Timing of an NOI critical when using a contribution to start a pension: education specialist
Starting a pension using part or all of a contribution needs to have a notice of intent (NOI) approved by the trustee before 30 June of the following year, an education specialist has said.
Mark Ellem, head of education for Accurium, said in a recent webinar that it is also contingent on whether the member has lodged their tax return on time.
“Keep in mind the NOI will not be valid, where if the time you gave the notice, the trustee has been going to pay a superannuation income stream, a pension, based in whole or part of the contribution,” Ellem said.
“It doesn’t matter that you may not have used all the contribution to start the pension. If you haven’t provided the NOI at that time, any notice of intent provided after the commencement of the pension is invalid.”
Ellem continued that members often argue that they have put $20,000 into their fund and claim it as a deduction, and they started a pension for less than their accumulation balance.
“They tell you that $20,000 is still sitting in the queue and none of it has been used to start the pension so the NOI is valid,” he said.
“Nice try. But no, that’s not how the rule works. It’s deemed that part of that contribution will be in the starting commencement value of that pension. It’s important to get the NOI in before. The other thing is to get that acknowledgement back as well. Not only does the notice need to be provided, but you need the acknowledgement because if you look at the rules regarding deductibility of personal contributions, it’s all about receiving the acknowledgement from the trustee.”
Ellem continued that from an SMSF perspective and from an accountant administrator approach, it is important to ensure there is also an allowance made for the 15 per cent contributions tax.
“Now, I know there’s no such thing as contribution tax. It’s just a term. All accessible contributions are included with other accessible income of the fund. You work out taxable income, and the fund pays tax at 15 per cent,” he said.
“But the term is common and on most accounting packages and admin platforms, you’ll see in the member’s accounts, if there was, for example, $1,000 worth of accessible contribution received, you’ll see contributions tax deducted. Make sure that you make that adjustment when working out the commencement value of the pension.”
Another thing to be aware of when dealing with an SMSF is that many of the documents required to start a pension are automatically generated out of the admin platform.
“You’re processing financial statements after 30 June, and the system sees you’ve made a personal contribution and it’s been included as accessible income. You find a deduction for it, and generate the NOI and the trustee acknowledgement,” he said.
“But the pension started six months ago, too late. So, not only consider when you’re starting the pension that the documents are done based on what’s actually happening and making sure they’re on a prospective basis.”
He added that it is also necessary to look back for the current year to see if there are any contributions that have been made by the individual member, who may want to claim a tax deduction.
“You need to do the NOI and trust acknowledgement then, not later,” he said.
“The other thing to look at is if down the track the fund comes out of the ATO’s lucky gift barrel for an audit, or the individual does for a personal return, and the ATO asks for a copy of the NOI and the trustee acknowledgement. Sure, you can give them that, but check what date is on them and ensure they are updated prior to the start of the pension.”