Speaking to SMSF Adviser, Merit Wealth accountants services director David Moss said any SMSF practitioners that plan to partially commute amounts above the account-based pension minimum should be documenting these strategies now.
“The law requires SMSFs to have these documents in place before the payment is even made,” said Mr Moss.
“You can't wait until the tax return to prepare these documents. If they have been prepared afterwards, you've got the risk of effectively having backdated documents and they could be viewed as fraudulent documents.”
Previously, this wasn’t an issue because the accountant would have simply prepared all the documentation when they did the tax return for the SMSF, which would state that the trustee had requested the payment to be made as a lump sum instead of a pension, he explained.
This is no longer possible with events-based reporting, however, and while the reporting deadlines are still being decided, it’s likely SMSFs will need to be reported at least 28 days after the end of the quarter in which the event occurred, he warned.
“If the accountant doesn't receive the information [about the pension payment] until the beginning of November and then looked at it and said ‘ideally this person should have paid this as a lump sum rather than a pension payment’, they're going to have to lodge one of these TBAR reports and they're going to have to lodge it late,” he said.
“The late lodgement of the TBAR means you are giving the ATO a document after the fact stating that the client has paid a lump sum. The ATO will look at that straight away and question whether that amount really was a lump sum or if someone looked at this after the fact and decided a better result would be a lump sum.”
Mr Moss said he believes the ATO will be automatically questioning every one of these reports that come in late and evaluating whether the correct facts have been submitted or whether the accountant is trying to create the best tax result for the client.
“It’s not like you can hide anywhere — you have to actively send the ATO a form stating that you want to treat it as a lump sum and you’re giving it to them late so it’s just an automatic red flag,” he said.
“The ATO has already said if there's cheekiness, they'll just treat the whole thing as a pension payment, not as a lump sum, so you don't get the outcomes for the client that you want.”
If there’s a late lodgement penalty issued, this creates an issue of who will pay the penalty, he said.
“It’s going to be a very awkward conversion when you tell the client that ‘we put in a report to change this for you because it would have got a better result, but now you have to pay a penalty, and the ATO knocked back what we were seeking to achieve anyway, so the payment won’t be treated as a lump sum, it’ll be treated as a pension payment,” he said.
“How do you get a client to pay a penalty when you tried to implement a nice strategy but you failed in your attempt to get it achieved?”