DBA Lawyers lawyer Joseph Cheung said with the introduction of the transfer balance cap, many SMSF practitioners are contemplating strategies that involve partially commuting some or all of the amounts above the account-based pension minimum.
A recent benchmark report from Class indicates that the average SMSF pensioner overdraws $24,000 above their minimum.
“This means that the average pensioner is withdrawing more than 32 per cent above their relevant ABP minimum and could miss out on significant opportunities unless timely action is undertaken,” said Mr Cheung.
It’s important, however, that SMSF practitioners and their clients prospectively document these strategies, said Mr Cheung.
“The ATO‘s view as expressed in SMSFD 2013/2 and TR 2013/5, 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,” he explained.
“Where no documentation exists either before or at the time of payment, it is hard to prove that the pensioner consciously exercised their right.”
The ATO, he warned, could therefore 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.
“Similarly, where the payments are allocated and the strategy documented ‘after the fact’, the ATO might take the view that 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.”
The safest approach, he said, is to have relevant documentation completed and signed before the payment in excess of the ABP minimum payment.
“[Otherwise], the ATO may allege false and misleading disclosure and, in addition to winding back any tax benefit from the ‘fabrication’ of any documents that did not exist before the relevant commutation, may impose penalties of up to 75 per cent plus the general interest charge,” he warned.
Mr Cheung also noted that the introduction of transfer balance cap reporting means there will be limits for reporting events and while the amounts paid directly from a pensioner’s accumulation interest will not need to be reported, amounts that are paid as a partial commutation of the pensioner’s relevant pension will need to be reported.
“A late lodgement penalty may be imposed by the ATO if a pensioner’s partial commutation in relation to the amount above the relevant ABP minimum is not reported on time,” he said.