Leigh Mansell, director of SMSF technical and education services for Heffron, said at last week’s SMSF Association Technical Summit that one of those issues is the need for a minimum prorated pension payment in the commutation year.
“The SIS Act states that if a pension is stopped, there must be a prorated minimum payment in the commutation year. This is one of the things that we’ve raised, but we haven’t got an answer on that as yet,” Mansell said.
“We’d be taking the conservative route and making sure you’ve taken that prorated minimum this financial year.”
One of the other issues for which there is still no clarity is what happens if a pension that failed is a death benefit pension.
“The SIS Act basically says, when somebody dies, you must cash their death benefits essentially two ways, in the form of lump sums or in the form of a continuously paid pension.”
“If you’ve got a pension that essentially stops or doesn’t meet the criteria anymore, you’ve got this situation where you go, ‘Oh, so have we failed the compulsory cashing conditions because we’ve got a failed pension?”
The ATO previously said that if an individual has a breach in the year the failure happened, it can’t be rectified. However, it also indicated that on a “go-forward basis”, if the tainted death pension was removed and a new one commenced and rolled forward, it would be accepted, although there would still be a breach.
“But that is not on its website anymore, and this is our grey zone,” Mansell said.
“We haven’t seen anything in terms of the guidance with a cemented tax law and haven’t heard anything back from the ATO that I’m aware of.”
Mansell added an example of what may happen if a pension fails.
“In this case, the member has two pensions, one or both of them are going to fail. Who’s going to decide which one’s going to fail? You, the trustee, the member?”
“I reckon it’s the member. So, you’d be telling the client the ramifications, and then the member would be deciding.”
However, she warned that caution needs to be taken on how that information is imparted.
“You could be talking to them about commuting a pension. That’s financial product advice. If you give them a recommendation to do that and start a new one, that’s financial product advice.”
“Advisers would need to do a statement of advice about that. The other critical thing to watch out for here is that you can give factual information, no problem, but as soon as the client hears or interprets what you’re saying to them as a recommendation, that is also advice.
“We have to be careful with advice. It’s not only real advice that you’re giving them, it’s what the client is hearing.”
