Ten 2013 Webinar Auditing Pensions

1. Auditing Pensions:
Segregation, Reserves and Minimums
Jo Heighway
ENGAGE Super Audits, Gold Coast
Paper and slides courtesy of
Sharlene Anderson, Director

2. Session Outline
• Pensions – Compliance with SISA & SISR
• Exempt Current Pension Income
• Reserves
• Auditing Tax Balances
2

3. 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

4. Evidencing Common Conditions of
Release
• Attaining age 65
• Retirement
• Death
• Terminal Medical Condition
• Permanent Incapacity

5. Evidencing Common Conditions of
Release
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
5

6. Evidencing Common Conditions of
Release
• 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.
6

7. Audit compliance with SISA & SISR
Trust 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.
7

8. Audit compliance with SISA & SISR
Revaluation 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)
8

9. Audit compliance with SISA & SISR
Minimum 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.
9

10. Audit compliance with SISA & SISR
Minimum Payment Amount
Age Percentage of account balance
2007-08 2008-09
2009-10
2010-11
2011-12
2012-13
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%
10

11. Audit compliance with SISA & SISR
Minimum Payment Amount
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
11

12. Audit compliance with SISA & SISR
Minimum Payment Amount
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
12

13. Audit compliance with SISA & SISR
Minimum Payment Amount
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

14. Audit compliance with SISA & SISR
Minimum Payment Amount
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

15. Audit compliance with SISA & SISR
Minimum Payment Amount
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.

16. Audit compliance with SISA & SISR
Failure 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)

17. Audit compliance with SISA & SISR
Was 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)’

18. Audit compliance with SISA & SISR
Was 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

19. 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

20. Exempt Current Pension Income
Segregation 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

21. Exempt Current Pension Income
Segregation 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)

22. Exempt Current Pension Income
Actuary 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

23. 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

24. 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, or
II. On the commutation of the income stream to commence another income stream as soon as practicable, or
III. Commutation of the income stream as a result of death of the primary beneficiary where to pay death benefits

25. 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

26. 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.

27. Jo Heighway
ENGAGE Super Audits, Gold Coast
1300 283 487 (1300 AUDITS)
jo@engagesuper.com.au
Sharlene Anderson
sa@veritascorp.com.au