Pension splitting a no go within SMSFs

pension payment splitting

Trustees looking to split a pension payment will find superannuation laws have blocked that path, but commutation planning could resolve the issue.

A lawyer has warned SMSF trustees attempting to leave their fund while receiving a pension payment that splitting provisions do not apply to such benefits and they will need to plan for a commutation first.

DBA Lawyers senior associate William Fettes said there was no method under law for splitting pensions drawn from an SMSF as the receipt of a pension required membership of the fund.

“Splitting provisions do not operate to split pensions. You have to first address the pension by first commuting it,” Fettes said during a recent webinar.

“In order to give effect to a split, you may need to fully commute or partially commute a pension because in an SMSF context there is not a mechanism there to [give effect to a split pension].

“Within the Superannuation Industry (Supervision) Act it says if you are in receipt of a pension from an SMSF, you are a member. So [in the case of a split] you will be sharing the fund, even though you are trying to separate and that wouldn’t make sense.

“The whole tenor of the regime is that you cannot split a pension within an SMSF.”

He advised trustees looking to split a pension to follow ATO Tax Ruling 2013/5, which states the departing trustee would “need to consciously and validly exercise the right to exchange their rights to an income stream or rights to a lump sum”.

Commutation documents would need to be drafted that give effect to that change and the process was distinct from that used by other types of superannuation funds, he added.

“It is important to note the commutation is just a normal debit,” he said.

“It is just item one of table 294-80 of the Income Tax Assessment Act (ITAA) and you need your transfer balance account reporting requirements as per normal as you would pay the minimum pension payment or pro-rated pension payments if you are fully commuting, then commute and roll that back into accumulation phase and allow the split to go ahead.

“It is not this thing that [trustees] might have seen if you went looking in the ITAA about payment split debits.

“It sounds like it’s relevant, but in fact it’s only really applicable for public sector super funds and corporate benefit funds where they are paying defined benefit pensions and so they are looking to split a defined benefit pension.”

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