ATO flags potential losses with flexi-pensions
The ATO has warned SMSF trustees concerning flexi-pensions, saying that where these pensions are commuted in full, the member may be forced to forgo part of the reserve supporting the pension.
ATO assistant commissioner Tara McLachlan said that the ATO is aware of an issue with flexi-pensions that comply with regulation 1.06(6) of the SISR where they are commuted in full.
“They have particular rules around the maximum amount that you can commute from that pension, and we are finding instances where people are commuting them in full, but the amount that’s actually supporting the pension is greater,” Ms McLachlan explained.
“What happens then is the member actually forgoes that excess amount because that’s the rules of the pension they signed up to, which means it gets left behind as an unallocated reserve.”
While the ATO stated in its recent guidance on reserves that the creation of any new reserves from 1 July 2017 would raise suspicion for the ATO, SMSFs with flexi-pensions in this situation would be an exception to the said guidance, the assistant commissioner said.
SMSFs with flexi-pensions who are in this situation will need to drip feed the reserve out under the 5 per cent limit each year to all the members to get that down.
“Our general expectation is that we need to be able to see reserves decreasing over time. You do need to be mindful of the concessional contribution cap rules there, but we would be expecting those reserves to go down over time,” Ms McLachlan said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.