SMSF pension compliance: The five critical documents

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Which documents are critical to SMSF pension compliance?

SMSF trustees and industry practitioners have long been at odds about which compliance documents members require when commencing an income stream, says national manager of training and advice for Topdocs, Michael Harkin.

“Not having the right documents could well mean the new income stream recipient was not entitled to payments which, in itself, would impact adversely on the taxable income of both the fund and the individual in question,” he says.

The five key compliance documents are:

  1. Trust deed

The main document outlining the rules which govern the operation of the SMSF. In preparation for a member commencing an income stream, the SMSF trust deed must be reviewed to ensure the trustee has the authority to start paying a pension and that the rules of the deed meet superannuation regulation requirements.

“Some advisers are of the belief that having detailed pension authority in the trust deed is unnecessary and that the rules set down in superannuation legislation provide this,” says Harkin. “This is not the case and it is vital that the authority is clearly stated in the deed.”

  1. Member application

The member must formally request that the trustee pay an income stream from the SMSF.

This written application is required to initiate the process, part evidence that the pension has been correctly established. The application can also nominate a reversionary pensioner - the person who will receive the income stream in the event of the member dying.

  1. Trustee resolution

These are the minutes of the meeting of either the fund trustees or the directors of the corporate trustee. The meeting should consider:

  • Whether the member is permitted to access his or her superannuation (i.e. has met a ‘condition of release’)
  • The fund's ability to make the payments
  • Details of the type of pension
  • Commencement date of the income stream
  • The level of member benefits funding the pension
  • A review of the fund investment strategy

Trustee resolutions should also formally accept the reversionary pension nomination to ensure there are no problems in this regard at a later date, says Harkin.

  1. Pension agreement

This is a formal agreement which sets out the terms of the pension, legislative restrictions and information such as the regularity of payments and the minimum and, if applicable, maximum pension payment amounts for the first year.

The agreement should include additional detail such as the treatment of the pension amount in the event of the recipient dying and whether a reversionary pension or alternative beneficiary nomination has been provided for. Also included in the agreement are the rules regarding pension termination, either by the trustee, or by the member.

 “Without such rules and provisions in the pension documentation, a degree of certainty as to procedural issues will be lost. In the event of a dispute between members, interpretations of applicable rules between the parties could end up being quite divergent.”

  1. Product disclosure statement

When it comes to commencing payment of an income stream, most disagreement revolves around the need for a Product Disclosure Statement (PDS).

In a nutshell, a PDS provides superannuation fund members with details about the benefits, features and rules of the income stream. Under the Corporations Law, all new SMSF members should receive a PDS on or before becoming a fund member. This is necessary because they will be receiving a ‘superannuation interest’ at that time of joining. On commencing an income stream, they will once again receive this interest.

According to Harkin, some advisers are of the view a PDS is not required if the trustee believes the member is across all the information contained in the document. “This has led some to suggest the document does not need to be issued.

“However, the problem with this is that advisers and trustees could breach provisions of the Corporations Law if it was later determined that the member, despite also being a trustee, was not fully across all the required information.

“For the sake of an extra document, the compliance certainty which a PDS provides should overcome any suggestion or recommendation that it is unnecessary.”