Pension payments are a key area of focus during an SMSF audit. Missing documentation, incorrect pension calculations or a failure to meet minimum payment requirements can create compliance issues and potentially affect the fund’s eligibility for tax concessions.
For accountants preparing SMSF financial statements and audit files, a few straightforward checks throughout the year can help identify issues early, reduce audit delays and ensure pension arrangements are properly documented.
Here are some common issues to review before submitting your clients’ funds for audit.
1. Confirm market values before commencing a pension
When a member commences an account-based pension, the opening pension balance must be based on the market value of the assets supporting it at commencement.
Using outdated or unsupported asset values can affect the pension balance, the member’s transfer balance account and the calculation of minimum pension payments.
Before a pension commences, accountants should check that:
Fund assets have been valued at market value using objective and supportable evidence.
The opening pension balance is correctly calculated and reconciled to the member’s account.
The taxable and tax-free components of the pension have been determined and documented.
Any required transfer balance reporting has been considered.
For assets such as property or unlisted investments, ensure there is sufficient evidence to support the valuation. This may include an independent valuation, comparable sales data or other relevant documentation.
2. Obtain a pension request and document trustee approval
A pension commencement should be supported by appropriate documentation demonstrating the member’s request and the trustees’ decision to establish the pension.
Accountants should check that the audit file includes:
A written pension request from the member.
Trustee minutes or a resolution approving the pension commencement.
Confirmation that the member has met the relevant condition of release.
Evidence that the pension arrangement complies with the fund’s trust deed and applicable superannuation requirements.
These records help establish that the pension was validly commenced and that the trustees followed the appropriate process.
3. Check minimum pension payments have been made
One of the most common pension audit issues is a failure to pay the required minimum pension amount during the financial year.
The minimum is generally calculated by applying the relevant age-based percentage to the pension account balance at 1 July. For pensions commenced partway through the year, the calculation generally uses the commencement balance and is adjusted for the remaining part of the financial year.
Accountants should verify that:
The correct minimum pension amount has been calculated for each member.
Payments have been made by the required deadline.
Payments are supported by bank statements and member records.
Partial commutations have not been incorrectly counted towards the minimum pension requirement.
Any transition-to-retirement pension also meets the applicable maximum payment limit.
A shortfall can have significant tax consequences, including the potential loss of the fund’s entitlement to exempt current pension income (ECPI) for the relevant year. If a shortfall is identified, seek advice on whether any ATO administrative concession may apply.
4. Keep a record of pension reviews and trustee meetings
Regular pension reviews help ensure that payment arrangements remain appropriate as members age, account balances change and fund circumstances evolve.
Where pension matters are discussed at trustee meetings, retain minutes documenting the decisions made. These records can help demonstrate that trustees have considered their obligations and that pension arrangements are being actively monitored.
A useful annual review should consider:
The member’s current pension balance.
The minimum pension payment required for the year.
Payments made to date and any remaining amount to be paid.
Whether the fund has sufficient liquidity to meet future payments.
Any changes required to the pension arrangement.
5. Reconcile pension payments to the member’s account
A payment described as a pension in the accounting records does not, by itself, establish that it meets the pension standards.
Accountants should reconcile pension payments to bank statements, member accounts and supporting documentation to confirm that payments were made to the correct member and recorded against the correct pension account.
Where a member receives both pension payments and lump sum withdrawals, ensure the payment type has been correctly identified and documented. This is particularly important where a partial or full commutation has occurred.
6. Review pension tax treatment and ECPI
Where a fund claims ECPI, accountants should ensure the calculation reflects the fund’s circumstances and that the relevant pension requirements have been satisfied.
Check that:
The pension meets the applicable superannuation income stream standards.
The ECPI calculation is supported by the fund’s financial records.
An actuarial certificate has been obtained where required.
Pension assets and any relevant earnings have been correctly identified.
The tax treatment of pension payments is appropriate for the member’s circumstances.
Incorrect ECPI calculations or missing actuarial certificates can lead to audit queries and delays in finalising the fund’s annual return.
Make pension audit preparation part of your annual process
Many pension audit issues can be avoided by reviewing the supporting documentation and payment calculations before the audit begins.
By confirming market values at commencement, retaining pension requests and trustee minutes, and checking minimum payments throughout the year, accountants can help their SMSF clients maintain compliant pension arrangements and make the annual audit process more efficient.
At Super Green Tick, we work with accountants to support a smooth and efficient SMSF audit process. Preparing the right documentation early can make a big difference when it comes time to complete the annual audit. If you have any questions, feel free to reach out to our team.