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.
