Jason Hurst, commentator and technical specialist for Knowledge Shop, said in a recent webinar that lodging a notice of intent (NOI) requires the SMSF member to provide the fund trustee with the correct paperwork stating they are planning to claim a deduction for personal contribution.
“That NOI needs to be provided before certain legislative deadlines. Traditionally, that will be either before the tax return is done, or the following 30 June, but there are some other deadlines in the legislation that say if any amount of that contribution has gone to a pension, then it is too late to launch that NOI,” Hurst said.
“People think they have made a contribution and want to claim that deduction. For example, they may have a $1 million balance and decide to move $900,000 into pension and leave some in accumulation and believe they will be able to claim a deduction, but unfortunately that’s not how the law works.”
If any money has gone into a pension, he said, the member loses the ability to lodge an NOI to claim that amount and subsequently cannot claim that on their return.
Hurst said this and many other factors must be considered when a member decides to start a pension – whether an account-based pension or a transition to retirement income stream.
“When commencing a pension, it’s important to look at TR2013/5 which provides a lot of good detail [about what is required.]”
“One of the first steps that must be undertaken when starting a pension is to remember that capital cannot be added to an existing pension. If you’re expecting multiple rollovers to come into an SMSF and you want those rollovers to end up in the same pension, you need to wait until all that capital is received.”
He continued there may be cases where a member might commence a pension before they receive a contribution, for example, if they want to quarantine some tax-free components.
“If a member has an accumulation interest and, for example, has $300,000 in accumulation that’s all taxable, and they’re about to make a contribution, they may choose to move that $300,000 of taxable [balance] into its own pension.”
“That would then make the accumulation balance zero. If they then make their non-concessional contributions into that accumulation balance and start a new pension, that newer, second pension will be tax-free.”
Deciding on the best strategy for commencing a pension, he said, comes back to calculating the tax components.
“For all super withdrawals, you need to apply the proportioning rules. If we have a super fund or a member interest that has 50 per cent taxable component and 50 per cent tax-free, and that member takes out some money, then the withdrawal will be in those same proportions.”
“That’s how a pension commencement would work.”
