What is a ‘non-commutable life pension’? Can an SMSF ever pay one? New AAT decision provides critical guidance
There is a provision in the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) that, on its face, appears to allow a person of any age to receive their preserved benefits.
More specifically, item 108 of sch 1 to the SISR appears to provide that even preserved benefits may be paid to a superannuation fund member of any age, simply so long as both the benefits are paid in the form of a “non-commutable life pension” and there has been the following condition of release: “Termination of gainful employment with an employer who had … contributed to the … superannuation fund in relation to the member.”
An optimistic interpretation might lead an SMSF trustee to think that it could pay benefits even to a relatively young SMSF member.
However, the term non-commutable life pension is not defined in the SISR. Further, there is a lack of commentary regarding non-commutable life pensions. For example, the entirety of the ATO website only mentions non-commutable life pension three times:
- Once briefly in ATO webpage QC 37785 in the context of a 53-year-old in receipt of such a pension and how he should declare that income in his personal income tax return; and
- Twice in the ATO “Community” pages.
A recent AAT decision provides insight and guidance regarding what a non-commutable life pension is, and whether an SMSF can provide one.
That AAT decision is WZWK and Commissioner of Taxation (Taxation) [2023] AATA 872. We now provide a brief summary.
Facts
The applicant was a registered tax agent, chartered accountant and approved SMSF auditor. In other words, the applicant was “… a superannuation audit expert [and therefore] it was reasonable to expect that he had a better than average understanding of the relevant superannuation legislation …”.
In the 2010 financial year, when the applicant was approximately 47 years old, he commenced a new SMSF. In the 2010 and 2011 financial years, he was a director and general manager of Company B, and that company contributed a total of $20,000 to the applicant’s SMSF.
The applicant said that Company B suffered a fire during the 2011 financial year. The applicant said that he decided it then became unviable to continue Company B’s business. The applicant said that he, therefore, satisfied the relevant condition of release for a non-commutable life pension (i.e., termination of gainful employment with an employer who had contributed to the superannuation fund in relation to the member).
Under the guise of a non-commutable life pension, the applicant then received from his SMSF benefits of over $800,000 over the next six years, even though he had not reached preservation age.
The ATO took issue with the applicant for various reasons. One reason is that the ATO disagreed that the applicant was receiving a pension authorised by SISR. Instead, the ATO felt the applicant was receiving money as illegal early access.
What the tribunal found
The tribunal was sceptical as to whether it truly was unviable to continue the business, noting:
The applicant’s evidence is not independent or objective. Company B was owned and operated by the applicant. It was the applicant’s decision to terminate his own employment. In these circumstances, more persuasive evidence is expected and required. There was no evidence regarding the financial viability of the business or why it could not have moved into new premises and continued performing its contractual obligations. There was no evidence that Company B was uninsured or that it had been abandoned by its customers. A copy of the employment agreement was not before the tribunal. No documentation was before the tribunal.
The tribunal accordingly found that the condition of release had actually not been met.
Therefore, it was unnecessary for the tribunal to consider what is a non-commutable life pension. Nevertheless, the tribunal considered that issue.
The tribunal found that a non-commutable life pension has to be paid for the life of the recipient, unlike the payments that were actually paid to the applicant. Further, the tribunal held that a non-commutable life pension has to be a pension that satisfies either subregulation 1.06(2), (7) or (8) of the SISR (i.e., defined benefit pensions and market-linked pensions). SMSFs, however, are, after 31 December 2005, typically no longer allowed to commence new defined benefit pensions or market-linked pensions.
The applicant bristled at this asking:
This would surely result in the absurd conclusion that a person in a self-managed superannuation fund would not be able to be paid a non-commutable life pension whereas a person in a large superannuation fund would.
The tribunal did not expressly address this, but that does appear to be the position: that an SMSF trustee cannot now pay a non-commutable life pension under item 108.
Other implications
The decision covers other aspects, too, such as when an individual should be disqualified from being an SMSF trustee, as well as adding some details regarding what might constitute recklessness in the relevant circumstances. The applicant was also taxed on moneys withdrawn from his SMSF as assessable income. Accordingly, it is well worth reading. The full text is available at http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2023/872.html
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Bryce Figot (
