- Financial Advisory
- Credit Advisory
- Estate Planning
- SWU Online Invest
Dec 09 , 2022
If you’re thinking of starting an income stream in your SMSF, otherwise known as a pension, there are three important things to get right before you get it going.
1. Meeting a condition of release
The first is to meet a condition of release, then decide on the type of income stream that suits you and finally work out the amount you wish to receive.
How do I meet a condition of release?
Commencing an income stream means you must have met a condition of release.
For most people, this includes retirement, reaching preservation age, or once you’re at least 65. But if you are permanently disabled or your partner dies, then you may become entitled to an income stream at an earlier time.
‘Retirement’ usually means when you have permanently ceased work, but for superannuation purposes, it can also depend on your age and how you ceased employment. If you are between your preservation age, currently 57, and 60, retirement is when you have ceased employment or self-employment and, at that time, don’t intend to go back to work for more than 10 hours each week. This does not prevent you from returning to work if you need to.
Once you reach 60, retirement is when you have ceased at least one employment or self-employment. Even if you have more than one job or stop and start a job after reaching 60 you will be treated as retired once one of those jobs cease.
If you are 65 or older, you meet a condition of release and there are no restrictions on when you can access your superannuation as a lump sum or income stream.
Other times you are considered to meet a condition of release is if you happen to become permanently disabled at any age. Permanent disability means you are unable to work in a job for which you are qualified by education, training or experience.
If your spouse dies, you may be entitled to receive a superannuation benefit on their death. The benefit you receive may be an income stream or a lump sum which you can use to start an income stream.
There are many other conditions of release, however, most of these do not relate to paying income streams from your SMSF.
2. What type of income stream can I start in my SMSF?
There are two types of income streams you can start from your SMSF. The first is an account-based income stream and the second is a transition to retirement income stream (TRIS).
Account based income streams
Account based income streams are calculated by using some or all your superannuation balance at the time it commences and thereafter at the beginning of each financial year. There is a minimum payment required to be paid each year, but there is no maximum to what you can take out. The minimum amount you must receive each year is based on your age as a percentage of its opening balance. If the account-based income stream is paid for part of the year it is prorated on a daily basis.
The amount you use to commence an account-based income stream is measured against your transfer balance cap, which for most people is $1.6 million. If the total value of your income streams in retirement phase is greater than your transfer balance cap, you may have to move the excess plus a penalty tax to accumulation phase in your fund or withdraw it as a lump sum. The income on investments used to support income streams in retirement phase is tax exempt.
After you reach 60, your account-based income stream is totally tax free to you. However, if you are under 60 the taxable proportion of the income stream, if permitted under the rules, is taxed at personal tax rates less a 15% tax offset.
Transition to retirement income streams
A transition to retirement income stream (TRIS) is calculated in the same way as an account-based income stream. A minimum amount is required to be taken each financial year, but they do have some additional restrictions. The main benefit is that a TRIS can be commence from your preservation age and you don’t have to retire.
Until you retire or reach 65, whichever happens first, you are required to take a minimum amount equal to 4% of the account balance just like an account-based income stream. However, there is a maximum that you can take which is limited to 10% of the opening balance when the TRIS commences or the balance on 1 July in each financial year after that.
The commencing value of a TRIS is not measured against your transfer balance cap, however, the income on investments that are used to support the TRIS are taxed at 15%. But once you retire or reach 65 your TRIS will be measured against your transfer balance cap.
If you are between your preservation age and 60 the taxable component of the TRIS, you receive is taxed at personal rates less a 15% tax offset. However, once you reach 60 the TRIS paid to you is totally tax free.
3. How much can I use to start the income stream?
You don’t have to use all your superannuation balance to commence an income stream and sometimes the rules may not allow it if you have more than $1.7 million because of your transfer balance cap.
To work out your accumulation balance in the fund you will need to value all investments of your SMSF to ensure they are ‘current’ under the ATO’s ruling. The ‘current’ value of an investment can be its value today or at the beginning of the financial year. It just depends on how easy it is to get the value or whether there has been a substantial change to it since the last valuation.
Most assets are reasonably easy to value such as bank accounts, shares listed on the stock exchange and units in public unit trusts. Other investments may be harder to value like real estate, private companies and trusts as well as artworks and collectibles, if the fund has any. With the more difficult to value investments the ATO is willing to accept a value that reflects a fair value negotiated in an open market between parties acting at arm’s length. Sounds technical, I know, but a reasonable value supported by information on how the value was determined is what the ATO is after.
Getting it right
So, if you are thinking of starting an income stream from your SMSF these three important things are what you need to do before you receive any payment. Make sure you get them right at the start to avoid any compliance issues.