Speaking in a seminar, DBA Lawyers special counsel Rebecca James explained that if an SMSF trustee has an excess transfer balance amount, the member can commute the excess voluntarily and then notify the ATO using the approved form — otherwise the ATO will initiate the commutation.
The ATO will issue an excess transfer balance determination, she said, and if the member still has an excess transfer balance 60 days after the determination has been issued, the ATO will then issue a commutation authority.
Under the ATO’s interpretation of the law, if the SMSF trustee does not commute the excess after this then they run the risk of losing ECPI for the entire year, Ms James warned.
“Now I think that's an interesting interpretation of the law because with the ECPI exemption, if we've got a pension that complies with the standards under the SIS regulations, then we have a complying pension,” she said.
“Just having an excess amount in retirement phase ordinarily wouldn't impact on the complying nature of a pension, or impact on our ECPI status. So it's an interesting stick that we're being hit with.”
Ms James said the SIS regulations provide that the pension rules must ensure that the pension standards are met. So one interpretation, she said, is that the rules ensure that those pension standards are met, if the terms of the pension are consistent with super law, the trust deed and pension documents.
“On that basis, even if you fail to pay the minimum pension that wouldn't make you lose your ECPI status, it would simply be that the trustees breached an agreement with the member,” said Ms James.
The ATO, however, takes the view that the trustee must take action and if the trustee doesn’t take action, for example, fails to pay the pension minimum or doesn’t reduce this transfer balance amount, then the pension effectively doesn’t meet the standards and the won’t get the exemption, she warned.
“Another issue that this raises is that if we don't meet those pension standards, is the pension now not a complying pension, does it need to be commuted and a new pension commenced on the right terms, or does the pension continue?
“If the pension's been commuted and deemed to be recommenced, have we got merging between our taxable and tax-free components? There's a risk here if we don't pay pension minimums, that's been something the ATO's been looking at really closely, or if we have an excess transfer balance tax amount that we don't commute within the relevant time frames.”