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Practitioners wary about new pension ruling

SMSF practitioners are trying to understand the new complexities introduced by the latest tax ruling affecting superannuation pensions, despite a lack of clarity in relation to some aspects of it, according to the SMSF Professionals’ Association of Australia’s (SPAA) technical director.

The Australian Taxation Office (ATO) issued Taxation Ruling TR 2013/5 “Income tax: when a superannuation income stream commences and ceases” on 31 July, which consequently affected the timing of when an income stream was payable.

SPAA technical and professional standards director Graeme Colley said the main issue advisers had been occupied with was the application of the ruling on pensions.

“When pensions stop and start, and the SMSF determination concerning the calculation of a minimum pension amount, which has a little to do with commutations, links in with the rulings as well,” Colley told selfmanagedsuper.

“Combining that with the amendments made in June by the government, there’s a fair bit for people to understand.

“That not only applies immediately, but the legislation carries back to 1 July 2012, so some advisers will have to go back and review what they’ve done over the last year.”

He said SMSF practitioners would have to make sure that if a non-reversionary pension was being paid from superannuation and the pensioner passed away, that they were aware of the consequences for the superannuation fund as well as the income supporting that pension.

“Whether it’s taxable or tax-free depends on these new rules,” he said.

“Also, there are two aspects of the new ruling, which wasn’t in the draft – what is actually a superannuation income stream, and it’s more than just one payment; it’s a liability for a series of payments.

“That’s why it might be a technical issue because you might find in some cases people start the pension with the intention of only taking one payment and turning that into a lump sum.”

In addition, the final ruling also referred to the partial commutation of pensions, he said.

“What the commissioner is saying is that for you to make a partial commutation of a pension and draw down part of that pension as a lump sum, you must elect that the next payment that comes out of the pension will be treated as though it’s a lump sum,” he said.

Further clarification was needed on the definition of commutation, specifically in the year of death whether a minimum pension payment was required to be made with a non-reversionary pension, he said.

“What happens at the moment is that in the year of death, if you commute that pension subsequently, then there’s no requirement to draw down a minimum pension payment in the year of death,” he said.

“What the commissioner needs to clarify for us is if you’re in a non-reversionary pension, whether the commutation happens at the time of the person’s death or whether it happens subsequently when a lump sum is drawn out.

“It’s a very technical point, but I’ve heard at a number of seminars professionals are working out strategies for that, which sort of complicates things as it could be easily solved by the commissioner indicating when he thinks the commutation takes place.”

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