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Pensions, Superannuation

Transfer balance transactions trap for unwary

transfer balance transactions

Trustees should be aware that not all transactions aimed at reducing a transfer balance will actually do so and can leave a fund open to excess taxes.

Trustees need to be fully aware that not all transactions to a pension in retirement phase within an SMSF will be considered as transfer balance debits and thus unable to reduce any excess in a transfer balance account, an SMSF legal firm has warned.

Referencing a recent legal case heard by the Administrative Appeals Tribunal (AAT), SuperCentral stated the case found there is a difference between commutations to a pension and a pension payment in generating transfer balance debits, and while the former could do so the latter could not.

The case – Lacey v Commissioner of Taxation [2019] AATA 4246 – which was decided on 18 October, centred on pension payments made by Raymond Hamilton Lacey as part of his efforts to reduce his excess transfer balance to zero, and his transfer balance cap to $1.6 million, after the introduction of the latter in 2017.

According to the details of the case, Lacey had a transfer account balance of $1,660,000 as at 1 July 2017 and aimed to reduce this by moving $30,000 to accumulation phase and making pension payments for the first six months of 2017/18 that totalled $40,000.

SuperCentral pointed out that only the first of these transactions generated a transfer balance debit leaving Lacey with a transfer account balance still over the $1.6 million mark.

“If Mr Lacey’s transfer balance account was $1,660,000 as at 1 July 2017, he had to generate one or more transfer balance debits which in total equal $60,000. Rolling back to accumulation phase generates a transfer balance debit.  However, pension payments do not.”

“Consequently Mr Lacey did generate a transfer balance debit of $30,000 (by rolling back that amount from retirement phase to accumulation phase) but the pension payments of about $40,000 generated no transfer account debit.”

As a result of this, Lacey was assessed by the ATO as having a transfer balance account of about $1,620,000 and an excess transfer balance of about $20,000 as at 31 December 2017 and was assessed for excess transfer balance tax.

In his defence, Lacey said he believed the pension payments would also generate transfer balance debits and relied on statements from the ATO’s website, including: “If on 1 July 2017 you are over your $1.6 million cap by $100,000 or less and you remove this excess by 31 December, then you will not have to pay excess transfer balance tax or account for notional earnings on the excess”.

SuperCentral noted that Lacey claimed the use of the word ‘remove’, rather than commute or rollback, or rollover, allowed for the reduction to be completed through pension payments.

The group pointed out that while the AAT considered the text on the ATO website could have been clearer, the pension payments did not generate transfer balance debits, and a misunderstanding of the correct taxation position did not prevent the ATO from applying that position.

“This case clearly highlights the need to correctly understand what transactions to a pension in retirement phase generate transfer balance debits: commutations of a pension do generate a transfer balance debit while pension payments do not.”

“In particular, one-off pension payments will not generate a transfer balance debit as a one-off pension payment is still a pension payment and not a commutation of a pension.”

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