Tips and traps with annual member statements
Member statements have many specific requirements and are a valuable source of data for planning purposes and strategy development. Therefore, it’s critical practitioners get the process right.
Over the years, I have seen member statements take many different forms. The majority are good and contain the information they should, while others are downright ugly and do not contain the necessary basic information to make them meaningful and of value.
Attributes of a member statement
There are a number of specific items that should be contained in a member statement, including personal details of the member so it clearly shows whose information is being provided.
The total member benefit should appear in two ways – as a split between taxable and tax-free components and also, the preservation values split between preserved, restricted non-preserved and unrestricted non-preserved.
A good member statement should detail contributions made during the year, the type of contributions, the income allocated, the taxes applied to the account and any insurance premiums deducted. This usually takes the form of an opening balance (being the closing balance of the previous year), items increasing the balance and items decreasing the balance, with a closing balance being the sum of the items above.
If the member has a binding death nomination in place, that should be recorded on the statement with the details of the beneficiary. If there is life insurance cover on the member in place, the value of the cover should be included in the death benefit value. The declared rate of return for the fund should also be shown.
Tax-free and taxable components
The tax-free and taxable components are terms introduced with the simplified super system. If the account is in accumulation, the components are reported as dollar amounts and, if in pension mode, they are reported as percentages.
As of 1 July 2007, the tax free had to be crystallised. The tax free predominately contained the un-deducted contributions before 1 July 2007 and the pre-1983 component. Since then, only non-concessional contributions are added to the tax-free component. The taxable component is calculated by taking the tax-free component from the member’s closing balance.
The taxable component usually consists of the crystallised taxable component as at 1 July 2007, plus employer and concessional member contributions plus earnings.
In pension accounts, the tax-free and taxable components are set, as a percentage, from the start of the pension. Pension payments and earnings are applied proportionally between the components.
The tax-free and taxable percentages will remain the same for the life of the pension. Lump sum withdrawals are applied under the proportional rule. The withdrawal reduces the tax-free and taxable components proportional to their value.
My client is over 60, what is the significance of the tax-free and taxable components?
It is true, benefits to members over 60 or death benefits to a spouse or financial dependant beneficiaries are tax free. However, what if the death benefit is to be paid to an adult child? The taxable component of the death benefit is taxed in the hands of the adult child at 15 per cent plus Medicare levy.
For conditions of release purposes, the member’s benefit can comprise of three categories – preserved, restricted non-preserved and unrestricted non-preserved. Unrestricted non-preserved money can be accessed at any time. The portion of benefit that is restricted non-preserved and preserved can only be accessed when certain conditions are met.
Besides rollovers from one superannuation fund to another, all contributions and earnings from 1 July 1999 are preserved. Employer eligible termination payments rolled into a super fund from 1 July 2004 are also preserved benefits. Restricted non-preserved benefits generally are employment related contributions, other than employer contributions, made before 1 July 2004.
The restricted non-preserved component cannot increase after 30 June 2004.
A member’s preserved and restricted non-preserved can only be accessed if a condition of release is satisfied. Under certain conditions of release, restrictions apply to the amount or type the benefit payment takes.
Why does my client have multiple member statements?
There are several possibilities why your client has more than one member statement. Perhaps they made a further contribution after the pension started. Once the pension has started, the balance cannot be added to. The additional contribution would have to be put into an accumulation account.
The only way a pension can be added to, is to commute the pension and then amalgamate the pension and accumulation accounts. If for any reason you don’t want to cease the original pension, the member would end up with multiple statements.
Possible reasons for not terminating the existing pension – maybe it was started before new Centrelink deeming rules applied or even when part of the pension was exempt. Commuting and starting a new pension means all current Centrelink rules apply. Another possibility could be that you want to keep the accounts separate because one or more accounts have a more favourable tax-free portion. Pension payments over the minimum required could be targeted at a specific account depending on the member’s age and the tax effectiveness for a death benefit.
Another reason for multiple member statements could be the client has a mixture of preserved and non-preserved money. Withdrawals from super are applied against unrestricted non-preserved firstly, secondly restricted non-preserved and finally preserved. Separating the preservation components can provide greater flexibility and access to the money.
As an advisor, what should I be looking for in a member statement?
Are the preservation components correct? If your client is over 65, has the administrator automatically transferred the funds to unrestricted non-preserved? If my client has met a condition of release and I have advised the administrator, has it been actioned to move the money to unrestricted non-preserved?
Check that the contributions are allocated correctly between concessional and non-concessional. If the administrator has allotted the contributions incorrectly, the client will be paying the wrong amount of tax and the tax-free and taxable components will be incorrect.
Check the member statement is showing details regarding the binding death nomination, if there is one in place.
Check any life insurance policy owned by the superannuation fund has been included in the death benefit balance. Also check that pension withdrawals are recorded when in pension mode.
Check investment income has been allocated to the accounts.
Cosette Woolley, director, Superannuation Services