As practitioners start to undertake the completion of the financials and SMSF Annual Return for the year ended 30 June 2020, many pension members are likely to have withdrawn more than the temporary 50% reduced minimum pension for the 2019/20 as a result of this amended legislation only taking effect from 24 March 2020.
It is widely accepted view that as part of a transfer balance cap ‘claw-back’ strategy, members would look to undertake partial commutations of an income stream where they have taken more than the minimum pension for an income year post 1 July 2017. For this to be effective, it requires a prospective election to be made, via a member request and trustee acceptance (following the ATO views set out in TR 2013/5 – when a pension commences and ceases).
The ATO’s view
The Regulator published as part of its COVID-19 FAQs for SMSFs to advise that it is not possible to re-classify pension payments already received by a member. You can read the ATO’s FAQ question and answer below:
I am retired and receive an account-based pension from my SMSF. My account-based pension has already paid me more than the reduced minimum annual payment required for the 2019-20 financial year. Is the amount over the minimum considered superannuation lump sum amounts?
Pension payments that you have already received cannot be re-categorised. Accordingly, payments made from your account-based pension in excess of the new reduced minimum annual payment required for the 2019-20 financial year are pension payments (that is, superannuation income stream benefits) for the year and not superannuation lump sums.
However, this statement appeared to still have a level of ambiguity as to whether member’s who had made valid elections prospectively for the 2019/20 year would be able to effectively apply this to amounts prior to 24 March 2020 there were above the 50% temporary reduced minimum? This question was recently clarified by the SMSF Association with the ATO, with the Regulator ‘sticking to their guns’, noting there even where an election was in place as far back as 1 July 2019, requesting the trustee to treat such amounts as a lump sum cannot apply. However, where an election is in place from 24 March 2020, subsequent amounts can be treated as commutations.
To understand this further, let’s consider the following example:
Neale (73) is receiving an Account Based Pension from his SMSF. At 30 June 2019, the balance of his income stream was $1.73 million, with a minimum pension of $86,500 required to be withdrawn for the 2019/20 financial year. Neale was intending to withdraw approx. $150,000 for the financial year and as a result, provided a member request (which was accepted by the trustee) to undertake a partial commutation of any withdrawals beyond his minimum pension.
As at 24 March 2020, Neale has withdrawn $80,000, just short of his minimum pension for the year. However, the temporary minimum pension now means that he is only required to withdraw $43,250, meaning that Neale would like to reclassify the excessive amount of $36,750 taken to 24 March 2020 as a partial commutation. Following the ATO’s guidance, he is unable to do this as the amounts have already been classified as pension payments.
Neale did withdraw a further $70,000 between 24 March and 30 June 2020. As he had a valid election in place, he can treat these amounts as commutation lump sums, which would have required reporting of the transfer balance account events by 28 July 2020.
What if Neale has withdrawn $100,000 prior to 24 March 2020?
Where the member had take at least their minimum pension through to 24 March 2020, then those above minimum amounts would have been classified as lump sum commutations in line with the valid election completed by Neale. These amounts do not need to be re-classified, however there is no ability to reclassify amounts below the minimum of $86,500 previously stated at 1 July 2019. Again, any amounts post 24 March 2020 can be treated as lump sums and reported to the ATO against the members transfer balance account.
Documentation & audits
This will be an area of heightened importance throughout the completion of the 2019/20 financial requirements for many funds paying super income streams to members.
It will be important for fund auditors to ensure that not only are payment classified correctly prior to 24 March 2020, but also that any subsequent amounts have been validly treated as a partial commutation lump sum, where there is a valid election in place. The timing of events-based reporting will also act as evidence to see whether such tasks have been done prospectively or not.
Above minimum pension election
Smarter SMSF has created documents that allow for a member to make a prospective election to the fund trustee regarding the way in which they wish to treat amounts taken above the minimum pension for the year – as a lump sum (from an accumulation account), as a partial commutation lump sum, or combination of both. These documents are available to order on the Smarter SMSF platform and also within Simple Fund 360.
For more information about these documents, visit our COVID-19 page.
Sample documents are available within the knowledge centre in the Smarter SMSF platform.