SMSFs looking to use a pension to legitimately reduce their tax burden should adopt a long-term approach to the use of the income stream to avoid it being flagged as an avoidance measure and falling foul of a recently updated tax ruling.
BDO senior consultant Peter Crump pointed out while the changes to Taxation Ruling (TR) 2013/5 focused on what happened when a pension failed to meet the minimum payment requirements, it also considered the issue of when such an income stream started and ceased, which was important in planning on how to create them in a fund.
“TR2013/5 asks when does a pension start and says the commencement day is determined by reference to the terms and conditions of the pension income stream as agreed between the trustee and member,” Crump said, said at the recent The Tax Institute National Superannuation Conference in Sydney.
“The ruling then goes on to say that a pension is in place when the trustee has a liability to make a series of periodic payments.
“The ATO actually calls out an example that says a person who starts a pension, makes one payment and then commutes it will fail that test because it’s purely intended as a tax-washing process.”
He said with this focus on the timing of pensions, SMSF members should be careful with adopting short-term strategies around their use.
“For example, if you’ve got a large asset gain and going to move into the pension process for tax purposes, don’t have just one payment. Set it up as a series of regular payments,” he added.
“You also need to consider how long does the pension need to be in place to evidence that it’s genuine and not a process set up to achieve a tax outcome.
“My informal rule of thumb is to have the pension for at least two financial years, not just for one financial year, because if it’s too short a period of time, it stands out.
“Do you think the tax office knows that pension has stopped? It should via transfer balance account reporting, which we’ve now got on a quarterly basis.
“So if the tax office sees an SMSF commence a pension and cease a pension for roughly the same amount in a very short period of time, you think the lights are not going to go off in Canberra or Perth or Melbourne, or wherever their office is?”
