220.127.116.11 Background to Income Streams Paid from SMSFs or SAFs
This topic covers:
- self-managed superannuation funds,
- small APRA funds, and
- general characteristics.
Self-managed superannuation funds
- has fewer than 5 members,
- all members are trustees (or directors of the trustee company if a corporate trustee is present) and no other persons are trustees (or directors),
- no member is an employee of another member, unless the members concerned are relatives, and
- no trustee of the fund receives remuneration for their services as a trustee.
There are 4 exceptions to the basic conditions:
Exception 1: Where an SMSF has only one member and:
- the fund has a corporate trustee, the member must:
- be the sole director of the trustee company, or
- be related to the other director of the trustee company and there are only 2 directors of that company, or
- not be an employee of the other director of the trustee company and there are only 2 directors of that company,
- an SMSF does not have a corporate trustee, the fund must have 2 individuals as trustees. The member must be the trustee with:
- another person who is a relative of the member, or
- any other person provided the member is not an employee of that person.
Exception 2: Where a member is under a legal disability, their legal personal representative can be a trustee. This is also the case where the representative holds an enduring power of attorney in respect of the member.
Exception 3: Where the member is a minor; a parent, a guardian, or the member's legal personal representative may be a trustee in the member's place.
Exception 4: Where a member is deceased, their legal personal representative can be a trustee up until the time that the deceased member's benefits are paid from the fund.
For classification as an SMSF under the superannuation legislation, a fund must meet all of the above conditions. The ATO has supervised SMSFs since October 1999. An income support recipient receiving the benefits from an SMSF must be a trustee of the fund. However, reversionary beneficiaries of members need not be members of the fund. Often the name of the SMSF will include the income support recipient's family name.
Example: Joan and Darby Simpson established the Simpson Family Superannuation Fund. Both Joan and Darby are trustees of the fund and they are also the only members. Darby Simpson rolls his existing superannuation benefits into this fund, and makes a significant additional contribution to the fund. Joan also makes a significant contribution to the fund. Upon retirement Darby and Joan receive benefits from their own member balances in the fund.
Act reference: SSAct section 9(1)-'superannuation fund'
Small APRA funds
SAFs are superannuation funds with fewer than 5 members that do not meet the conditions to be classed as an SMSF. SAFs differ from SMSFs in that they must have a corporate trustee that is approved by APRA and the prohibition on remuneration of trustees, which applies to SMSFs, does not apply to approved trustees. SAFs are regulated by APRA.
Example: Two brothers, Felix and Igor Smith, established the Felix and Igor Superannuation Fund with the assistance of a company, Flexitime Superannuation Services Pty. Ltd. The brothers are the only members. Both brothers are too busy to undertake the day-to-day administration of the fund and they appoint Flexitime Superannuation Services as the fund's trustee. Flexitime Superannuation Services is an APRA approved SAF trustee, therefore the Felix and Igor Superannuation Fund is an SAF.
Before 1 January 2006, SMSFs and SAFs were able to offer any type of income stream, with allocated or account-based income streams being the most common type. From 1 January 2006, new income streams sourced from these funds are limited to account-based income streams and market-linked income streams. The funds may continue to make payments in relation to lifetime and life expectancy ATE income streams that were commenced before 1 January 2006.
Also from 20 September 2007, SMSFs and SAFs are not allowed to offer market-linked income streams unless the income stream is fully sourced from a commuted income stream that is a lifetime ATE income stream, life expectancy ATE income stream or market-linked income stream (i.e. complying with SSAct section 9A, 9B or 9BA).
If the original lifetime or life expectancy ATE income stream was purchased prior to 20 September 2004, the fully commuted assets, including reserves, can only be used to purchase a lifetime or life expectancy ATE annuity (from the statutory fund or benefit fund of a life office or friendly society) that is then used to source the income stream payments from the SMSF or SAF. Alternatively, the fully commuted assets, including reserves, may be used to purchase a lifetime or life expectancy ATE income stream directly from a retail provider.
For lifetime and life expectancy ATE income streams, they MUST:
- meet all of the characteristics of an ATE income stream (for pre-20 September 2004 ATE income streams refer to 18.104.22.168, and for post-20 September 2004 ATE income streams refer to 22.214.171.124) including actuarial certification for lifetime and life expectancy ATE income streams purchased prior to 1 January 2006 (126.96.36.199), AND
- meet the documentation requirements specified in 188.8.131.52, AND
- satisfy the relevant prudential requirements of the SIS.
- Non-allocated pensions paid from SMSFs or SAFs are classified as 'defined benefit pensions' under SIS regulations. They are rarely 'defined benefit income streams'.
- Under SSAct section 9(1)-'superannuation fund', an SMSF or SAF must be a complying fund under the SIS. Where it is non-complying under the SIS, it is a private trust under SSAct section 1207P(1), refer to 4.12.
Act reference: SSAct section 9(1)-'superannuation fund', section 1207P(1) Designated private trusts
Policy reference: SS Guide 184.108.40.206 Characteristics of pre-20/09/2004 Asset-Test Exempt Income Streams, 220.127.116.11 Characteristics of Asset-Test Exempt Income Streams Purchased from 20/09/2004 & before 20/09/2007, 18.104.22.168 General Provisions for Assessing Income Streams Paid from SMSFs or SAFs, 22.214.171.124 Documentation Required for Assessment of Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs, 126.96.36.199 Actuarial valuation certificate for lifetime or life expectancy ATE income streams paid from SMSFs or SAFs, 4.12 Means Test Treatment of Private Trusts & Private Companies from 01/01/2002