The commencement of an income stream (pension) should be appropriately documented. The Australian Taxation Office requires documented evidence of the commencement of an income stream for it to be effective. This ensures that the SMSF can exempt income from current pension assets, i.e. income exempt from income tax and capital gains when in retirement phase pension.
On commencement of an income stream, the capital that will be used to support that income stream is determined, and the taxable and tax-free components will be proportionate to the accumulation balance just before commencement, if the whole of the accumulation balance is not used to commence the income stream. The capital that will be used to support the income stream must be calculated by determined the market value of all assets on the commencement day of the income stream.
No addition to income stream account
Once an income stream is commenced for a member, no additional capital can be added to the income stream account. For example, a contribution received after the income stream is commenced cannot be added to the income stream account.
A new income stream may be commenced.
Multiple income stream account
If you have contributions or rollovers to your SMSF after commencing an income stream, these amounts remain in accumulation phase. The amounts in accumulation phase may be transferred to a retirement phase income stream. A member in a SMSF may have multiple income stream account.
Note: generally, small amounts of regular contributions should not be transferred to commence separate income streams as this will be an administrative and reporting burden, and should be accumulated to a larger amount before commencing an income stream. If there are no further contributions, it may be appropriate for a small accumulation balance to be transferred to commence an income stream for the entire member balance to be in retirement phase and tax free.
ATO reporting
There are also transfer balance account report (TBAR) reporting requirements to the ATO as part of the event-based reporting framework. This is in addition to the annual tax return. For certain SMSF, the TBAR reporting frequency is quarterly. This means that that for crertain SMSF, the report is due 28 days after the end of the quarter in which the income stream commenced.
Getting it done
For existing clients - please contact us to have us prepare the commencement documentation and ATO reporting.
To have Superannuation Accounting Services prepare the commencement documentation and ATO reporting for you, download the Commencing a Pension form or contact us on 1300 735 254 to obtain one, complete it and return to us.
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