SMSF members cannot take a series of lump sums from a pension during the year as a single or grouped amount due to their tax treatment, but can direct the trustee as to where those sums should come from to reduce any tax burden, according to a technical expert.
Heffron SMSF specialist Sean Johnston said the correct practice for making multiple lump sum payments per month from a pension that are above the minimum payment amounts is they need to be processed at the time of the transaction and relevant lump sum documents and minutes prepared and signed within a reasonable timeframe.
Speaking during a recent briefing, Johnston added there was no way of batching these payments and then making them monthly, quarterly or annually.
“From a processing perspective, you don’t have to do these in real time, but the transactions each have to be treated as a singular transaction because they will have different components pulled out throughout the year and so you have to calculate those at each withdrawal stage,” he pointed out.
“We can solve that treatment from a documentation perspective and at the start of the year the member can instruct the trustee their payments are to be processed in a specific order.
“Firstly, you would take it from minimum pensions, then lump sums from the accumulation account and then partial commutations from the pension account.
“That process would allow you to do one set of documents, usually at the start of the year, because they have to be done before the lump sums start coming out, or at least the decision has to be made to treat it this way before the lump sums start coming out.”
He noted this order could be reversed where a member was still making personal super contributions.
“You might reverse the order of taking lump sums from accumulation [and move it] from second to last if you’re doing something like making regular contributions that you are going to claim a tax deduction for,” he said.
“Otherwise you have to get your section 290 notice [of intent to claim a deduction] in and your acknowledgements done as you are getting those contributions in every time before you take the next lump sum.
“The other time you might think about that slightly different order is if your tax components are more favourable in your accumulation account and you might want to commute some of that pension so you can maintain that tax-free component within that accumulation balance and use that to start a pension in the future.”
