Pre-pension tax planning a must

Pension tax income stream

Tax-effective strategies associated with a pension need to be formulated before an income stream is commenced, a technical expert has said.

The tax consequences for beneficiaries from the pension of a deceased member should be considered and any tax-effective strategies put in place before the commencement of an income stream, a technical expert has advised.

The importance of adopting this approach is due to the fact the tax components applying to a pension are set at the commencement of the income stream and do not change, Accurium SMSF technical services manager Melanie Dunn said during her firm’s latest technical webinar.

Dunn added it was particularly critical if the individuals to whom the pension will be distributed upon the relevant member’s death are not dependants, as defined by the Superannuation Industry (Supervision) Act, as they are required to take the payment as a lump sum and will be taxed at up to 15 per cent on the taxable element and 30 per cent on the untaxed element of the benefit.

“So we can think about things on the approach to retirement or as we’re thinking of starting a new income stream in the SMSF, such as recontribution strategies, because we know non-concessional contributions coming into an SMSF contributes to the tax-free component of an interest,” she said.

“So if we can take some money out and put some money back in as a non-concessional contribution under those available caps, that can help increase tax-free components.”

She pointed out it is also worth considering making downsizer contributions before the commencement of a pension for the same reason.

“Similarly the downsizer contribution is actually treated like a non-concessional contribution in that it adds to the tax-free component of the SMSF accumulation interest,” she said.

She had a further message for advisers and trustees when calculating the tax-free and taxable components of an accumulation interest that will apply to a subsequent income stream.

“The ATO do note on their website not to round these amounts down or up for the decimals. The legislation doesn’t provide for any rounding rules so you should allow for all the decimals in that tax-free proportion and that taxable proportion calculation,” she said.

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