A workable solution allowing assets held by an SMSF inside a pension reserve to be liberated is still being sought in an effort to extinguish troublesome balances that are no longer serving a purpose, a technical manager has said.
“Every few months we put a proposal through to the ATO if we can find the right scenario, [or seek] a private binding ruling with the particular client’s circumstances, trying to explore every option we can so that we can find a situation [allowing us] to get rid of these reserves as say a lump sum death benefit or something like that,” Heffron head of SMSF technical and education services Lyn Formica revealed.
“[Unfortunately] we’ve not come up with any solutions to date [but] we are continuing to explore things with the ATO.”
According to Formica, the problem has arisen if a SMSF was set up to support a defined benefit pension using a reserve to fund the income stream in question. Specifically, the amounts in the reserve remain trapped from a situation where the original pension recipient has died and the beneficiary of the reversionary pension has also passed away.
The situation has been further complicated by having to take into account the contributions caps of adult children and the stipulation any allocations from reserves must be less than 5 per cent of the member’s balance, Formica said.
She noted the inability to extinguish these reserves easily is causing trustees to experience significant inefficiencies resulting in suboptimal outcomes.
“A lot of these funds have very piddly amounts left in them. Effectively [people are] stuck with these funds [and incurring unwanted associated fees],” she revealed.
“[Firms] like ourselves are getting accounting fees every year [as a result], but we don’t want to look after these funds. We would much rather [people] be able to wind them up.
“So again we’re having conversations with the ATO saying if the balance is small enough, can we just all turn a blind eye and whip this money out, but [we’ve received] no answer on that one yet.”
Suggestions have been made that the rule allowing individuals to carry forward the unused portion of their concessional contributions cap could provide an avenue to extinguish reserves such as these.
