SMSF rules to keep your income flowing

Making sure your self-managed super fund abides by the myriad rules that apply to super in general and SMSFs in particular can be a challenging task.

While the tax office is not unreasonable and can be quite flexible within the limits of the law, sometimes even a relatively minor mistake can result in a fund losing super's valuable tax concessions.

This penalty is particularly painful if a member is drawing an income stream, usually an account based pension, since a breach of the rules can result in the earnings on the money backing the pension losing their tax free status.

One rule that it is easy to breach unintentionally is the requirement to draw out at least the set minimum annual pension payment.

This normally ranges from 4% of the account balance for a member aged under 65 up to 14% for those 95 and over.

Fortunately, the tax office recently introduced some flexibility into how this rule is applied.

It indicated, in effect, that everyone can correct a modest breach of the minimum payment requirements without being penalised.

But Andrew Yee, a director of wealth management with accountancy group HLB Mann Judd, explains this concession - like the one used when a super fund member exceeds the annual concessional contribution limit by no more than $10,000 - can be used only once.

Yee says the risk of breaching the minimum pension requirements has increased in recent years as the minimum percentages have been varied in response to the investment losses triggered by the GFC.

The required minimums were halved from 2008 - 09 to 2010 - 11 while for 2011 - 12 and 2012 - 13 they have been reduced by a less generous 25%, with the normal minimums due to apply from July 2013.

For example, the usual 5% minimum for someone aged 65 to 74 was first cut to 2.5%, is currently 3.75% and returns to 5% on July 1.

To be able to make automatic use of the new concession a number of conditions have to be met.

The key ones are:

• The pension underpayment is the result of what the tax office calls "an honest mistake" or matters out of trustees' control.
• The underpayment isn't more than one 12th of the minimum pension amount that should have been paid.
• It is corrected within 28 days of the trustees becoming aware of it.

If any condition isn't met the trustees can't use the new concession but have to apply to the tax office to waive the penalty.

Yee says transition to retirement income streams, which are structured as account based pensions, will also benefit from the new concession but cautions that, as yet, there has been no similar concession to cover cases when the maximum annual payment - currently 10% of the assets backing the TRIS - is breached.

Super tip

Don't forget that, from July 1, 2012, all investors have a $25,000 cap on concessional super contributions, including the over 50s. So make sure you keep within your cap to avoid paying extra tax.

Remember, too, that indirect contributions count towards your concessional cap.

For example, if a related company pays your fund's audit and accounting expenses, forgives a debt owed by the fund, or even pays for improvements to a fund assets, such as a business property, those payments all count as concessional contributions, allocated proportionally to each member.

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