The best way for SMSF trustees to document the commencement and terms of a pension from a SMSF is for:
- the SMSF trustees and the member to execute an agreement setting out all of the terms of the pension;
- the SMSF trustees to record their decision to enter into the agreement in minutes; and
- the SMSF trustees to provide the member with a product disclosure statement (PDS).
This article examines:
- the operational benefits of these documents; and
- the compliance issues that require these documents.
Benefits of a properly documented pension arrangement
A properly documented pension arrangement provides the following benefits to SMSF members and trustees:
The pension documents form the evidence for the fund's auditor and the ATO that a pension is in place and when it began. Pension documents will clearly evidence:
- the fact that the pension commenced in accordance with the pension payment standards; and
- when the assets supporting the pension became income tax exempt.
To qualify for concessional tax treatment, a pension must meet the definition of pension under the superannuation law1. A pension meets the definition if:
- the pension documents have been drafted in contemplation of the pension payment standards set in the superannuation law; and
- the trustees comply with the terms in the pension documents.
To comply with superannuation law, the SMSF trustees must make certain information and documents (which are usually set out in a PDS) available to the member. Accordingly, pension documents that include a PDS help the trustees to comply with this obligation.
Clear pension documents that have been prepared in contemplation of the pension payment standards and which are in plain English act as a set of guidelines for the trustees to follow when administering the pension.
Clear pension documents that are in plain English and include a PDS enable the member to understand the terms and nature of the pension arrangement. This naturally reduces the number of questions that the member may need to ask his or her advisers before deciding to start receiving a pension.
Pension documents that contain clear provisions about how the pension is to be administered after the death of the member will reduce the likelihood that claims will be made by the member's dependants after the member dies. A common pension administration issue that is avoided by good documents is whether or not the pension will revert to one or more dependents — and if so, which ones.
Well drafted pension documents — even though they might attract initial establishment costs — will avoid the need for future costs to be incurred by:
- members seeking advice about their rights and obligations under, or in relation to, the pension;
- trustees seeking advice on how they should administer the pension both during the lifetime of the member and after the member's death;
- trustees responding to claims made by dependents claiming reversionary rights to the member's pension after the member has died; and
- trustees responding to queries from the fund's auditor and to audits by the ATO and rectifying any non-compliance.
Technical matters: Why are these documents needed?
The SIS Regs states that, for a benefit paid from a SMSF to qualify as a pension and attract tax concessional treatment, it must meet the pension standards referred to in regulation 1.06(1)(a) and (b) of the SIS Regs.
Certain prescribed information must be made available to members of SMSFs. Regulation 4.01 of the SIS Regs provides that prescribed information for the purposes of section 52(2)(h) is set out in section 1017C(2) of the Corporations Act 2001.
This requires trustees to provide a member with a PDS or to make information and documents available to the member so that the member can make an informed decision about participating in the fund — including starting a pension. Pension documents must include a PDS that specifically provides the member with the sufficient information about the pension so that he or she can understand, and make an informed judgement about whether or not to start the, pension. If a pension's documents do not contain a PDS, then it is very unlikely that the member will have available to him or her all of the information and documents that the member requires to make an informed decision about the pension.
Documentation standards and ATO expectations
At the very least, trustees must comply with the requirements of the superannuation law to retain minutes of the meeting at which the trustees resolved to start paying a member a pension2. It is an offence for trustees to fail to retain any records that the superannuation law requires the trustees to retain3 — trustees facing penalties (in the worst case) and costs associated with rectifying non-compliances (in the best case).
The ATO's view, as expressed by the Assistant Commissioner, Superannuation, is that good-record keeping is something that the ATO will focus on "Trustees must keep some records for a minimum of 5 years and some for a minimum of 10 years"4.
The ATO recently raised this issue again — reminding SMSF trustees and their advisors that, as part of complying with these obligations, trustees must ensure their fund's minutes record a member's request to commence a pension 5.
What documents are needed?
As a matter of good record keeping, compliance and clarity, SMSF pension documents should include:
- Member request: a request from the SMSF member to the SMSF trustees to start a pension, which record the member's wishes with respect to the timing of payments and whether the member wishes for the pension to be paid to one or more dependants after the member's death;
- Minutes: minutes of the SMSF trustees' decision to pay the pension to the member;
- Agreement: all of the terms of the pension as agreed between the member and the SMSF trustees, including: how regular payments are to be made, how the pension may be varied, what limitations apply to the pension (such as in the case of a transition to retirement pension) and what happens to the pension after the member's death; and
- PDS: disclosure by the SMSF trustees to the member all of the matters the member should be aware of before commencing the pension in accordance with the disclosure requirements under the Corporations Act 2001.
Questions & Further Information
For questions or more information about SMSFs, pensions and documents call Maddocks in Melbourne (03 9288 0666) and ask for a member of the Maddocks Superannuation Team.