not the members.
Because the trustee & the member are the same people, the idea of documenting what is seen as essentially your own thoughts is not normal behaviour. Consider, if you want to take money out of your bank account, you don’t write a note to yourself saying, please let me take $200 out of my bank account.
So, what we generally see for benefit payments is just a transaction on the bank statement (maybe with a narration pension payment) and no other paperwork explaining who asked for it and where to pay the amount.
For pensions, this is mainly an issue for both pension establishment and subsequent payments. If we talk about the paperwork for new pensioners, we have no compulsory industry standards, so the information needed to prove provided to the trustees is quite variable.
At the very least, what do we need as a minimum from the member is:
• which condition of release the members met,
• how much of their account balance to convert to pension (may not be the total account balance due to the transfer balance cap),
• what level of pension to pay,
• what happens to the pension on death (does the pension revert to another person, or is it subject to death benefit nomination), and
• where to pay the pension to.
Going back to the commencing pension documentation or the members' request, we are starting to see that most members don't specify a pension payment level. However, the minimum level has significance due to strategies around managing the Transfer Balance Cap. As such, then minimum pension as the specified amount of pension to be paid can be used, but there also needs to be an instruction in respect of any amounts that are taken once that level has been achieved. Specifying which of these multiple accounts these extra amounts should come from is critical to various tax & estate planning strategies if the member has multiple accounts.
One way of dealing with this is to make sure things very clear, and because of strategies, the answers to some of these questions can be dealt with through standing instructions, but the standing instructions are only as good as the content.
When we get to the making the actual payments, of course, this becomes a lot trickier because not every SMSF sets up regular pension payments.
One of the advantages of an SMSF is flexibility, so we see many circumstances where pension payments are not a regular monthly stream but a range of ad hoc payments of different levels at different times throughout the year. This makes the standing instructions even more necessary to be able to determine whether these payments are pensions or not. One of the consequences that we see with this is that with ad hoc payments; there is very little, if any, a record about each payment; what we see is usually just a bank transaction that may have the narration pension payment.
Going back to the principle that we talked about earlier, how did the trustees know to make this payment because it is coming from the trustee's bank account? This is not the member taking the money; members can't take money from SMSF bank accounts; trustees pay them out.
The fundamental principle is how the trustee knew that the member wanted the payment because until the trustee knows about a member's request for payment, it can't make one. At a minimum, there needs to be at least some correspondence from the member to the trustees saying, please pay me an amount again. It may need to specify more information if there are no standing instructions.
Clearly, if we have the appropriate paperwork in play from the pension establishment, including standing instructions, the paperwork necessary for any ad hoc payments can be pretty minimal. It could be as simple as "please pay me in the amount of $X and treat it in accordance with my standing instructions". The trustees can then rely on everything else they have on file rather than needing to collect all the other information again.
Another issue that comes about with these sorts of paperwork gaps is ensuring the SMSF meets the minimum pension levels. One way to assist with this would be to establish a periodic monthly payment based on the minimum level. Some SMSFs do this, which makes it easier to satisfy the minimum and use a standing instruction to deal with the shortfall in June, requesting the trustees make a shortfall payment is due if the minimum has not been met by a specified date in June.
Ultimately, suppose we get the paperwork for pension payments right. In that case, it will make the ongoing monitoring and compliance of those pensions simpler and ensure that the SMSF is able to continue to claim its pension earnings exemption.
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