SMSF members aware of the updated rules around minimum pension payments may still breach super regulations when making a commutation and cause their fund to lose its tax-exempt status, a superannuation technical specialist has warned.
Colonial First State head of technical services Craig Day said many trustees and practitioners were aware a fund could breach the pension standards by not making minimum payments from an account-based pension (ABP), but could also do the same by failing to make payments when commuting the income stream.
“When you go into the Superannuation Industry (Supervision) Regulations, they state ABPs are non-commutable unless you satisfy the requirements around pro-rata payments,” Day said at The Tax Institute National Superannuation Conference held in Sydney today.
“So if you are pulling money out of an ABP, you have to look at whether it’s a partial or full commutation.
“If it is a full commutation, you have to take at least a pro-rata payment up until the day that you actually commuted your pension.”
He said the ATO introduced this rule as in the past there was no requirement to do so and people would open an ABP, commute it close to the end of the financial year and roll over to a new income stream provider.
By doing so they would sidestep requirements for a minimum drawdown and pro-rata payments, while also keeping their pension assets in a tax-free environment for most of the year.
“If you are doing a partial commutation, it is a bit easier. You can apply the pro-rata rules or just make sure the remaining balance is enough to pay out the minimum for the rest of the year,” Day said.
“That’s all it is, but you would be surprised that people do fail those rules and that can also cause you to fail the pension standards, and from a tax perspective the income stream stops immediately and therefore you have no exempt current pension income for that year.”
