A senior sector executive has revealed a number of SMSF members are improperly executing a withdrawal and recontribution strategy by not ensuring they have met a full condition of release before implementing the plan.
Colonial First State senior technical manager Tim Sanderson noted this has happened in situations where an individual, who has reached age 60, incorrectly believes they have satisfied the definition of retirement that will allow them to make the drawdown for the strategy.
Sanderson cited an example of how this could happen in the situation the employment arrangement is predicated on time-defined contracts.
“We’ve seen people claim that they’ve satisfied the retirement condition of release where their contract with the employer came to an end and the employer then engaged them under a new contract doing the same thing,” he said on a recent FirstTech Podcast.
“In that case they really won’t have ceased their arrangement of gainful employment and therefore won’t have satisfied a condition of release on that basis that allows them to receive a lump sum [from the super fund].”
Colonial First State head of technical Craig Day added he had witnessed a situation where an individual’s leave arrangement complicated the strategy and ultimately led to it being put in place before it should have been.
The circumstances involved an employee who declared his retirement, but included 12 months of long service leave before the end of his work term was made official.
“The adviser unfortunately misunderstood this arrangement and thought they’d already fully retired [at the commencement of the long service leave period] and therefore recommended the client cash out a lump sum shortly after they went on leave and before they had actually retired, which was a breach of the preservation rules,” Day explained.
“[Unfortunately, this situation] got picked up by the licensee’s compliance team reviewing the number of SOAs (statements of advice) and as a result the client needed to be informed the whole amount of the withdrawal was in breach of the preservation rules.
“[So] all of that amount [the client drew down had] to be included in [their] assessable income. This was a number of years ago and I just assume it was when the [non-concessional contributions] cap was $300,000. That’s a lot of money to include in your assessable income.
“That actually resulted in the adviser of the business needing to pay compensation for some negligent advice.
“So it can just be as simple as getting that sort of thing wrong that can really trip people up and that’s why we say it seems obvious, but just make sure everything is actually as it should be before you take money out of super.”
