Lump sum payments

Everything an SMSF trustee should know about compliance.

There can be many reasons why a self-managed superannuation fund needs to make a lump sum payment. It could be as a part of an SMSF re-contribution strategy, or it could be that a member it requires one large amount for such things as a new car or an big overseas holiday.

When a lump sum payment is required by a member there needs to be correspondence and resolutions to support the payment. In addition a member must have met a condition of release so that they can have non-preserved benefits in their account paid as a lump sum payment.

Lump sum payments can be made from a member's account that is in accumulation phase and also from a member's account that is in pension phase. If a member is in pension phase, unless they are receiving a transition to retirement pension, they should have already met a condition of release and this would not need to be addressed when requesting a lump sum.

Care needs to be taken with lump sum payments from a superannuation fund to a member who is under 60. Payments up to the lump sum threshold, which is increased annually each year in line with increases in AWOTE in $5,000 increments, are tax-free and any excess is taxed at 16.5 per cent.

The steps that need to be taken and documentation required for each of these lump sum payments are as follows:

Lump sum payment in accumulation phase

  1. A letter from the member stating that they have met a condition of release and they wish to withdraw or a lump sum payment.
  2. Resolution needs to be passed by the trustees acknowledging receipt of the lump sum request and authorising the payment.
  3. A letter from the trustees to the member acknowledging receipt of the request and confirming the payment will be made.
  4. Payment made to the member's bank account.

Lump sum payment in pension phase

  1. A letter from the member stating that they require a lump sum payment as part of their pension.
  2. A letter from the trustees acknowledging receipt of the request and confirming the payment will be made.
  3. Payment made to the member's bank account.

Starting an account based pension

The documentation required for an Account Based Pension is very similar to that required for a TTR pension. The main differences being:

  • there are no maximum limits on the amount of pension that can be taken,
  • a condition of release must have been met for an ABP to be started.

Just as was the case with a TTR pension the documentation required is a series of letters and resolutions by the member and trustees as follows:

  1. A letter from the member to the trustees stating that they have met a condition of release and that they want to commence an ABP,
  2. A resolution passed by the trustees detailing the member's request and that the ABP pension will we paid,
  3. A letter from the trustees back to the member acknowledging receipt of the request, a statement that the ABP will commence, and that a TFN declaration form was enclosed for the member to complete,
  4. The member completes the TFN declaration, and
  5. In some cases the super fund sometimes needs to register for PAYG Withholding tax. This will involve the trustees in completing a BAS once a quarter and forwarding tax withheld from the TTR pension to the ATO.

Just as was the case with a TTR pension when a member who is under 60 receives an ABP they will pay tax on the taxable portion of the pension received. This taxable portion is calculated at the start of the pension based on the percentage held in the member's accumulation account of tax free super benefits. The tax payable on the assessable amount of the pension received will also receive a 15 per cent tax reduction in the form of a tax offset.

The super fund will pay no tax on the income generated to fund the pension payable. If the value of the pension accounts is below the pension transfer limit the trustees of the fund will can choose to either segregate the assets of the fund between the member's accounts in pension phase and those in accumulation phase, or use the proportional method and obtain an actuarial certificate.


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