SMSFs warned on reclassifying pension payments
SMSFs have been cautioned against reclassifying pension payments made before 24 March as lump sums in response to the reduced minimum pension requirements.
In March this year, the government reduced the minimum annual payment required for account-based pensions and similar products for 2019–20 and 2020–21.
SuperConcepts technical specialist Anthony Cullen said he has received a lot of queries in relation to whether members who had already met the minimum pension requirement for 2019–20 before 24 March can reclassify the excess amounts as a lump sum from either their pension or accumulation account.
“Unfortunately, we’ve got to think about when the law changed, so although the law states that for the full 2019–20 financial year the minimum requirement is half of what we would normally expect it to be, the law only received royal assent on 24 March and only commenced the day after that,” Mr Cullen explained in a SuperConcepts podcast.
“So, we need to use the 25th of March as a line in the sand date, anything that occurred prior to that date was basically withdrawn from the fund based on what the previous rules were.”
If an SMSF member had already been taking out money on a monthly basis and by the 25th of March he had already met his reduced minimum requirement, they can’t go back and reclassify those repayments, Mr Cullen warned.
“The ATO has provided clarity on this on its frequently asked question page and clearly stated that you cannot go back and reclassify them, if they were a pension payment previously, then they are still a pension payment, we can’t just reclassify them as lump sum payments,” he said.
Mr Cullen said that for a payment to be treated as a lump sum, there needs to be a request from the member prior to that payment being made saying that it is to be classified as a lump sum.
“So, if you don’t have that paperwork, it’s going to be difficult to go back and say that a payment made back in December was a lump sum, because an auditor will turn around and request the paperwork to support that payment,” he said.
“There are people in the industry and clients who do back-date documents, but we don’t endorse that, it’s not an approach you should take. If anyone does go down that path, I would question how they justify applying a law that they didn’t know about until the 25th of March any earlier than that.”
Looking ahead, Mr Cullen said that if clients have met their reduced minimum requirements for the financial year but are still looking to take out further amounts, they might want to consider taking them as lump sums as this creates a debit in their transfer balance cap.
“This may free up some space within your cap that you may be able to utilise later on,” he 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.