Presentation slides from webinar conducted by Aaron Dunn of SMSF Academy on 20 July 2012 discussing key strategies around the payment of income streams and estate planning within SMSFs. This presentation contains general advice only. The SMSF Academy disclaims all liability for the end-user who relies or acts upon any information within this presentation. The content is based on the relevant laws at the time of the presentation. It is the end-users responsibility review any legislative change that may have occurred since the preparation of this presentation.

1. Webinar:
Strategies for Pensions & Estate Planning
Presented by
AARON DUNN
The SMSF Academy
© The SMSF Academy 2012

2. Housekeeping
• Attendees are muted for the session
• Presentation slides available in under
‘Materials’ box
• Also contained within session login link
• You can type questions to the
presenter(s) from your screen
• Webinar recording to be uploaded
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• Will also be available to purchase recording and
transcript
• This session will be issued with SPAA
& FPA CPD points once assessed

3. SMSF members will choose one of two models when reaching
draw down phase:
S.K.I Build a SMSF
Model Pension Plan

4. http://www.spendingyourkidsinheritance.com

5. Taking minimum benefits from super up to a male’s life expectancy from age 60
will leave the highest balance with a SMSF when their reach their life expectancy…
Male 60 years
Life Expectancy of
25.9 years
Minimum
pension reaches
equivalent level
to Fund’s RoR @
say 7%
Structuring Income Streams
becomes very important

6. Strategies for Pensions & Estate Planning
Opportunities with preservation
components

7. Impact on UNP with Transition to Retirement
• Proportioning rule states that tax-free & taxable components
must be taken in proportion to each other
– Accumulation: Based on component before lump sum benefit paid
– Pension: Proportion determined at commencement of income stream
• SIS or Tax Law does not impose any proportioning to
preservation components
– Can separate unrestricted non-preserved benefits from preserved and
restricted benefits
• Why?
– Priority of cashing benefits
– Allocation of fund earnings

8. Impact on UNP with Transition to Retirement
• Case Study
– Greg (55) has $700,000 account balance within SMSF
– Components include preserved $500,000, unrestricted
$200,000
– Target pension income of $60,000 p.a. (CPI, 3%)
– Access to capital is important to Greg
• How do we best structure the pension(s) for Greg?
– Do we commence one or more pensions?
– Two pensions will allow for Account Based Pension to be
commenced with unrestricted non-preserved benefits

9. Impact on UNP with Transition to Retirement
$300,000 $800,000
$700,000
$250,000
$600,000
$200,000
$500,000
$150,000
$400,000
$100,000
$300,000
$50,000
$200,000
$- $100,000
55 56 57 58 59 60
Single TRIS TRIS & ABP Balance
• Within 4 years, single pension has totally eroded unrestricted benefits
• Additional $243,331 of unrestricted benefits available after five (5) years by
running separate income stream (ABP)

10. Strategies for Pensions & Estate Planning
Multi-pension strategies

11. Maximising benefit payments
• Maximise benefit of locking in the tax-free and taxable
components
• Why is this important?
1. Greater tax efficiency for pensions under 60 years of age
2. Estate planning benefits
• Create multi-pensions where undertaking recontributions
– Ability to elect which interest to draw benefits from
• Use them to advantage in a downward investment market
– Full commutation and absorb decrease in taxable component

12. Benefit of a multi-pension strategy
• Case Study
– Ted (60) has recently retired
– $1,000,000 balance in SMSF ($200,000 TFC)
– Requires $60,000 pension p.a. (CPI – 3%)
– Fund earnings at 6% p.a.
– Undertakes recontribution strategy of $450,000
• TC = $360,000 + TFC = $90,000
• Should Ted commence one or more pensions?

13. Benefit of a multi-pension strategy
One pension Multi-pensions
• Original components include • Original components include
20% TFC 20% TFC
• Post recontribution includes • Recontribution creates a new
56% TFC (44% TC) super interest (ABP#2) with
100% TFC
• All earnings and benefits taken – ABP#1 commences with
must be applied in proportion recontribution (20% TFC)
to when the income stream • All earnings and benefits to be
commenced applied proportionately
– i.e. 56% TFC / 44% TC – Choice of above minimum
pension amounts
• After 10 years - $394,673 of
• After 10 years - $248,089 of
taxable component
taxable component

14. Benefit of a multi-pension strategy
Change in Tax-Free Component
$650,000.00
$600,000.00
$550,000.00
$500,000.00
$450,000.00
$400,000.00
$350,000.00
$300,000.00
1 2 3 4 5 6 7 8 9 10
Single pension Multi-pension
• $113,636 improvement in the tax-free component by
running a multi-pension strategy (6% net earnings)

15. Benefit of a multi-pension strategy
• What impact does the fund earning rate have?
Strategy Benefit based on fund earning rate
$140,000.00
$120,000.00
$100,000.00
$80,000.00
$60,000.00
$40,000.00
$20,000.00
$-
3% 4% 5% 6% 7% 8%
Strategy Benefit
• Multi-pensions can play a key role with market volatility

16. Strategies for Pensions & Estate Planning
Pensions with volatile investment
markets

17. Capitalising on market volatility
• Investment markets can fluctuated over past five (5) years due
to Global Financial Crisis (GFC)
• SMSF pension plan will allow member to benefit from
opportunities in both downward and upward investment
markets
• Requires active management to provide greater tax efficiency
or longer-term estate planning benefits

18. Benefiting from a poor investment market
Example
• Arthur drawing an Account Based Pension
with an account balance of $1,000,000 at
30 June 2011
– Includes 50% Tax-Free proportion
• Poor share market performance shows
portfolio decreased to $800,000
– dropped 20% in 2 months
• Do nothing = benefits reduce
proportionately from commencement of
income stream
– $400k TFC / $400k TC
• Is there an alternative solution for
Arthur?

19. Benefiting from a poor investment market
• Full commutation at 30 June 2011 = $500,000 TFC / $300k TC
– NB. Not 1 July otherwise, pro-rata minimum (1/365th) pension
required to be withdrawn
• Commence new income stream from 1 September 2011
– 62.5% tax-free proportion
• Result = 12.5% improvement in tax-free component
– Under age 60: reduced Arthur’s taxable income
– 60 years & over: improved tax on lump sum death benefit when paid
to non-dependant
• Opportunity Cost = 2/12ths tax exemption for financial year
– @ 4% Fund income = $6,667 share of income x 15% = $1,000 tax

20. Investment Segregation
• Ability to segregate specific assets within an SMSF to a
member or ‘pool’ of members
– Pension Pool / Accumulation Pool / Reserve Pool
– Class of Membership
• Why segregate?
– Tax exemption / tax deduction (e.g. LRBAs)
– Members have different risk tolerances
– Accelerate the tax-free proportion of an income stream
– Improve the tax effectiveness of a TRIS (under 60)
• ATO’s views (NTLG Super Technical Group – March 2010)
– ATO typically expects total segregation of an asset
• not half a property or part of a bank account
– ATO to provide more information on topic, including new ATO
publication on pensions in July 2012

21. Using segregation or member pools for
investment succession
• Ella (55) has $420,000 and wishes to start a TRIS on 1 July 2009
– Includes $20k TFC
• She has the ability to make in-specie share transfer of $330,000 as NCC
contribution
• Combine or setup two pensions (multi-pensions)?
• If setup two pensions:
– Can elect to segregate to each pension account
– Can assign ‘aggressive’ assets (i.e. shares) to TFC pension ($330k)
– Share market rebounds 30%; overall fund portfolio increases 15%
– TRIS #1 = $420,000 x 1.032* (growth) - $42,000 (pension) = $391,500
– TRIS #2 = $330,000 x 1.30 (growth) - $33,000 (pension) = $396,000
– Increased balance and tax efficiency of TRIS #2 as 100% tax-free
• Not assessable even through <60

22. Unsegregated vs. Segregated Pension Assets
How a $1 account balance can allow
you to carry forward capital losses

23. Exempt Current Pension Income
• As part of fund investment strategy, trustees may wish to:
– Segregate assets; or
– Pool assets (unsegregated)
• Segregation can take various forms:
All members are in pension phase
Segregated by ‘pool’ of members
Asset Asset Member Member
A B
A B (Pension) (Pension)
Member Member
Asset Asset Member Member A B
C D
C D (Accum.) (Accum.)
Segregated by Asset

24. Exempt Current Pension Income
• ATO does not accept partial segregation of an asset*
– Can a single bank account or a property be segregated?
– Is it solely used to discharge all or part of its liabilities?
• s295-385 (ITAA 1997)
• Distinguishing the treatment of capital losses
– Unsegregated method – a capital loss can be carried forward (s102-
5, ITAA 1997)
– Segregation – a capital loss is disregarded (s118-320, ITAA 1997)

25. Asset Segregation Example
• Fred & Wilma are both retired and drawing Account Based
Pensions from their SMSF
• During 2011-12 financial year have realised several
investments which have resulted in capital losses totalling
$100,000
• As fund is ‘segregated’ – capital losses are to be disregarded
– Section 118-320, ITAA 1997
• If a member decided to roll back part of their income stream
to accumulation phase, an actuary certificate would be
required using unsegregated method
• Change in method would allow for the capital losses to be
carried forward

26. Why is this important?
• Carried forward capital losses
can be very important in light of
the Commissioner’s views
expressed within TR 2011/D3:
– Failure to complying with pension
standards
• Loss of fund tax exemption
– Death of a member
• Pension ceases at death unless
automatic reversionary beneficiary

27. Strategies for Pensions & Estate Planning
Meeting the minimum pension

28. Meeting the minimum pension
• 25% reduced minimum for FY2011-12 & FY2012-13
• TR 2011/D3 states that failure to take minimum will result in:
– the pension ceasing at the start of the financial year
– No tax exemption of fund income
– All payments to be treated and taxed as lump sums
• Need to consider the timing of when a benefit is cashed
(SMSFD2011/1)
– e.g. unpresented cheque at 30 June?

29. Meeting the minimum pension
• Electing to take a lump sum via a partial
commutation
– TR 2011/D3
– Amount payable as a lump sum where election
is made
• Section 995-1.03(b) of ITAR 1997
– Income stream benefit still exists (no cessation)
– Lump Sum counts towards minimum pension
• SISR 1.06(9A) includes partial commutation payments
– Amount can be in cash or in-specie

30. Partial Commutation example
• Bob (57) has recently retired and has $1,000,000 in
accumulation within SMSF
• Wishes to commence an Account Based Pension and take an
amount of $40,000 as a single payment
• Subject to Bob’s other assessable income he will have
between $600 (16.5% tax rate) - $12,600 (46.5%) of tax
payable on this pension
• If taken as a lump sum can use LRT, but 15% super fund tax
rate applies (accumulation phase)
• Could Bob have the best of worlds?

31. Partial Commutation example
• Yes, he can
• Where pension is partially commuted and payment is elected
to be received as a lump sum, this amount will count towards
the member’s minimum pension for the financial year.
• This benefit payment can be made in cash or in-specie

32. Strategies for Pensions & Estate Planning
Anti-detriment vs. Recontribution
strategy

33. Anti-detriment or recontribution?
• TR 2011/D3 has highlighted taxation issues with super death
benefits from:
– Lump Sum death benefit to non-tax dependants; and
– Capital Gains Tax (CGT) within the SMSF
• Recontribution ‘window’ typically 60 - 64 years of age
– Can extend beyond 65 if ‘work test’ is met

34. Anti-detriment or recontribution?
• Case study
– John (62) is retired and sole remaining member of SMSF
– $450,000 balance made up entirely of taxable component
– 2 x Adult children (independent)
– Death benefit nomination indicates to be paid equally
• Should John consider undertaking a recontribution strategy
or look to fund an anti-detriment payment?
– $74,250 lump sum tax saving with recontribution (i.e. $450,000 x
16.5%)
– What about CGT within the fund?
• Say $200,000 of unrealised capital gains

35. Anti-detriment or recontribution?
Anti-detriment Recontribution
Account Balance on death $450,000 $450,000
Tax-free component $0 $450,000
Taxable component $450,000 $0
Anti-detriment payment* $63,643 $0
Total death benefit $513,643 $450,000
Tax-Free Component $0 $450,000
Taxable Component $513,643 $0
Tax on death benefit ($84,751) $0
Capital Gains Tax $0** ($20,000)
Excess Contributions Tax*** $0 $0
Net benefit $428,892 $430,000
John’s ESP is 1 July 1971, with date of death benefit payment 31 March 2012
* Calculated in accordance with ATOID 2007/219
** Provides a carried forward tax loss, subject to other fund income ($224,287)
*** ECT ignored but could apply due to reserve transfer and concessional contribution cap limitation

36. Anti-detriment or recontribution?
• Anti-detriment payment creates
a $424,287 tax deduction for
SMSF
– Unrealised capital gain of
$200,000
• Becomes a future tax benefit for
adult children but will they use
it?
• Is there an optimal outcome?

37. Anti-detriment or recontribution?
Anti-detriment Recontribution Both
Account Balance on death $450,000 $450,000 $450,000
Tax-free component $0 $450,000 $237,880
Taxable component $450,000 $0 $212,120
Anti-detriment payment* $63,643 $0 $30,000
Total death benefit $513,643 $450,000 $480,000
Tax-Free Component $0 $450,000 $237,880
Taxable Component $513,643 $0 $242,120
Tax on death benefit ($84,751) $0 ($39,950)
Capital Gains Tax $0 $20,000 $0
Excess Contributions Tax** $0 $0 $0
Net benefit $428,892 $430,000 $440,050
• 2.21% effective tax rate on fund income and death benefit

38. Summary
• Pension phase is not ‘set and forget’
– take an active role in the management of income streams to optimise
tax-efficiency and estate planning benefits
• Understand member components opportunities
• What is the impact of one or more pensions?
• Can you improve the pension outcome in a volatile market?
• Can a better tax outcome be obtained but still meet minimum
pension obligations?
• Is CGT the issue, or taxable component or both?
– How do you structure the super interest to manage both?

39. General Advice Warning
General Advice Warning
This presentation provides general advice only. No direct or implicit recommendations are given in this
document. This means that the general advice provided has not been prepared taking into account an individual’s
financial circumstances (i.e. investment objectives, financial situation and particular investment needs). You
should assess whether the advice is appropriate to your individual financial circumstances before making an
investment decision. You can either assess the advice yourself or seek the help of an authorised representative
through an Australian Financial Services License (AFSL) holder.
The SMSF Academy Pty Ltd believes that the information in this presentation is correct at the time of compilation
but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, The
SMSF Academy disclaims all responsibility for any loss or damage which any person may suffer from reliance on
this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is
caused by any fault or negligence on the part of presenter or otherwise.

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