SUMMARY: ATO clarifies rules on $1.6m pension rollbacks, and gives a pardon for death benefit errors in the past.
The Tax Office has handed out pardons for some past sins as it tries to smooth the deck of some compliance issues ahead of 1 July.
The ATO has also delivered guidance on how to handle 30 June for difficult-to-value assets, and multiple pension interests over the $1.6 million transfer balance cap.
Importantly, members of self-managed super funds with more than $1.6m in pension funds will be able to work out the detail later, so long as they make valid decisions prior to 1 July.
The ATO accepts that a member might not know the actual value of an income stream, or multiple income streams, on 30 June, 2017. If members are likely to be in this position, they will simply need to declare in writing what they want done, with the details able to be worked out prior to the SMSF lodging its 2017 financials.
In Practical Compliance Guideline 2017/5 (PCG 2017/5), the ATO has made a list of conditions that will allow SMSF members to request the partial commutation of income streams, without knowing the actual balances on 30 June.
Members will have to advise trustees in writing of how each income stream is to be treated, in the event of the $1.6 million transfer balance cap being busted.
The request must be in writing from the member, accepted by the trustees and made before 1 July 2017.
It must also specify the methodology for determining the “precise quantum” of the amount to be commuted back to accumulation and exactly which income streams will be impacted. And it cannot conflict with a similar agreement a member has made to the trustee of another fund.
The ATO gave a couple of examples.
If a member with total pension benefits of $1.8m was to make a proper declaration to the trustees, before 1 July, that amounts above $1.6m are to commuted back to accumulation, the trustees will have until the time they lodge their accounts for FY17 to determine exactly how this will occur.
It is a little more involved if a member has pension interests across multiple superannuation funds that are above the $1.6m transfer balance cap.
Take a member with multiple income streams, from across his SMSF and an APRA-regulated fund.
There are two separate pensions in the SMSF of $100,000 and $1,200,000. (Individuals might have many pension accounts for a number of reasons, including the split of taxable and tax-free monies going into each pension account at the time it is started.) The APRA-regulated fund pension account is valued at $800,000.
The same sort of written election would need to be made. But it would need to specify which pension accounts were to be commuted to accumulation and in what order. Again, it must be made before 1 July.
The ATO also gave guidelines on what the requests cannot contain. They can’t give trustees discretion with respect to how much is commuted or put conditions on the commutations. They must give trustees certainty as to which pension income streams will be affected and cannot be dependent on actions by the trustee of another fund.
No penalties for past death benefit commutations
In another guideline (Practical Compliance Guideline 2017/6), the ATO said that it would not throw the book at trustees who have wrongly commuted death benefit pensions to spouses’ accumulation accounts in the past.
The ATO have reiterated that its view of the law is that a death benefit either needs to be paid out of the system, or needs to be paid as a death benefit income stream.
It should not be transferred from the deceased’s pension account to their spouse’s accumulation account.
However, the ATO concedes that previous guidance wasn’t perfectly clear in some aspects and the SMSF advice industry had interpreted that to the point where it had now become industry practice.
The ATO won’t prosecute now if certain conditions are met. They are that the member was the spouse of the deceased on the date of death, the commutation is made before 1 July 2017 and the lump sum paid from the commutation is a member benefit for income tax purposes.
The grace from the ATO will not apply beyond 1 July. This is partly about ensuring the grace is not used to abuse the $1.6m transfer balance cap.
In one example, the ATO said a spouse, Henry, had died in 2015 and the pension reverted to wife Kate. Kate had her own SMSF and instructed the rollover of Henry’s pension to her own SMSF’s accumulation account.
Kate’s actions will not be investigated.
In a second example, Justin died in 2015 after starting a $2.5m pension. Six months later, wife Edwina reverts the remaining $2.3m pension income stream to herself.
This will be allowed, but Edwina is now caught up in the $1.6m transfer balance cap and will need to revert approximately $700,000 of the pension back to accumulation.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s new book, Mortgages Made Easy, is available now.