The primary tax benefit of starting a superannuation pension is that the monies invested in your SMSF will enjoy tax-free investment earnings up to the Transfer Balance Account limit ($2m from 1 July 2025).
Lifestyle choices can also affect the decision to start a pension. However, this blog is directed at family business owners with multiple income streams who are flexible in how their tax affairs are structured and how they choose to work. For those family owners, the tax benefits of an SMSF, delivered by their Perth tax accountants who are structuring their tax affairs, at a holistic level are more important than identify cash to fund their retirement income.
When can I start a superannuation pension?
You can start a self managed superannuation fund pension if you are
- 60 years old and retired, or
- 65 or more.
There are other ways to access your super early (death, terminal medical condition etc and these will not be discussed here).
What does 60 years old and retired mean?
The term “retired” for a founder of a family business is not the same and as clear-cut as it is for other people. If you are a government worker, the final day of work is clear and distinct. However, an owner of a family business can retire, still own the business, check in as a shareholder, and still have a token relationship-building role in the business.
The super tax definition of retirement is technical and includes a situation where:
- Your employment ceased, and
- The employment ended while you were over 60.
It is important to note that you do not need to intend never to work again to satisfy the tax rules. This raises a range of options for family business owners, as they will often have multiple income streams and multiple forms of employment from a range of tax structures.
However, simply resigning from a role, like a directorship or company secretary role, is not enough. You need to retire from an employed role. A company director is generally an officeholder and not an employee. The company constitution will need to confirm that directors can be paid for their role and, preferably, that the director will be paid.
If the director is remunerated, and they retire, they will typically qualify as retirement and enjoy the SMSF tax pension benefits.
However, the ATO has indicated (QC 48668) that a simple “paper” retirement is insufficient and might warrant investigation. So, getting clear tax advice from your Perth tax accountant on what constitutes retirement is critical to ongoing tax management and tax benefits.
Choosing the retirement date
If you start an SMSF pension, you must determine the value of your SMSF assets when the pension starts. This involves preparing a fresh set of financial reports for the SMSF, including a valuation of the SMSF assets, so the value of the member’s pension, including all accrued tax liabilities and accrued costs, can be clearly determined.
For most people, the simple choice is to choose a date that lines up with the end of the financial year, stopping the cost of two sets of SMSF reports to be prepared (so 30 June). However, in rare instances, starting an SMSF pension on your birthday (with a cessation of employment) is prudent if you are about to generate a large capital gain or taxable income in your SMSF.
When to delay starting an SMSF pension
If you start an SMSF pension, you must receive a minimum yearly cash payment from your SMSF as a member. If you start an SMSF pension at 60 years old, you must receive at least 4% of the SMSF pension yearly.
If your SMSF has no cash, starting an SMSF pension might not be a good idea. You might be forced to sell assets at a bad time or incur significant selling costs/break costs to meet your pension.
This is particularly relevant if your SMSF has acquired commercial real estate.
Getting investment advice from a licensed investment advisor is prudent for those with a cash-strapped super fund. However, for these people, when the SMSF is not generating income to give them cash, the tax benefits of a super pension might not be that strong—typically, if an SMSF does not get any cash (remembering that reinvested dividends are a type of cash receipt), then it is potentially not generating much taxable income.
Should you start an SMSF?
The decision to start an SMSF should be made with a licensed investment advisor. There are competing super options for people that can also be a good option, so the investment advisor can show you a range of other options before you make the jump including the benefits and downsides of an SMSF.
As a guide, if you can handle the paperwork associated with employing staff (Single Touch Payroll, PAYG Withholding, payslips, workers’ compensation etc), you should be able to manage the SMSF administrative paperwork – especially with the support of an independent tax advisory firm. The knowledge gained in running a business will help a family decide – are SMSFs better for families in business?
Starting an SMSF pension in June?
If you start your SMSF pension in June, you do not need to make the minimum pension payment before the end of the financial year.
If you start an SMSF pension before 1 June, your minimum pension payment is pro-rated for the number of days in pension mode. So, a pension started halfway through the year needs only half of the minimum pension paid.
Clarity on starting a superannuation pension
If you are starting a super pension, you should review your estate planning documents. Notably, a will only cover assets you own, and you do not own your super fund or your super pensions- the SMSF trustee owns that.
So, if you start an SMSF pension, consider whether it should have a reversionary pensioner or directly determine how the SMSF will be dealt with on your death. It might also be opportune to consider your death benefit nominations on file.
Lodging pension documents
If you choose to start an SMSF pension, you must notify the ATO through a Transfer Balance Account report within 28 days of the end of the quarter. So, if you choose to start an SMSF pension on 1 July, the quarter will end on 30 September, and the Transfer Balance Account Report must be lodged to the ATO on or before 28 October.
So, your choice of pension commencement date must also consider your Perth tax accountant’s bandwidth, the timing of your investment reports, and the capacity of your investment advisor to produce tax reports on time.
Practically, the ATO has taken a more tolerant approach to lodging these reports (so far, in our firm’s experience).
A significant event of lodging the Transfer Balance Account Report when you commence an SMSF pension is that you will notify the ATO of the amount of tax-free (non-concessional) components in your SMSF and the amount of the taxable (concessional) components in the SMSF.
The Tax Act (Sub 307-C) then sets the percentage components of your SMSF pensions and these are then fixed for the life of the pension. So, there is a potential benefit in timing non-concessional contributions to an SMSF and the commencement of an SMSF pension, coupled in with possible options of having multiple SMSF pensions from the one SMSF.
Getting it right
The date you start an SMSF is a significant tax point in your tax structuring. And it is easy to get it wrong from a technical, legal and tax viewpoint if you do it with a cookie-cutter approach. This is where Westcourt is a natural choice for managing the tax affairs of your family business – our independent, impartial, award-winning advice, focus on tax advisory for business families, and global network give us a competitive edge that translates to real-world benefits-so why not give us a call?
