Strategies

There are strategies available to increase ECPI, such as;

If condition of release (age of member) for the pension has been reached and the minimum pension requirements are satisfied, then making the pension commencement date as early as possible will improve the tax free percentage.

The fund is not entitled to claim any amount for exempt pension income under either Section 295-385 or 295-390 if the minimum prescribed amount is not withdrawn. If no amount is withdrawn then exempt percentage cannot be claimed, then the only alternative is to convert the fund back to accumulation phase. However, if the member is above 55 years but below 59 years of age it is possible to include the minimum withdrawal amount as PAYG withholding amount and issue a PAYG payment summary with the same amount as payment withheld.

For example Smith Family Super fund has only one member, Rodney Smith who was 56 years old as on 1st July 2010 and had $1,000,000 in pension phase; there is no accumulation account as on that date. In the 2010 / 11 year, his employer contributed $50,000 as employer contributions and as salary sacrifice by quarterly instalments. The fund earned $200,000 as capital gain, interest and dividend income. Rodney was required to withdraw minimum of 4% (half minimum allowed) before 30th June 2011 but he forgot to withdraw any amount.

The advisor can issue a PAYG certificate with a gross and tax amount of $20,000 and remit $20,000 to ATO for PAYG withholding after 30th June 2011 and still have the fund in pension phase and claim a percentage of ECPI instead of paying income tax @ 15% on $200,000 income.

It is possible to roll back part of the purchase price of pension back to accumulation phase to ensure that minimum withdrawal is in sync with the pension amount.

Assume the same example above, but this time Rodney is over 62 year old and instead of withdrawing no amount, he withdraws only $10,000.

The way to fix this problem is to roll back $1,000,000 pension amount to accumulation account as on 1st July 2010 and commence a pension with only $500,000 and leave the balance in accumulation account. This strategy will at least save half the tax as some balance would be in pension phase and the minimum pension payments will now be satisfied as it is sync with the pension amount withdrawn ($10,000 is 2% of $500,000). Extreme care is required for this strategy as the trust deed must allow for internal roll over.

The ATO has issued a draft ruling that the pension mode stops on date of death of the pensioner. Any income or realised gains on assets sold to pay lump sum superannuation death benefits will be fully assessable if assets are segregated for the pensioner. If assets are un-segregated, some of the capital gain may become tax free if the assets are sold quickly after death.

Further the longer the assets are in accumulation phase (after death), the more income the fund is going to earn. Hence it will be advisable to payout the lump sum as early as possible.

The higher the pension account, the favourable the ECPI percentage. This means that pensioner should delay, if circumstances permit, to withdraw the minimum amount till the last week of the financial year.