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9 thoughts on “Meeting minimum pensions as lump sums

  1. Aaron

    I am sorry that I do not agree with you (and with Meg Heffron) on this issue.

    I agree that any payment from a super fund can be elected to be paid as a lump sum instead of being treated as an income stream as per ITAA Regulation 995-1.03(b), however just to take the lump sum enough to meet the requirement of minimum withdrawal as per Schedule 7 is too far reaching and extending the intention of SIS Regulation 1.06(9A)(a).

    If you were correct then imagine the following

    A 55 year commences a simple pension (no TRIP) with say $1M – the minimum about is $30k for 2011/12 and then $40K and by the time he reaches 60 the limit of $165K low rate threshold will increase – this will mean that none of the pension will be included in his income tax return as long as he withdraws the minimum amount and all the withdrawals will be treated as lump sums and since all the withdrawals are below the low rate threshold – no tax is payable and according to you (and Meg) the minimum withdrawal amounts have been met.

    I am sorry, but the above is NOT acceptable to me as a SMSF Specialist Auditor – i can take this issue with our discussion group, but according to me, the withdrawal has not met the pension conditions and the fund according to me will not be able to claim Exempt Pension Income. I will prefer to see a private ruling from the ATO or something more concreate then an “opinon” of one advisors (well respected even by me) of the interpretation of SISR 1.06

    Manoj Abichandani

    • Hi Manoj,

      Thanks for your response. I can understand a conservative position that you may take in respect to this issue, but as you would be aware once these views are expressed by the ATO within a tax ruling, they are legally and administratively binding. Until this guidance was provided by the ATO, simply relying on a view expressed by the ATO in an NTLG Super Technical Meeting does carry risk as it is not binding in any way (it is simply a view).

      I do not think that in practice that a person drawing a monthly income stream could effectively run this strategy as it would be administratively costly to arrange for multiple partial commutations. Questions would be asked about the “tax motives” as well, however, for an individual wanting to draw down a single pension payment within a financial year, it is very effective. In addition, with views expressed that these payments can done “in-specie”, this can allow somebody to arrange for a simple transfer of shares or units.

      I’d be more than appreciative of further comments from auditors within the SPAA discussion group. I think you will find a ‘mixed bag’ of responses, in particular subject to the amount of times that the strategy is utilised by a fund member within a financial year.

      Regards,
      Aaron

      • I ueasrntdnd re the buckets.I guess what I was trying to get at, is if you want to go with cash and index funds, then is it that hard to do a SMSF? while these options are available in superfunds, you may be able to do it youself just as easily and possibly with lower fees (ie Ubank and vanguard)… I ueasrntdnd that there are SMSF support structures out there that can audit etc a SMSF for around $700 per year… So depending on your funds, that doesn’t necessarily equate to significant costs (ie to warrant someone needing a $1,000,000 before setting up a SMSF).I agree with you, re superfunds offering a fast variety of products and can manage for very low fees and probably mean that a SMSF isn’t necessary. But I think that SMSF isn’t necessarily that hard or expensive…. It is an interesting and complicated debate and I guess depends on what people want to achieve.

  2. Aaron, you mentioned in your reply to Manoj that payments could be made ‘in specie’, would capital gains tax within the superfund occur at this point on the effectvie disposal of those assets?

    • Yes, the disposal is a CGT event, but if the fund is running an unsegregated investment strategy, the tax exemption should be 100% (i.e. sold tax-free).

      Regards,
      Aaron

  3. Aaron, I note that the recent ATO draft taxation ruling supports your view on this. You mentioned that “this strategy is not available with a transition to retirement income stream (TRIS), as these benefits are preserved. If a client has unrestricted benefits available, consideration should be given to running multiple income streams.”

    The ATO website states that “If a transition to retirement income stream is commuted, the resulting lump sum benefit cannot be taken in cash unless the member satisfies a condition of release with a ‘nil’ cashing restriction (for example, retirement) or the purpose of the commutation is to cash an unrestricted non-preserved benefit”.

    This seems to indicate that a TRIS with an unrestricted non-preserved component can be partially commuted. Could you please clarify?
    Regards,
    Andrew

    • Hi Andrew,

      Thanks for you question. I believe that if the TRIS has an unrestricted non-preserved component, it can be partially commuted and the unrestricted component can be paid as a lump sum. Ordinarily I would recommend separating any unrestricted benefits into a separate pension, rather than combining into a TRIS, as this component is required to be taken first. By setting up a second pension with the UnRNP, this can be an Account Based Pension and enjoy the benefits of net earnings being applied against UnRNP benefits rather than preserved where combined into the TRIS.

      Regards,
      Aaron

  4. By way of update, I draw attention to TR2011/D3 and particularly paragraph 108, which I interpret as validating the lump sum strategy proposed by here (and by Meg Heffron). I’m hoping my SMSF auditor doesn’t take the contrary view taken by Manoj Abichandani prior to the ruling.

    • Hi Graeme,

      Two points I make:
      1. You note Manoj’s views were expressed pre-ruling; have these changed since the release of TR 2011/D3? and
      2. As a prudent step, why wouldn’t you have the discussion with the fund auditor now and provide them with the technical references and industry commentary to provide comfort before sending to audit?

      Regards,
      Aaron

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