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Pension overpayment treatment can’t be ad hoc

Pension overpayment

SMSF documentation cannot be drafted on the spot in an effort to allow a pension overpayment to be treated as commutations, a technical expert has said.

A technical expert has highlighted the essential characteristic an SMSF’s documentation needs to have before a decision can be made on the treatment of an income stream overpayment brought about by the minimum pension reduction as a COVID-19 financial relief measure.

“You now may want to make a specific decision in respect to those amounts that are going to be above the minimum if you’ve already taken them. So are you going to treat them as a commutation, and therefore as a lump sum, that you can then apply against a member’s transfer balance account?” Smarter SMSF chief executive Aaron Dunn said during his SMSF Day webinar yesterday.

“This is [what] you need to document prospectively, otherwise you will not be entitled to the debit for the transfer balance cap. I cannot express that enough.”

Dunn said making a decision now about what to do with a pension overpayment may not be possible without a documented predetermined course of action, seeing the ATO expressed its attitude toward these situations, at least when the transfer balance cap was introduced.

“It is important to always remember the commissioner has been very clear around this concept of the treatment of benefits in hindsight,” he said.

He cited ATO Tax Ruling 2013/5, which dealt with when an income stream commences and ceases, and ATO Practical Compliance Guide 2017/5, which addressed commutation requests made before 1 July 2017 to avoid exceeding the $1.6 million transfer balance cap, as materials demonstrating what the regulator considers is required for a pension commutation to be valid.

“This is where [it was determined] the decision that needs to be made has to be prospective. So that prospective arrangement requires [an SMSF] to not only have a member’s request, but trustee acceptance to be able to treat the amount as something other than an income stream payment,” he noted.

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