Advice practitioners need to carefully consider the intention and benefits behind starting a pension, selling assets and then exiting that income stream to avoid claims of tax avoidance by an SMSF member, according to the Institute of Financial Professionals Australia (IFPA).
IFPA senior technical services specialist Stuart Sheary said the scenario of starting an account-based pension (ABP), realising an asset and then ceasing the ABP raises the question of whether the fund was really supporting a pension in the first place.
“Taxation Ruling 2013/5 assumes an income stream is one where the trustee has a liability to pay an ongoing, periodic payment, and so the question there would arise was there ever an income stream in the first place?” Sheary stated during a session at the recent IFPA 2026 Annual Conference in Melbourne.
To illustrate this issue, he gave the example of Jane, aged 65, who will roll out of her SMSF, but before doing so commences an ABP, sells the fund’s assets, realising large capital gains, and then rolls the cash proceeds into the fund.
“Jane doesn’t want the SMSF anymore. She wants to roll into a new fund. She doesn’t particularly want an ABP, but wants to make sure she doesn’t pay any tax,” he said.
“You think this could be tax avoidance? Is this really an income stream that we’ve got going here?
“Alternatively, Jane has still decided to roll out of her SMSF, commence the ABP, realise the capital gains and roll into the new fund, but the caveat here, she is going to start an ABP with the new fund. In this scenario, would that be okay?
“In our gut, we feel it should be fine. Jane wants a pension long term anyway.
“Yet if we step back a little, Jane has decided she would like an ABP, just not with this fund, but then starts a pension, redeems the assets and later on rolls it across into the new fund. We could have a bit of an issue here and I wouldn’t feel comfortable with it.”
He noted issues of cost may be a driver for undertaking the strategies outlined above, particularly where another fund may offer a cheaper pension.
“Would you start an ABP, dispose of the assets and then roll over or dispose of the assets in accumulation phase and then roll over?” he said.
“It would be hard to justify selling down the assets in accumulation phase and rolling across to the new fund given it could potentially cause a large cost to the client.
“So we might want to think about starting a pension in our existing fund because when you do the product comparison, you have to consider the potential capital gains tax upon rolling out into the new fund.
“We can kick off the pension, let it run and in 12 months’ time, under our client best interest duties, we then look at the existing pension and what’s on offer elsewhere and then it makes sense to roll over as we no longer have that tax to consider in our assessment.”
