Retirement means more than stopping work: experts
Meeting the definition of “retired” to start an income stream in an SMSF requires more than just stopping work, especially if you are a director, a shareholder or a sole trader, says a leading technical specialist.
Annie Dawson, senior SMSF technical specialist for Heffron, said in a recent Retirement Masterclass webinar that sole traders have potentially the hardest job of being able to show that they've ceased a gainful employment arrangement to access retirement income from an SMSF.
“They can really only sell the business or wind it down, cancel the ABN and prove there is no more income coming in,” Dawson said.
Lyn Formica, head of SMSF technical and education services at Heffron, said there are some common misunderstandings about meeting the retirement definition and the subsequent conditions of release for an income stream.
“Unless someone has met the full condition of release, they're not going to be eligible to start a retirement phase pension and their only opportunity is going to be a trust,” Formica said.
“Retirement has a specific meaning in the superannuation law. Our first starting point is that the person has to have at least reached their preservation age. For anyone born after the 1 July 1964, the preservation age is 60.”
Formica said the second step once they reach preservation age is to meet either of two definitions of retirement.
First, they must meet the permanent retirement definition, which includes three parts: reaching preservation age, having had a paid job or gainful employment position at some point in the past that has now ended, as well as the intention not to work for 10 or more hours per week again in the future.
“If a person has met all three parts of that test then that person qualifies as retired,” she said.
“The second definition is only for people who do slightly different things. Again, they need to reach age 60 and they have to have ended a paid job sometime after their 60th birthday.”
For the second definition of retirement, the person’s future work intentions are irrelevant, Formica said, but with both definitions, it is required that the person has ceased a gainful employment position.
However, for partners, directors and sole traders, the definition of retirement can be less clear-cut, said Dawson.
“For someone like a partner, it is sometimes a little bit difficult because for them to be genuinely ending a paid arrangement they need to stop being a partner and exit that partnership,” she said.
“They also need to dispose of their share of assets in the partnership and no longer be entitled to partnership distributions.”
Dawson added that directors can also qualify for having ceased an employment position or a genuine paid arrangement but they have to have resigned from the company and no longer receive director fees.
Sole traders have an even more onerous task in proving they have retired, Dawson said, as it can be hard to demonstrate their paid job has ceased.
“There are different examples, depending on what that employment arrangement is that we'd expect to see,” she said.
“One of those is if you were never paid for your personal exertion to begin with and it's quite common to see for example, in family businesses where they're being carried on through a family trust, for members of the family not to actually get paid a wage.”
Dawson said it can also be difficult if the person was living off drawings from the business, which may have gone to a beneficiary account, or if they got trust distributions, but were never actually paid a wage.
“In that case, we can't say that they've ceased a gainful employment arrangement because they weren't paid for their personal exertion. A similar issue is if you just get dividends because you're a shareholder, not because of your exertion,” she said.
“You also won't qualify as ceasing a gainful employment arrangement if you just change how you're getting paid. We'd have great concern, if someone left the office on Friday as a paid employee and came back on Monday as a contractor for the same company doing exactly the same thing.”
She added that similarly, a changing role won't qualify, and there would also be concerns if there was no remuneration tab, but the person kept turning up and doing the activities.
“If you're a sole trader, and you want to argue that you've ceased a gainful employment arrangement, you won't be able to qualify if you simply pay someone else to come in and run the business for you because the gainful employment is with you, the sole trader, you're still carrying on the business it’s just that you're hiring people to work for you,” Dawson said.
