SMSF members should not view the tax-free treatment of pension payments from their fund as a vehicle to avoid capital gains tax on assets held within their retirement savings vehicle and must run the income stream for a reasonable period of time, an SMSF technical specialist has pointed out.
Heffron head of education and content Lyn Formica confirmed it was possible to convert all of a member’s benefits into a pension and then withdraw it all, but the two barriers to an action like that are the member meeting a condition of release and the tax-avoidance rules.
“For someone getting to age 60, what they need to do to access their super and take it all out is meet a full condition of release and satisfying the retirement definition is one of those full conditions of release,” Formica told attendees of a recent practitioner briefing.
She pointed out a condition of release, for those who have not reached age 65, required the member to have reached the preservation age of 60, terminated a past employment without intending to work 10 or more hours a week in the future, or to have reached age 60 and had a termination of a paid job after that date.
“After this you could take your super as a lump sum and it would be tax-free,” she added.
“You could take your super as an account-based pension and those payments would be tax-free. There is a minimum each year, but no maximum, so it’s potentially very tax advantaged to start an account-based pension.
“However, if your goal was to start a pension and then take it all out, and you were starting the pension so you could sell all the assets of the SMSF and get the tax exemption on them, that is, not paying capital gains tax, I would be a little bit worried about that.
“It seems that would be a scheme to try some tax avoidance.
“Generally speaking, when we start a pension we need to take at least an annual payment and keep the pension running to make sure that we could make that payment.”
