Critical documentation for post reform pension strategies
It is crucial for advisers to document the allocation of member benefit payments following the super reform changes.
Now that we have finally come to terms with the rules around the Transfer Balance Cap (TBC) and Transfer Balance Account (TBA), many Advisors are focusing on strategies surrounding the taxation and estate planning implications of member benefit payment allocations.
It’s not uncommon for SMSF members to have multiple pension accounts that isolate differing tax components, or to have an accumulation account receiving contributions or required by compliance with the TBC provisions that came into effect 1 July 2017.
The challenge for Accountants and Advisors is how member withdrawals are allocated across the member accounts given the various outcomes that result. Each client will be different so it’s not just a one size fits all approach.
For some members who have fully utilised their $1.6m TBC, they may be trying to maximise the amount held in pension phase to increase the Exempt Current Pension Income (ECPI) percentage and reduce tax paid by the fund. In this scenario it may be beneficial to first withdraw the minimum amount from each of the pension accounts, followed by withdrawing amounts in excess of the required minimums as lump sum payments from the accumulation account, effectively increasing the ECPI percentage and reducing the tax payable by the fund.
If the member does not have an accumulation account, but has multiple pensions, then it may be more beneficial to ensure that amounts above the minimum pension payments required are withdrawn from the account with the highest taxable component, especially where adult children beneficiaries have been nominated.
Remembering that a debit to the TBC is achieved where amounts are commuted from the retirement phase pension accounts back to accumulation, it may be beneficial to classify excess withdrawals as a commutation from the pension account with the highest taxable component to the accumulation account, prior to a lump sum being taken. This strategy will effectively reduce the TBA leaving room for additional contributions and potential use of the bring forward provisions to commence a new pension up to the TBC.
Each of the above scenarios will have various consequences both in the short term (ECPI), and longer term of the fund (Estate Planning and payments to non-tax dependent beneficiaries).
One way for Accountants and Advisors to mitigate risk to their firm in the implementation of these allocation strategies is to have documentation prepared confirming that the member has instructed the trustee to allocate their withdrawals in a particular way.
This documentation will not only confirm the allocations have been made at the direction of the member, but will also provide the Auditor with confirmation that the transactions being reviewed are in line with the members instructions and have been recorded correctly.
Importantly, it will also ensure that the strategies underpinning the allocations are effective and that the member’s desired taxation and estate planning outcomes will be met.
Failure to document these decisions in such a manner could result in litigation risk for the Accountant or Advisor if allocation decisions result in adverse outcomes for the members or beneficiaries.
This being the case, having benefit payment allocation documentation put in place that outlines the member’s instructions to the trustee is the best way to eliminate this risk to your business while also ensuring that client’s desired strategic outcomes are met.
Brett Davis, technical services manager, Topdocs