The new transfer balance cap causes a trap for SMSF pensioners who receive payments above the account-based pension (ABP) minimum annual payment. For these pensioners, the capital supporting the pensions is reduced by the amount of the pension payments, including the amounts above the ABP minimum. However, there is no corresponding debit to the pensioner’s transfer balance account!
The following strategy avoids the trap of exhausting the capital supporting the pension faster than is necessary for superannuation law purposes.
A strategy to avoid the trap is to treat all amounts above the relevant ABP minimum as a lump sum payment from the pensioner’s accumulation superannuation interest. This strategy preserves the capital supporting the pension to the greatest extent possible. In other words, the capital supporting the pension will be exhausted only by the relevant minimum pension amount.
However, sometimes the pensioner does not have an accumulation superannuation interest or the accumulation superannuation interest is insufficient to pay the amounts in excess of the minimum ABP amount. If so, the strategy can provide an alternate option, namely, that these amounts are to be paid as a partial commutation of the relevant pension.
Bob is 66 years old and has an existing ABP with $1.6 million capital supporting this ABP. He does not have any other pensions. He also has an accumulation superannuation interest of $100,000. On 1 July 2017, his personal transfer balance cap is $1.6 million. A credit of $1.6 million applies to Bob’s transfer balance account.
On 1 August 2017, the SMSF trustee makes a payment of $200,000 to Bob. As Bob is 66 years old, the relevant ABP minimum payment for Bob is $80,000 (i.e., $1,600,000 (account balance) x 5 per cent (percentage factor)). Accordingly, this payment of $200,000 exceeds the ABP minimum payment for Bob by $120,000.
Provided the strategy is documented properly, the $80,000 is a payment from the capital supporting Bob’s pension, the $100,000 is a payment from Bob’s accumulation superannuation interest, and the $20,000 is a payment as a partial commutation of the ABP.
A critical question
Many advisers are already familiar with the above strategy. However, many advisers might have the intention of waiting until ‘after the fact’ to allocate payments and document this allocation. In other words, there is no evidence of the parties’ intention at the time of payment. This raises a critical question: if documentation is only made ‘after the fact’, will the ATO accept that the payments in excess of the ABP minimum came from either the accumulation superannuation interest or was a valid partial commutation?
The answer is probably no, without documentation made ‘before the fact’, the ATO will probably not accept this.
In relation to the partial commutation of pensions, 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. 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 could 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. Accordingly, any strategy involving a partial commutation should be documented prior to the time of payment.
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 ATO could then treat the payment was paid as a pension payment in excess of the relevant ABP minimum. A conservative approach is to have relevant documentation completed and signed before the payment of the amounts in excess of the ABP minimum payment.
Joseph Cheung, lawyer and Bryce Figot, senior counsel, DBA Lawyers