SMSFs warned on retrospective lump sum payments

SMSF practitioners who plan to retrospectively allocate pension payments as lump sum payments from an accumulation interest have been warned the ATO may not accept this, cautions an industry lawyer.

DBA Lawyers special counsel Bryce Figot warned that the transfer balance cap causes a trap for SMSF pensioners who receive payments above the account-based pension (ABP) minimum annual payment.

“For these pensioners, the capital supporting the pension is reduced by the amount of the pension payments, including the amounts above the ABP minimum. However, there is no corresponding debit to the pensioner’s transfer balance account,” Mr Figot explained.

One of the strategies that SMSF practitioners might use to resolve this issue, Mr Figot said, is to treat all amounts above the relevant ABP minimum as a lump sum payment from the pensioner’s accumulation superannuation interest.

“This strategy preserves the capital supporting the pension to the greatest extent possible. In other words, the capital supporting the pension will be exhausted only by the relevant minimum pension amount,” he said.

“However, sometimes the pensioner does not have an accumulation superannuation interest or the accumulation superannuation interest is insufficient to pay the amounts in excess of the minimum ABP amount.”

In this situation, Mr Figot said, another strategy that might be used by practitioners is to treat these amounts as a partial commutation from the relevant pension.

“Many advisers are already familiar with the above strategy. However, many advisers might have the intention of waiting until ‘after the fact’ to allocate payments and document this allocation,” he said.

“In other words, there is no evidence of the parties’ intention at the time of payment. This raises a critical question: if documentation is only made ‘after the fact’, will the ATO accept that the payments in excess of the ABP minimum came from either the accumulation superannuation interest or was a valid partial commutation?”

“The answer is probably no, without documentation made ‘before the fact’, the ATO will probably not accept this,” he warned.

In relation to the partial commutation of pensions, Mr Figot said the ATO‘s view is that the pensioner must consciously exercise their right to exchange something less than their full entitlement to receive future pension payments for an entitlement to be paid a lump sum. This is expressed in SMSFD 2013/2 and TR 2013/5, he said.

“Where no documentation exists either before or at the time of payment, it is hard to prove that the pensioner consciously exercised their right,” he said.

“The ATO could decide that there was no partial commutation and that the amount was just paid as a pension payment in excess of the relevant ABP minimum.”

As a result, Mr Figot said any strategy involving a partial commutation should be documented prior to the time of payment.

“Similarly, where the payments are allocated and the strategy documented ‘after the fact’, the ATO might take the view that the payments did not come from an accumulation superannuation interest as it could not be proven that this was the parties’ intention at the time of payment, and it was not a valid partial commutation,” he said.

“A conservative approach is to have relevant documentation completed and signed before the payment of the amounts in excess of the ABP minimum payment.”

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