Poor documentation putting entitlements at risk, lawyer warns

Poor documentation putting entitlements at risk, lawyer warns

The constant demand by SMSF trustees for lower administration costs and the shortcuts used by their advisers to achieve this can have significant tax consequences, including on pension entitlements, an industry law firm has warned.

Townsend Lawyers principal Peter Townsend said his legal firm continues to be surprised by the poor quality of documentation relating to SMSF pensions, including no or defective pension applications and agreements, no or defective trustee minutes, and trust deeds that fail to empower the trustee to pay account-based or transition to retirement pensions.

Mr Townsend said one of the common problems among practitioners and trustees is the mistaken belief the creation of pension documentation is just ‘form-filling’, which can be done by anyone and should cost nothing.

This dismissive attitude, he said, can “land all concerned in plenty of hot water”.

“Tax Office Ruing TR 2013/5 makes clear that pension entitlements must be locked in from a legal perspective. If the pension documents are not correct and in place the pension may not have been effectively created, in which case the fund may still be in accumulation phase with the accompanying tax consequences,” said Mr Townsend.

Without documents that adequately evidence the terms and conditions of the income stream, the agreement between trustee and member and the fact the agreement complies with the governing rules of the fund and the SIS regulations, Mr Townsend said the pension cannot be proven to have commenced.

“It is advisable for pension documents to be prepared before the pension commences, with the opening balance confirmed later if necessary once the fund’s accounts have been finalised for the relevant period,” he said.

“If the pension has been paid for a number of years the commissioner might have a field day with the additional tax payable by both the fund and the member.”

Another common error, he said, is not bothering to check what the trust deed says.

“As with almost every aspect of the administration of an SMSF, it is crucial to check the trust deed and then follow it to the letter as comprehensively as possible,” he said.

“If there are problems with the contents of the trust deed it may be possible to amend the deed or governing rules.”

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Poor documentation putting entitlements at risk, lawyer warns
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