The ability to automatically commute and restart a pension that fails the minimum payment standards via a clause in a trust deed is unlikely to work and may create other problems for an SMSF member, according to Heffron head of education and content Lyn Formica.
Speaking at the recent Heffron Superannuation Intensive Day held in Sydney, Formica said that following the release of the revised Taxation Ruling 2013/5, which states a pension that did not make minimum payments must be commuted and restarted to retain exempt current pension income, more clients were asking if that could happen automatically via documentation.
“I have been asked a number of times could we have something in the deed or the pension contract which automatically stopped the pension and restarted it if we have discovered that we have failed to pay our minimum,” she said.
“Ideally, we would have that type of clause in our deed and that commutation restart would happen after 30 June, say on 1 July.
“I would love to put something like that in the deed or the pension contract, but I just don’t think it works.
“I’m not sure that would be a valid commutation of that pension as there are too many variables since the trustee doesn’t know on 30 June that the pension has ceased.
“Usually they don’t discover it until many months down the track to be able then to argue that back on 30 June they had commuted the pension.”
She pointed out that even if an automatic commutation of a pension was possible, it could cancel out other strategies available to an SMSF pension recipient.
“It certainly means the ability to request the ATO’s discretion to use the one-twelfth rule disappears if you have got something in your deed that automatically commutes that pension,” she added.
“In addition, we might want to have more control over when we commute the pension and sometimes want to be able to consciously commute at a particular date.
“So even if we automatically commute, I’m not sure we would want to do that.”
In June, ASF Audits head of technical Shelley Banton also questioned the validity of an automatic commutation process, noting that starting a pension requires advice and it would be tacit admission by the trustees they had failed to fulfil their duties.
