Bill Kable provides a cautionary tale about how SMSF income can be treated in child support payment calculations. Government collection of child support started when former prime minister Bob Hawke declared no Australian child would live in poverty by 1990. Hawke now admits the obvious: establishing the Child Support Agency (CSA) to ensure this pipe dream came true was a serious policy mistake, with one negative ramification extending to SMSFs. But first some background.
Hawke’s naïve idea was that the CSA would be the best way to get fathers to pay for children rather than forcing the obligation onto the state. The CSA would work hand in glove with the Family Court, which had been set up in 1975 with the ideal of being a family-oriented court more focused on social workers than lawyers and judges. That was the policy goal.
But what’s the reality? On 22 December 2014, The Canberra Times reported on the case of a determined litigant known simply as “DT” because of strict Family Court rules on identifying parties. The Department of Human Services (DHS), which runs Centrelink and Medicare, as well as the CSA, resisted handing over documents to the court and defied orders to release information to the Office of the Australian Information Commissioner.
As of April 2014, DHS had allegedly paid more than $500,000 to defend the DT case where they were disputing a father’s payment of $6000. This is despite the fact the issues surrounding this case were always highly contentious. It also begs the question why a negotiated settlement couldn’t have been reached without resorting to the courts. After all, we are only talking about $6000.
Certainly Senator Nick Xenophon thinks so. He has been trying to use Senate estimates to get answers on the spending in the case, but the CSA cites “confidentiality” as the reason for not coming clean. So we do not know exactly how much has been spent trying to recover $6000 on this claim.
Why this background? Knowing about this case, and how DHS has apparently used a $500,000 legal sledgehammer to crack a $6000 nut, influenced my decision on whether to proceed with a review by the Social Security Appeals Tribunal (SSAT) of an assessment made by the DHS in my own case.
It should be kept in mind by financial planners when asked for advice by separated fathers who are interested in establishing an SMSF.
From 1 January 2013 through to the appeal decision on 12 December 2014, I had been paying child support in accordance with the normal formula provisions. In July 2014, the mother applied for a change of assessment based on reason 8 under the Child Support (Assessment) Act. To establish this reason, the mother must show that the relevant assessment is not fair because of the income, property, financial resources and earning capacity of the payer.
In considering the claim by the mother, DHS accessed ATO records of my SMSF and the decision was based solely on that information provided by the tax office. Reliance was made to the transition-to-retirement rules in determining the maximum amount of income stream that could be received. I continued to work throughout this period, but I was not employed and therefore no employer was making superannuation contributions for me.
The ATO records showed the income of the SMSF for the relevant periods as well as the total assets. The records also showed the withdrawals made annually in order to comply with the transition-to-retirement rules being 4 per cent of the total investment. I did make some non-concessional contributions, but no concessional contributions were made.
In my objection, I referred to the DHS’s own deeming rules regarding income from assets. I also noted on the advice of my financial planner that all contributions I made to the SMSF should not be considered as reportable contributions.
I would strongly recommend to financial planners that if a separated father has an SMSF, he needs to be aware the assets can be treated as income by DHS.
The overriding consideration in my submission was that superannuation had been fully accounted for in the original property settlement at the time of the divorce.
The appeals decision by DHS was to ignore the actual income of the SMSF, to ignore the actual withdrawals made to comply with the rules for transition-to-retirement and to ignore its own guidelines on income to be derived from assets. Based on its investigation of ATO records on the SMSF, DHS came up with a novel approach to income and created its own definition of reportable contributions.
The decision by the DHS was that since a maximum of 10 per cent of the assets of the SMSF could be withdrawn annually while still complying with superannuation rules, they would treat the full 10 per cent as annual income.
There are many absurdities in this decision, apart from the query of how this would work on an ongoing basis if the 10 per cent were not withdrawn in a particular year. If I was not in a transition-to-retirement, if I had simply been in retirement, I could have withdrawn 100 per cent of the assets. It could follow that 100 per cent of my superannuation assets could be treated as annual income on the basis of how the transition-to-retirement pension was treated. It appears that if I had not started a transition-to-retirement pension with an SMSF, I would not have been assessed.
In its motivation to redistribute wealth, the DHS was prepared to overlook its own guidelines and the actual income of the SMSF in determining the income of the paying father.
There is currently a federal government inquiry, headed by MP George Christensen, due to report, but with all the other issues that were raised at the inquiry, it is very unlikely the position on SMSFs will be addressed. As Xenophon has shown, there is little an individual politician can do in the face of this. So it appears we will have to live with this use of power.
That being the case, I would strongly recommend to financial planners that if a separated father has an SMSF, he needs to be aware the assets can be treated as income by DHS. Whether that is 100 per cent of assets or 10 per cent depends on whether the member is in transition-to-retirement. What seems to be the case is that income streams in SMSFs are treated differently to anyone receiving an identical income stream in a retail or industry super fund.
If the funds remained in a large Australian Prudential Regulation Authority (APRA)-regulated fund, the DHS would probably not have the ready access to ATO records on fund performance. It would appear that for the best protection when a father is still working, he should not go into an SMSF and he should not enter transition-to-retirement so that he remains barred from accessing preserved funds. This should continue until the child has left school, which, in my case, meant the end of the last exam of the HSC, not when they actually have the farewell from the school.
If you say to yourself “the CSA can’t do that”, believe me they probably can.
For a transition-to-retirement pension account with a $300,000 balance on 1 July, the minimum pension drawdown required is $12,000 or 4 per cent, and the maximum that can be drawn is $30,000 or 10 per cent. Irrespective of how much is actually drawn, DHS assesses $30,000 as income. Using simplistic figures, for the sake of the example, the following year the disadvantage compounds further. Had $30,000 actually been drawn, the raw balance would be $270,000, and DHS would assess $27,000. However, drawing a minimum of $12,000, brings the raw balance to $288,000, and DHS assesses income at $28,800, even though the actual pension drawn may be the minimum of $11,520. You can see from this example, over a two-year period DHS has assessed income of $58,800 against an actual amount drawn of $23,520.
Comment from SMSF Association director of technical and professional standards Graeme Colley
Treatment of income for CSA purposes is a bit of a Pandora’s can of worms, to mix a metaphor, in trying to understand what will and won’t be included. In some cases, what ends up as assessed income is in the lap of the gods.
The general rule is the income assessed for CSA is based on what is ‘adjusted taxable income’ for income tax purposes, however, there is a catch. Adjusted taxable income is a person’s taxable income as determined under the income tax law plus reportable superannuation contributions plus reportable fringe benefits plus a write-back of investment losses. In addition, the CSA legislation allows the adjusted taxable income to be adjusted where it considers it should take into account other amounts due to the circumstances of the relevant parent who is providing the support.
What we have seen in the circumstances of this case is an adjustment that has taken into account a situation where an individual has commenced a transition-to-retirement income stream and has withdrawn the minimum amount under the legislation. However, in view of reasons which are not obvious, reason 8 under the legislation has been invoked. This has resulted in an additional amount being included in the adjusted taxable income calculation, so the individual has been deemed to have taken the maximum amount equal to 10 per cent of the account balance of the income stream.
If the same practice were adopted by the CSA for a person who is receiving an account-based pension, then the whole balance could be included in their adjusted taxable income. One would hope this would not be the case or would only occur in exceptional circumstances where it is obvious the individual is depriving the children of any support at all.
The claim being made in the article is that this practice is restricted to someone who is a member of an SMSF and not to a member of an APRA-regulated fund. If this is the case in identical circumstances, there must be a question of equity in the application of the law in theory and practice. That is, if a person who is in receipt of a transition-to-retirement income stream is required to include the maximum amount of pension they should be receiving, then the same applies in identical circumstances, whether it is an SMSF or otherwise.
The lesson to be learnt in these circumstances for anyone with an SMSF is they may be at risk when drawing an income stream that the maximum permissible could be included as part of the adjusted taxable income if the CSA sees fit. It is interesting to see there is no reference to the preserved components of the underlying pension balance, but to the amount of income stream that can actually be accessed by the pensioner.
It will be interesting to see whether the logic used by the CSA in this case extends to account-based pensions, which have no restriction on the maximum amount of income stream that can be received, SMSF or no SMSF.