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Member Accounts


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Member Accumulation Account and Pension Account

It is important to understand that every Member has two accounts in a SMSF.  These Accounts are an "Accumulation Account" and a "Pension Account" (more about Pensions can be found here).  These accounts are simply "Accounting Accounts" and not actual physical bank accounts.  Accordingly whilst your actual Super Benefit will be invested in a range of assets including cash and shares, ESUPERFUND will allocate your Super Benefit between your "Accumulation Account" and a "Pension Account" in the accounting records of your SMSF. 

 
 
Allocating Contributions and Rollovers to the Member Accumulation and Pension Accounts

All contributions and rollovers made to your SMSF (via the Transaction Bank Account) will automatically be allocated to your "Accumulation Account".  When you commence a Pension in your SMSF, your Super Benefit is transferred from your "Accumulation Account" and recorded in your "Pension Account".  Unlike Retail Funds, after commencing a Pension a SMSF can continue to accept contributions (subject to the normal contributions rules) and rollovers.  These contributions and rollovers continue to be made to the Transaction Bank Account setup for your SMSF.  When you make additional contributions and rollovers to your SMSF these contributions and rollovers are allocated to your "Accumulation Account" even if you have commenced a Pension.  They cannot be added to your "Pension Account" directly. 

Example:

Barney is 56 and commences a SMSF.  He rolls over his Super Benefit from his current Superfund totalling $190,000.  Barney's spouse Lisa is also a Member of the SMSF and makes a personal Non Concessional Contribution into the SMSF totalling $100,000.  The rollover and contributions are made to the same Transaction Bank Account established for their SMSF by ESUPERFUND.  An amount of $250,000 is in turn invested in shares and the balance of $40,000 is left in cash.

In the above example ESUPERFUND will allocate the rollover of $190,000 to Barney's Accumulation Account.  Similarly ESUPERFUND will allocate the contribution made by Barney's Spouse Lisa of $100,000 to her Accumulation Account.  Importantly these are "Accounting Entries" only.  This means that the actual investments remain in cash and shares as detailed above.

Barney in turn decides to commence a Simple Account Based Pension (SABP).  In this case ESUPERFUND will transfer the balance from his Accumulation Account to his Pension Account.  After the commencement of the Pension, Barney makes a personal contribution into the SMSF of $10,000 which Barney leaves in the Transaction Bank Account which now has a balance of $50,000.  The personal contribution of $10,000 will be allocated to Barney's Accumulation Account.  At that time the SMSF will look as follows:

 

SMSF Assets $
SMSF Shares $250,000
SMSF Cash $50,000
Total $300,000

 

Member Accounts $
Barney - Pension Account $190,000
Barney - Accumulation Account $10,000
Lisa - Pension Account $0
Lisa - Accumulation Account $100,000
Total $300,000

 

 
 
Tracking Member Accumulation and Pension Accounts

ESUPERFUND tracks each Members "Accumulation Account" and "Pension Account" as part of the annual compliance process.  No action is requited from you.  ESUPERFUND will determine what portion of the SMSF belongs to each Member and in turn what portion of the Member Account belongs to each respective Members Accumulation and Pension Accounts on a proportional basis.  This percentage is constantly changing during the financial year and is tracked by ESUPERFUND.  Importantly as part of the annual compliance process ESUPERFUND will prepare a Member Statement for each Member of the SMSF.  This is a legal requirement.  The Member Statements are included in the annual compliance documents completed for clients and must be approved by you as the SMSF Trustee before lodgement with the ATO.

Example:

In our earlier example Barney has contributed $200,000 or 66% of the monies to the SMSF so he will own 66% of the SMSF assets.  Barney's Spouse Lisa has contributed $100,000 to the SMSF or 33% of the monies so she will own 33% of the SMSF assets.  Their Pension and Accumulation Accounts are further tracked on a proportional basis as follows:  

 

Member Accounts $ %
Barney - Pension Account $190,000 63.33%
Barney - Accumulation Account $10,000 3.33%
Lisa - Pension Account $0 0%
Lisa - Accumulation Account $100,000 33.33%
Total $300,000 100.00%

 

 
 
Income and Realised Capital Gains allocated to Member Pension and Accumulation Accounts

As part of the annual compliance process ESUPERFUND will determine the income and realised capital gains made during the financial year by the SMSF.  These are in turn allocated to each Members Pension and Accumulation Accounts on a proportional basis.  Income includes dividends, interest and rent from property.  Realised capital gains are gains from the sale of assets like shares and property.  It is important to remember that unrealised capital gains (ie from assets that have appreciated in value but have not been sold) are never subject to tax until sold.

Example:

In our earlier example assume Barney's SMSF has derived interest income of $2,000 for the financial year and sold shares held for greater than 12 months generating a realised capital gain of $20,000.  The SMSF also sold shares held for less than 12 months generating a realised capital gain of $10,000.  The income and realised capital gains are in turn allocated to each Members Account on a proportional basis as follows:  

 

Member Accounts
% Income Capital Gains
> 12 Months
Capital Gains
< 12 Months
Barney - Pension Account 63.33% $1,267 $12,667 $6,334
Barney - Accumulation Account 3.33% $67 $667 $333
Lisa - Pension Account 0% $0 $0 $0
Lisa - Accumulation Account 33.33% $666 $6,666 $3,333
Total 100.00% $2,000 $20,000 $10,000

 

 
 
Tax Payable on Income and Realised Capital Gains allocated to a Members Accumulation Account

ESUPERFUND will allocate the SMSF income and realised capital gains derived by the SMSF for a financial year to each Members Pension and Accumulation Account on a proportional basis.  The tax rate that applies to the income and realised capital gains allocated to the Members "Accumulation Account" will be taxed as detailed below:

Income will be subject to tax at 15% 
Realised Capital Gains will be subject to tax at 15% if the asset is held less than 12 months
Realised Capital Gains will be subject to tax at 10% if the asset is held more than 12 months

Example:

In the above example tax will be paid as detailed below. 

The $67 in income allocated to Barney's "Accumulation Account" will be taxed at 15%.
The $666 in income allocated to Lisa's "Accumulation Account" will be taxed at 15%.
The $667 in capital gains held for more than 12 months allocated to Barney's "Accumulation Account" will be taxed at 10%.
The $333 in capital gains held for less than 12 months allocated to Barney's "Accumulation Account" will be taxed at 15%.
The $6,666 in capital gains held for more than 12 months allocated to Lisa's "Accumulation Account" will be taxed at 10%.
The $3,333 in capital gains held for less than 12 months allocated to Lisa's "Accumulation Account" will be taxed at 15%.

 
 
Tax Payable on Income and Realised Capital Gains allocated to a Member Pension Account

Conversely the tax rate that applies to the income and realised capital gains allocated to Barney's "Pension Account" will be taxed is 0%. 

Example:

In the above example tax will be paid as detailed below. 

The $1,267 in income allocated to Barney's "Pension Account" will be taxed at 0%.
The $12,667 in capital gains held for more than 12 months allocated to Barney's "Pension Account" will be taxed at 0%.
The $6,334 in capital gains held for less than 12 months allocated to Barney's "Pension Account" will be taxed at 0%.
 Lisa has a nil balance in her Pension Account and no tax is therefore applicable.

Monitoring Accumulation and Pension Accounts

If you make significant Rollovers or Contributions to your SMSF after commencing a Pension they will sit outside the Pension in the Member's "Accumulation Account" as detailed above.  This will mean that earnings on this part of your Super Benefit will continue to be subject to Tax.  In this case it may be appropriate to commence a second Pension with your "Accumulation Account" balance to continue to ensure your Super Benefit earnings continue to be completely tax free.  We do caution however that additional Pensions should only be commenced when there is a significant benefit in the Members "Accumulation Account" (eg $50,000 or more).  Where you are making smaller contributions (eg from your monthly employer super contributions) you should not commence a separate Pension with each of these amounts as this becomes administratively burdensome.  You should note that ESUPERFUND still provides you with a solution for these contributions, to ensure even these smaller amounts are consolidated into your Pension via our annual "merging" of the "Accumulation" and "Pension" Accounts.

That is as part of the annual compliance preparation process ESUPERFUND will review each Members "Accumulation" and "Pension" Account balance.  Where the Member has a balance in their "Accumulation Account" ESUPERFUND will automatically merge the balance in the "Accumulation" Account with the Members "Pension" Account.  Merging the "Accumulation" and "Pension" Accounts means that the Pension commenced must be "commuted" (ie stopped), and both the "Accumulation" and "Pension" Accounts merged.  A new Pension with the Members total Super Benefit is then commenced.  This process is administratively burdensome so it is usually recommended that this "merging process" occurs only once per annum on 1 July.  The great news is that ESUPERFUND will automatically merge these accounts to ensure your Super Benefit retains its tax free status.  This service is FREE!       

Example:

In the above example ESUPERFUND will automatically "merge" Barney's Pension and Accumulation Account balances together on 1 July to ensure that he pays no tax on his Accumulation Account balance which may build up and become sizeable over time.  This service is absolutely FREE providing thousands of dollars in tax saving benefits to clients.

This "merge" process is not relevant for Lisa in the above example, as she has no balance in her Pension Account.  If she wishes to convert her benefit in the Accumulation Account to the Pension Account and hence enjoy tax free income she will need to apply with ESUPERFUND to commence a Pension when she is eligible.

Timing of Realised Capital Gains is important

As detailed above the tax rate on realized capital gains relating to a Members Pension Account is 0%.  Importantly any accumulated unrealized capital gains up to the time of commencing the Pension will also never attract tax if sold after the Member commences a Pension.

Example:

Assume you are the sole Member of a SMSF.  The SMSF acquired a number of Blue Chip Shares in 2003 for $600,000 and they are now valued at $1,000,000.  You have recently turned 60 and decide to commence a Simple Account Based Pension.  Accordingly if you sell the Blue Chip Shares the day after commencing the Pension (when your entire Super Benefit is in the Pension Account) you will not pay tax on the increase in value of $400,000.  Interestingly if you sold the same shares the day before commencing the Pension you would pay tax on the entire capital gain of $400,000 (ie $40,000 in tax).  The timing of the sale in the example results in a tax saving of $40,000.

Timing of Income is important

As detailed above the tax rate on income relating to a Members Pension Account is 0%.  This means that income paid will be tax free if that income is received after the Member commences a Pension.  This is the case even if the income relates to an Investment made before the Pension commences. 

Example:

Assume you are the sole member of a SMSF and the SMSF has invested your total Super Benefit of $1,000,000 in a 1 Year Term Deposit at 6.00%.  Ten months into the Term Deposit you decide to commence a Pension.  The Interest is subsequently paid two months later at the maturity of the Term Deposit.  In this case the Interest received of $60,000 would be completely tax free as it was paid after the Pension commenced!  Interestingly if you commenced the Pension the day after the Term Deposit matured, meaning the $60,000 in interest was paid the day before commencing the Pension you would pay tax on the entire interest of $60,000 (ie $9,000 in tax).  The timing of the Pension Commencement in the example results in a tax saving of $9,000! 

 
 
Refund of Franking Credits

As detailed above because there is no tax payable on SMSF earnings (including dividends) when all Member Benefits are in the Pension Account, your SMSF is entitled to receive any franking credits on Australian Share dividends in cash from the ATO.  Franking Credits simply represent tax paid by Australian companies on dividends your SMSF is receiving.  Given that the company has paid 30% tax and your SMSF tax rate on dividends is Nil when all SMSF Members have commenced a Pension, the entire 30% tax paid is refundable to your SMSF.

Example:

For every $10,000 received in fully franked dividend income, your SMSF receives $4,285 as a cash Refund from the ATO each and every year the dividends are paid, when all Member Benefits are in the Pension Account.

Unrealised Capital Gains

It is important to remember that unrealised capital gains (ie from assets that have appreciated in value but have not been sold) are never subject to tax until sold.  You will however notice when you receive your annual compliance documentation from ESUPERFUND that unrealised capital gains on assets are recorded as income in the SMSF Income Statement.  This is a legal reporting requirement as all assets of the SMSF must be revalued to market value at financial year end in order to accurately report each Members Super Benefit in the SMSF.  Notwithstanding that the unrealised capital gains appear in your SMSF Income Statement they are excluded from the SMSF Tax Return and not subject to tax until the asset is sold and the capital gain realised.

 
 
Tax Savings when you commence a Pension

To see the potential Tax Savings associated with commencing a Pension view our Case Study here.  To demonstrate the Tax Savings of commencing a Pension using your own personal circumstances click here to participate in our Interactive Pension Analysis and see how much tax you can save.