SMSF members making recontributions off the back of pension commutations must keep an eye on the processes they use to inadvertently avoid using up their transfer balance cap (TBC).
Colonial First State head of technical services Craig Day said questions should be raised with SMSF clients who wanted to use a recontributions strategy, particularly where a pension was involved, to ensure any commutations were carried out correctly as mistakes were not reversible.
“In terms of pensions, if we are doing a partial commutation, that’s not too hard if we make sure the remaining balance is at least equal to the minimum amount required to be paid for the year,” Day said at the recent Tax Institute National Superannuation Conference in Sydney.
“The one where people can get caught out is the full commutation where they need to pay out a pro-rata pension payment before they pay them the lump sum.
“Let’s say the member receives an annual payment of $50,000 each June and they fully commute on 1 January, that means whatever balance is being paid to them, $25,000 of it has to be treated as income and they can still take that $25,000 of recontributed money as income or not.
“Why am I bringing this up as an issue? Well, if they get that wrong, they have failed the pension standards and the ATO says that pension is not a pension as it ceases to be a pension on the first day of the financial year, and all the assets are accumulation assets and we will have our tax on that please.”
He said this failure of the pension standards impacted TBC reporting as a debit would arise at the start of the financial year, but the value of the debit would be the value of the interest at the time the member took the commutation and forgot to pay out the pro-rata pension payment.
“To administer all of that, the member has to run the admin through to the point that they failed to get the value and then you’ve got to rerun it back to 30 June to get the right reporting. It is a nightmare and large superannuation funds can manage that, but the trap will be for SMSFs,” he said.
He said this could be avoided by taking an additional pension payment, but that creates a different problem as pension payments were not debits for TBC purposes.
“When the member takes the money as a pension payment, they don’t get a debit. When they put it back in and start a pension, they get a credit and that may use up more of their transfer balance cap and might even push them over,” he said.
“For some people it won’t be an issue, but if they are close, then they may not want to use up more of their TBC than they need to and should just take it out as lump sum.”
