When I commence a Simple Account Based Pension or TRAP, is there a minimum and maximum amount I need to draw each year?
You will be able to choose the amount you take as a Simple Account Based Pension or TRAP each year subject to a minimum percentage drawdown of your account balance depending on your age as follows:
55 - 64 4%
65 - 74 5%
75 - 79 6%
80 - 84 7%
85 - 89 9%
90 - 94 11%
95+ 14%
In the Pension Commencement Year the percentage to be taken is applied to the Commencement Value of the Pension in that year (prorated if commenced part way during the year). Importantly each Financial Year the Pension Balance is recalculated on 1 July and the percentage is applied to the new balance on that date to determine the minimum amount that must be drawn in the relevant year. There is no maximum Pension Withdrawal that you can take for a Simple Account Based Pension. There is a maximum Pension Withdrawal amount of 10% of your Member Balance for a Transition to Retirement Simple Account Based Pension (TRAP).
Pension Drawdown Relief
For the 2011 Financial Year the Minimum Pension Drawdown required to be taken when you commence a Pension, has been reduced to an amount equal to half the minimum amounts detailed above.
For example for a person aged between 55 and 64, the Minimum Pension Drawdown was previously 4% per annum. Under the Pension Drawdown Relief changes the Minimum Pension Drawdown has been reduced to 2% per annum.
Can I take a lump sum after I commence a Simple Account Based Pension or TRAP?
There are no restrictions in accessing your capital when you commence a Simple Account Based Pension. In effect your SMSF is like an ATM where you can access any amount as a Lump Sum over and above your Pension Withdrawals. However with a Transition to Retirement Simple Account Based Pension (TRAP), you cannot take any Lump Sum Withdrawals whatsoever. You are limited to taking up to 10% of your Member Benefit each year as a Pension Payment only. Importantly however, to avoid this restriction you can convert from a TRAP to a Simple Account Based Pension once you retire enabling you to make Lump Sum Withdrawals in retirement.
When I commence a Simple Account Based Pension or TRAP, do I have to set up a new separate Bank Account for my SMSF?
No. The existing SMSF Bank Account will remain as it is and no new Bank Account is needed. The Simple Account Based Pension or TRAP is tracked by ESUPERFUND when preparing your SMSF Annual Compliance Requirements and is simply an Accounting Entry in your Fund.
When I commence a Simple Account Based Pension or TRAP, do I have to sell my Existing Investments?
No. Nothing changes when you commence a Simple Account Based Pension or TRAP. That is your investments stay as they are. All that happens is that a form is lodged with the ATO notifying the ATO that you will start accessing some of your super as a Pension Income Stream. Once the notification has been lodged with the ATO your SMSF Tax Rate on earnings and capital gains drops to 0%, making this the perfect taxation investment vehicle. From your perspective you will not notice anything different about your SMSF. That is your SMSF Bank Account and Investments will be exactly as they were before commencing the Simple Account Based Pension or TRAP. The only difference you will notice is that your Fund will no longer pay tax on earnings and capital gains!
What tax is payable on my Fund Earnings and Capital Gains after I commence a Simple Account Based Pension or TRAP?
As outlined above, once you commence a Simple Account Based Pension or TRAP, your Funds Tax Rate on earnings and capital gains drops to 0%, making your SMSF the perfect taxation investment.
What happens to my Franking Credits from Shares when I commence a Simple Account Based Pension or TRAP?
Given that your SMSF Tax Rate drops to 0% when you commence a Simple Account Based Pension or TRAP, you will no longer require pay tax on your Fund Earnings. This means that when you commence a Simple Account Based Pension or TRAP you are entitled to receive all Franking Credits on Australian Share Dividends in cash from the ATO. Franking Credits simply represent tax paid by Australian companies on dividends your Fund receives. Given that the company has paid 30% tax and your Fund tax rate in Pension Mode is 0%, the entire 30% tax paid is refundable to your Fund. Example: For every $10,000 received in fully franked dividend income, your Fund receives $4,285 as a cash refund from the ATO each and every year the dividends are paid, after you commence a Simple Account Based Pension or TRAP!
What about unrealized capital gains I have incurred at the time I switch to a Simple Account Based Pension or TRAP?
At the time you commence a Simple Account Based Pension or TRAP, your SMSF Investments may have unrealized capital gains. For example you may have acquired BHP Shares in say the year 2003 for a combined value of $100,000 and they may now be valued at $300,000. Once you commence a Simple Account Based Pension or TRAP you will never pay tax on the unrealized capital gains on your SMSF Investments. Accordingly in the example provided if you sell the BHP Shares the day after commencing the Simple Account Based Pension or TRAP you will not pay tax on the increase in value of $200,000. Interestingly if you sold the same shares the day before commencing a Simple Account Based Pension or TRAP you would pay tax on the capital gain.
Does this mean that I may never pay tax on the Capital Gains made on my SMSF Investments?
It certainly can mean this. The only requirement is that you sell your Investments after you commence a Simple Account Based Pension or TRAP.
Can I contribute to Super after I commence a Simple Account Based Pension or TRAP?
Yes. You can continue contributing to your SMSF even after you commence a Simple Account Based Pension or TRAP subject to the contribution rules which can be found here on our website. That is if you are under 65 you can contribute to your SMSF even after commencing a Simple Account Based Pension or TRAP with no work test required. If you are between 65 and 75 you can contribute to your SMSF even after commencing a Simple Account Based Pension or TRAP if you have worked for at least 40 hours in a period of not more than 30 consecutive days in the particular financial year.
What happens to additional contributions made to my SMSF after I commence a Simple Account Based Pension or TRAP?
Before you commence an Simple Account Based Pension or TRAP your SMSF Benefit is recorded in your "Accumulation Account". When you commence Simple Account Based Pension or TRAP your SMSF Benefit is recorded in your "Pension Account". These are simply Accounting Entries in your SMSF and do not require separate Bank Accounts for each Account Type. When you make contributions to your SMSF after you retire these contributions are allocated to your "Accumulation Account". This will mean that you will have two Accounts at the same time in this case, namely a "Pension Account" paying your Simple Account Based Pension or TRAP and an "Accumulation Account" which represents contributions made to your Fund after commencing the Simple Account Based Pension or TRAP. The difference between each Account is the "Pension Account" does not pay tax on earnings and capital gains but the "Accumulation Account" does pay tax on earnings and capital gains at up to15%.
Can I join my Accumulation Account and Pension Account if I decide to continue contributing to my SMSF after I commence a Simple Account Based Pension or TRAP?
Yes. Joining the Accumulation and Pension Accounts means that the Simple Account Based Pension or TRAP commenced must be "commuted" (ie stopped), and both the Accumulation and Pension Accounts joined. A new Simple Account Based Pension with your total benefit is then commenced. This process is administratively burdensome so it is usually recommended that this "joining process" occur only once per annum.
Do I still need to lodge annual compliance documentation for my SMSF once I commence a Simple Account Based Pension or TRAP given the SMSF pays no tax?
Yes. Even though your SMSF does not pay tax on earnings and capital gains after you commence a Simple Account Based Pension or TRAP it is still required to prepare Financial Statements and an Income Tax Return each year. Similarly your SMSF must be audited each year.
Do I pay tax on my Deductible and Employer Contributions after commencing a Simple Account Based Pension or TRAP?
Yes. The 15% contributions tax on Deductible and Employer Contributions into a SMSF continues to apply. Only the SMSF earnings and capital gains are tax free in your SMSF after commencing a Simple Account Based Pension or TRAP.
Do I pay tax on Pension Payments I receive from my Simple Account Based Pension or TRAP Withdrawals if I am Over 60?
No. From July 1, 2007 no tax is payable on any withdrawals made from your SMSF.
Do I pay tax on Lump Sum Withdrawals I receive from my Simple Account Based Pension (no lump sum withdrawals are allowed for a TRAP) if I am Over 60?
No. From July 1, 2007 no tax is payable on any withdrawals made from your SMSF.
Do I pay tax on Pension Payments I receive from my Simple Account Based Pension or TRAP if I am between 55 and 59?
Yes. Pension payments are taxable as normal income if you are between 55 and 59. However the portion that relates to your Exempt Super Benefit is not taxable. For example assume you have a super benefit of $500,000. Of this amount $400,000 is made up of Undeducted Contributions (ie 80% of your benefit). This means that 80% of your Simple Account Based Pension or TRAP Pension Payments are not taxed as UDC are considered an Exempt Super Benefit. So assuming you draw the minimum pension of 4% per annum on the $500,000 benefit, then of the $20,000 drawn only 20% is taxable, namely $4,000. In addition you are given a 15% rebate on the assessable pension drawn further reducing your tax bill. In the above example assuming you are on the top tax rate of 46.50% you would be assessable on $4,000 at 46.50% resulting in $1,860 on tax. Given you also receive a 15% rebate on the $4,000 assessable pension, that is $600, the tax bill is further reduced to only $1,260. This means you pay tax of only $1,260 on a $20,000 pension payment in the above example even though you are on the top marginal tax rate of 46.50%. In many cases the tax payable on a Simple Account Based Pension or TRAP before age 60 is acceptable given you pay no tax on your SMSF earnings and capital gains once the Simple Account Based Pension and TRAP is commenced.
Do I pay tax on Lump Sum Withdrawals I receive from my Simple Account Based Pension (no lump sum withdrawals are allowed for a TRAP) if I am between 55 and 59?
Maybe. Lump Sum withdrawals are deemed to be taken in the proportion of your SMSF Benefit Components. Essentially your SMSF Benefit is comprised of two components - an Exempt Super Benefit and a Taxable Super Benefit. The Exempt Benefit is essentially comprised of your Undeducted Contributions and Pre 1983 Benefit. The Taxable Component is essentially the difference. Any withdrawals are deemed to be taken proportionately. As an example assume you have a Super Benefit of $500,000 made up of $400,000 in UDC's. This means your Exempt Super Benefit percentage is 80% ($400,000/$500,000) and the Taxable Super Benefit is 20% ($100,000/$500,000). Assume you decide to access $50,000 as a lump sum withdrawal. An amount of 80% will be exempt and the balance will be taxable, namely 20% of the $50,000 or $10,000. The $10,000 assessable amount is then taxed as follows:
The First $160,000 in Withdrawals Tax Free
The Balance above $160,000 16.50%
In the above example as the $10,000 is less than $160,000 the lump sum withdrawn it is tax free. If you are contemplating large lump sum withdrawals before age 60 above $160,000, then it may be prudent to defer accessing larger lump sum withdrawals until age 60 when the lump sum withdrawals are tax free.
Can one Member be in Simple Account Based Pension or TRAP Mode and the other Member in Accumulation Mode?
Yes. Each Member's Benefit in a SMSF is tracked separately. This means that one Member can be in Simple Account Based Pension or TRAP Mode and the other Member in Accumulation Mode.
If one Member in my SMSF has commenced a Simple Account Based Pension or TRAP and the other Member is in Accumulation Phase what tax rate does my Fund pay?
In this case the Fund assets are prorated between the assets that are in "Pension Phase" and the assets that are in "Accumulation Phase". For example if the Fund has $1,000,000 in assets and the Member in "Accumulation Phase" has a benefit of $400,000 and the Member in "Pension Phase" has a benefit of $600,000, then 60% of the Fund's assets are considered to be in "Pension Phase" and 40% in "Accumulation Phase". This is important as the Earnings and Realised Capital Gains from the assets still in "Accumulation Phase" continue to be subject to 15% tax, whilst the Earnings and Realised Capital Gains from assets in "Pension Phase" are tax free. To determine the Earnings and Capital Gains in "Accumulation Phase" and "Pension Phase" the total Earnings and Realised Capital Gains made by the Fund are prorated. In the above example 60% of the Funds Earnings and Realised Capital Gains would be considered to be in "Pension Phase" and tax free and 40% would of the Funds Earnings and Realised Capital Gains would be considered to be in "Accumulation Phase" and subject to tax at 15%.
How do I commence a Simple Account Based Pension or TRAP with ESUPERFUND?
To commence a Simple Account Based Pension or TRAP simply visit the Simple Account Based Pension Application Form or TRAP Application Form.
What does it cost to commence a Simple Account Based Pension or TRAP with ESUPERFUND?
It is FREE to establish a Simple Account Based Pension or Transition to Retirement Simple Account Based Pension.
If I want to commence a Simple Account Based Pension or TRAP when should I notify ESUPERFUND?
In order to commence a Simple Account Based Pension or TRAP you need to provide the Market Value of your SMSF at the date the Simple Account Based Pension or TRAP is to commence. Logistically this means that you can only apply to establish a Simple Account Based Pension or TRAP after the intended setup date as this is the only way you can know what the Market Value of the SMSF is at the date of commencement. It is important to understand that the documentation provided to you will be dated the date you want to commence the Simple Account Based Pension or TRAP. This ensures that you do not lose any valuable taxation savings.
Example: Assume you want to commence a Simple Account Based Pension or TRAP on 1 July 2010. This means that you should complete our Online Pension Application Form sometime after this date. There is no set timeframe after the intended date you should Apply Online, however it should generally be within 30 days. Assuming you apply on say 10 July 2010, all documenmtation will be sent to you after this date, but it will be dated 1 July 2010 as this was your intended start date. This ensures that you do not lose any valuable taxation savings.