Ten 2013 Webinar Auditing Pensions

Auditing Pensions: Segregation, Reserves and Minimums

Jo HeighwayENGAGE Super Audits, Gold Coast

Paper and slides courtesy of Sharlene Anderson, Director

Session Outline

• Pensions – Compliance with SISA & SISR

• Exempt Current Pension Income

• Reserves

• Auditing Tax Balances

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Overview – Audit compliance with SISA & SISR

• Obtain evidence condition of release is met• Ensure SMSFs Trust Deed provides for the type of

pension paid• Audit valuation of opening pension balance• Calculate Minimum (and if applicable maximum)

payment amounts and ensure minimum pension is physically paid and any maximum not exceeded

• Ensure pension balances correctly recorded in member statements

Evidencing Common Conditions of Release

• Attaining age 65 • Retirement • Death• Terminal Medical Condition• Permanent Incapacity


Commencing a transition to retirement income stream (TRIS)

• Confirm member’s DOB, ensure the member has reached preservation age at commencement of TRIS

• TRIS is non-commutable income stream and cannot be commuted as lump sum payments

• Ensure pension account balance remains correctly recorded as Preserved

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• If condition of release not met?Member may have obtained illegal early access to benefits and the fund may have breached Reg 6.17 SISR.

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Audit compliance with SISA & SISRTrust Deed

• Auditor to review Trust Deed to ensure fund governing rules provide for type of pension paid

• Commonly SMSF Deeds include a clause allowing benefits in any manner permitted by SISA and SISR. However, certain Trust Deeds may specify types of pensions that can be paid and only where certain specified conditions of release are met.

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Audit compliance with SISA & SISRRevaluation of Assets

• Ensure the assets of the fund supporting the pension have been revalued to market value at pension commencement/beginning of financial year

• If valuation not done? Minimum/maximum pension limits may be incorrectly calculated which could cause a breach of SIS Reg 1.06(9A)

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Audit compliance with SISA & SISRMinimum Payment Amount

Account Based Income Streams (Most Common)• Minimum payment = percentage of member’s account balance at

the start of the year or date the pension commenced• If commenced or ceased during the year the minimum is pro-rata’d• If the pension commences on or after 1 June, no payment is

required• Drawdown relief 2009 to 2013 Financial Years• Currently, from 1 July 2013 there will be no further drawdown relief

and the minimum percentages shown next for the 2007 – 2008 year will apply to the 2013 – 2014 year and onwards.

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Age Percentage of account balance

2007-08 2008-092009-102010-11

2011-122012-13

Under 65 4% 2% 3%

65-74 5% 2.5% 3.75%

75-79 6% 3% 4.5%

80-84 7% 3.5% 5.25%

85-89 9% 4.5% 6.75%

90-94 11% 5.5% 8.25%

95 or more 14% 7% 10.5%

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Allocated Pensions• Schedules to the SIS Regulations provide the formulas to

calculate the relevant age based minimum and TRIS maximum pension (using valuation factors) – simpler from 1 July 2007

Market Linked Pensions• Schedule 6 to SIS Regulations determines annual payment

amount. Actual payment is permitted to be within 10% of required payment

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Other Complying Pensions• Auditor should obtain pension contract for pre existing defined

benefit pensions which would prescribe annual required payment amount and indexation

• Generally, complying super pensions (market-linked, lifetime and

life expectancy pensions) which commenced before 1 July 2007 are not able to be commuted in order to start another pension to adopt the new pension rules. An exception applies for existing complying pensions which are commuted after 19 September 2007 in order to purchase a market-linked pension

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Transition to Retirement Income Streams (TRIS) • the same minimum payment percentages apply as for

account based pensions• Minimum pension is pro-rata’d in the first year, and nil if

pension commenced on or after 1 June• MAXIMUM draw down each year of 10% of the account

balance at the start of the year or the day on which the TRIS commenced

• There is no pro rata of the maximum pension limit


When Account Based Pensions Commence• cannot commence before all the capital

supporting the income stream has been received by way of contribution or roll over

• the income stream can commence before the first payment is physically made


Pension Commencement + Commutations• If minimum for a whole year has not been

paid and the trustees assert that the pension was stopped or started part way through the year, the auditor should obtain the relevant minutes or resolutions confirming the trustees intention.

Audit compliance with SISA & SISRFailure to comply

• Failure to pay minimum pension:- breach of regulation 1.06(9A) of the SIS Regulations and is

reportable in Part B of the auditor’s report (no ACR)- the fund is taken to have not paid a pension from the start of the year but a series of lump sums- the fund cannot claim ECPI in relation to the income derived from the assets that supported the pension - TRIS breach SIS Reg 6.17 (early access) as lump sums not allowed

• Exceeding the maximum pension limit is a breach of SIS Reg 6.17 (early access)

Audit compliance with SISA & SISRWas minimum PAID?

• Generally, pension payments cannot be accrued but must be paid by 30 June

• SMSFD 2011/1 considers payment of pension by cheque or promissory note at year end and in what limited circumstances such payment can be counted as ‘cashed’ by 30 June of the year

• Commissioner discretion - January 2013 the ATO released ‘Self-managed superannuation funds - starting and stopping a superannuation income stream (pension)’

Audit compliance with SISA & SISRWas minimum PAID?

Commissioner Discretion:• Minimum pension was not made because of either:

– an honest mistake by the trustee resulting in a small underpayment (one twelfth of minimum)

– matters outside the control of the trustee– The ECPI entitlement would have continued but for the trustee failing to pay the

minimum payment• The trustee makes a catch up payment as soon as practicable in the

following income year• The trustee treats the catch up payment as if it were made in the prior

income year (ie: accrued)• Can self-assess and claim ECPI provided the trustee has not previously been

granted this concession

Exempt Current Pension Income(ECPI)

• Segregation or Actuarial Certificate method• Exclude:

- Concessional Contributions - Non arm’s length income- Carried forward tax losses (must be utilised

first)• Section A audit report qualification if tax balances

materially misstated

Exempt Current Pension IncomeSegregation of Assets

• Proper segregation of pension assets in practice is difficult to achieve

• The assets must be specifically identified and there must be a clear relationship established between the relevant assets and the member's account

• The auditor must review the ECPI amount claimed and test to ensure that only income from segregated pension assets is included and also that no expense incurred in deriving ECPI is claimed as a deduction

Exempt Current Pension IncomeSegregation of Assets

Common problems identified in segregation of assets:• Only one bank account held by the SMSF • Payment of pensions from accumulation account• Banking of contribution or asset income into wrong account• No splitting or inappropriate split of fund expenses• Inappropriate transfers of monies between bank accounts• Single holdings of listed securities treated as part accumulation,

part pension assets• Pension assets comprising illiquid assets which may not be able

to support minimum pension payments (cash)

Exempt Current Pension IncomeActuary Certificate

• Certificate required even when immaterial portion of fund is in accumulation

• Auditor to obtain copy of Actuary Certificate• Perform calculations testing the correct

percentage of appropriate income items has been reported and that only the appropriate portion of expenses are being claimed

Exempt Current Pension Income

Impact of Death on ECPI• Death – Draft Ruling indicates would cease upon

death of member (unless reversionary in place)• However, regulations now passes which allow

ECPI to continue to be claimed on the income derived between the date of the members death and the benefits being ‘cashed’ from the 2012 – 2013 income year onwards

Reserves• Auditor to check Trust Deed provides for reserves

• Ensure the Reserve is maintained in accordance with the fund’s written Reserve Strategy

• Ensure the Reserve is consistent with the actuarial certificate (if applicable)

• Allocation from reserves may be included as concessional contributions for the member to whom they were allocated

• Exceptions:- where the amount is allocated in a fair and reasonable manner to all members of the fund AND the amount allocated

is less than 5% of the value of the member’s balance- where the amount is allocated from a reserve solely for the purpose of enabling the fund to discharge all or part of

its liabilities as soon as they become due, in respect of superannuation income stream benefits that are payable by the fund at that time if;

I. The amount is allocated to satisfy a pension liability, orII. On the commutation of the income stream to commence another income stream as soon as practicable, orIII. Commutation of the income stream as a result of death of the primary beneficiary where to pay death benefits

Auditing Tax Balances

• Auditor must form an opinion for Part A of the Auditor’s Report that tax items (Income Tax Expense, Income Tax Payable / Receivable, PAYG payable and Deferred Tax Asset / Liability) are materially correct

• ECPI claims are likely to have the most material effect upon Income Tax Expense and Income Tax Payable / Refundable items in the SMSF financials

• Auditor must have sufficient appropriate evidence that the fund was both entitled to claim ECPI and that the ECPI has been correctly calculated

Disclaimer

• This presentation is for information purposes only and does not constitute advice.

• The views expressed here contain information that has been derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. This presentation should not be relied upon as a recommendation by Veritas Corp or the presenter.

Jo HeighwayENGAGE Super Audits, Gold Coast

1300 283 487 (1300 AUDITS)[email protected]

Sharlene [email protected]

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Ten 2013 Webinar Auditing Pensions