SMSF advisers and trustees have been warned not to backdate pension commencement dates to minimise tax, particularly when dealing with exempt current pension income (ECPI) as it can be viewed as criminal activity by the ATO.
DBA Lawyers special counsel Bryce Figot said SMSF members looking to calculate ECPI using the segregated method were often unable to do so because of the disregarded small fund asset rules, which apply where someone in a fund in retirement phase had a total super balance over $1.6 million.
However, Figot noted an exception to this rule created in 2021 allowed an SMSF to have segregated current pension assets if, apart from the disregarded small fund asset rules, all of the assets of the fund would be segregated current pension assets.
He gave the example of a $3.8 million SMSF with two members, both aged 65, which was in accumulation mode from 1 July to 31 December 2023, but started two $1.9 million account-based pensions on 1 January 2024 and then sold a property asset on 2 January for $3 million, resulting in a $2.5 million capital gain.
“How much tax is payable? Well, it depends if the asset is a segregated current pension asset and since the 2021 changes that could apply because the whole fund is now in pension mode, meaning the capital gain is disregarded and no tax is payable,” he said in a recent briefing by the law firm.
“If, however, the asset is not a segregated current pension asset, it will come down to what percentage an actuary certifies.
“I suspect that an actuary might certify that 50 per cent of the fund’s income relates to current pension liabilities and if the fund was in pension mode for half a year, only half of the income is exempt.”
He said this tax position could have been reduced if the pensions had commenced on 1 July 2023, rather than 1 January 2024, as an actuary was likely to certify the income was around 99 per cent exempt, but warned SMSF members should not falsify pension start dates.
“I want to warn you because we often get the question: ‘Can we say that the pension did start on 1 July as the ATO says you are able to start a pension, but not make the payment until months afterwards?’” he said.
“The answer is no and firstly you will draw attention to yourself very quickly because you’ll be lodging late transfer balance account reports and secondly it’s a crime.
“That would be a falsified document and if you look at section 83 of the Crimes Act, there are some specific elements and you might find yourself satisfying those and an extreme manifestation of it is 10 years in prison.
“I haven’t actually seen anyone being imprisoned for it, but have seen other bad implications occur so don’t backdate.”
