In an online opinion piece, SMSF Association technical manager Mary Simmons said where members opt to take withdrawals in excess of their minimum pension as a lump sum, it is a common industry practice to put documentation in place at the start of the financial year electing that these amounts above the minimum be treated as a lump sum withdrawal.
While this has traditionally been an acceptable practice to the ATO, Ms Simmons said there has been a lot of discussion about how this applies with the reduced minimum drawdown amount for the 2019–20 financial year.
Recognising that there was no unanimous industry view, Ms Simmons said the SMSF Association sought clarity from the ATO to ensure that the industry is consistent in its application of the law and that any associated tax liabilities and transfer balance account reporting (TBAR) obligations are met.
The ATO has previously made clear on its SMSF FAQ website that it is not possible to re-classify pension payments already received by a member.
“Essentially, pension payments made up to 24 March 2020, the date of the government’s announcement, in excess of the new reduced minimum annual payment will be treated as pension payments in 2019–20 and cannot be treated as lump sums,” she explained.
More importantly though, Ms Simmons said the ATO has confirmed that this treatment also applies where a valid election was in place as far back as 1 July 2019, requesting that the trustee treat any payment over the minimum pension amount required for the year as a lump sum.
“In this situation, only payments made to a member, after 24 March 2020, in excess of the reduced minimum annual pension drawdown, can be treated as a lump sum,” she said.
“Unfortunately, what this means is that some retirees will be disadvantaged. Essentially, it’s just bad luck for any member who took more than the reduced minimum amount as a pension before the change became law on 24 March 2020, despite having in place a valid election to treat any excess pension payments as lump sum commutations. These members can only treat payments made after 24 March 2020 as lump sum commutations.”
On the other hand, for those members who chose to receive their pension in the later months of 2019–2020, provided they had a valid election in place prior to receiving the payment, Ms Simmons said they will be able to take advantage of the retrospective nature of the reduction in the annual minimum pension drawdown requirements and can treat any excess pension payments as lump sum commutations.
For SMSFs impacted who have quarterly TBAR obligations, the reporting of any partial commutations in the last quarter of 2019–2020, she said, was due by 28 July 2020.
“For example, on 1 July 2019, Simon, aged 66, instructed his fund to treat any withdrawal from his account-based pension, in excess of the minimum pension drawdown amount, as a lump sum. Simon’s pension balance on 1 July was $1 million and his minimum pension withdrawal was originally calculated as $50,000 for 2019–20. His reduced minimum was re-calculated to $25,000,” she explained.
“Simon had arranged to withdraw $5,000 on the last day of every month for 2019–20. As at 24 March 2020, he had withdrawn $40,000 from his SMSF. Even though this amount was greater than his reduced minimum, he must treat the entire $40,000 as a pension in 2019–20. The remaining withdrawals, valued at $20,000, could be treated as lump sums.”
Had Simon opted to withdraw his benefits in two equal payments, one in December 2019 and the other in June 2020, then only the $25,000 received prior to 24 March 2020 would need to be treated as a pension payment, she said.
“The entire $25,000 received in June 2020 could be treated as a lump sum because, at the time of the payment, Simon’s reduced minimum had already been paid,” she stated.
“Although unintentional, this is an example of how retrospective law changes can sometimes lead to inconsistent treatment of retirees.”
This is also the case for members with a market-linked pension who restructured into the new market-linked pensions based on the original formula, she added. These members may now face themselves at risk of being in excess of their transfer balance cap.
“We continue to work with the ATO on this issue and have called for the use of the regulator’s regulation-making powers to essentially create a write-off transfer balance account debit for those members who, prior to the announcement of the new formula, restructured into a new market-linked pension in good faith based on the original law,” she said.
25 August 2020
BEc (Acc), MBA, CPA, FFin
David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.
David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.
Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.
David maintains a strong personalised client service focus, providing tailored solutions for clients.
David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846
Business Finance Manager
B Bus (Acc), CPA
Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.
Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.
With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.
B Com, Dip FP
Darren joins the Integrity team as a strong technical specialist with almost 20 years’ in the Financial Services industry. He has extensive experience advising clients on how to build and protect wealth, prepare for retirement and retire comfortably.
Commencing with advising clients on direct equities for over 10 years at Baker Young, Tolhurst Noall, and ABN AMRO Morgans, his career expanded to providing holistic client advice, having operated his own financial services licence and company. Most recently having worked for a 'Big 4' bank, he has welcomed the more personalised ‘client first’ approach that is evident at Integrity Financial Advisory.
With a deep understanding of investment markets, he is appropriately qualified and authorised to provide direct share advice, as well as superannuation/SMSF advice, encompassing both investments and insurance.
Meticulous in his approach, he aims to deliver quality outcomes for clients by understanding their financial situation and needs before providing advice which is central to our advice process. Darren supports David in tailoring solutions for all client financial advice needs.
Darren Chalk is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846
Client Service Manager
Natasha commenced working in the financial services industry in June 2008 and is a new addition to the Integrity team. During the past 11 years, she worked closely with advisers providing administration support in a share broking and financial advice business.
Having successfully completed her RG146 accreditation in securities and managed investments and continued her studies to complete her competency in Superannuation, Natasha can ably assist with all aspects of fixed interest, cash management, portfolio administration, direct shares and client advice implementation.
Natasha takes time to ensure she understands our client’s financial goals and needs and believes in creating, preserving and utilising wealth through effective financial management as a key objective in helping clients.
Client Service Manager
Kelly has worked in the Financial Services Industry for over 10 years and has supported David since 2013. Kelly’s primary background is in customer service and administration.
On starting in the industry, Kelly initially focused on direct shares, stockbroking administration and client liaison. Since moving to the Client Service Manager role, Kelly has developed skills encompassing all aspects of financial planning including client advice implementation and term deposit management.
Kelly’s experience in the direct share environment, especially management of estates, provides a key part of the direct equity expertise in Integrity’s Client Service Team.
Returning from Parental Leave following the arrival of her second child, Kelly has developed further honed multi-tasking skills after juggling the demands of a growing family.
Client Service Manager
Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.
Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.
Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.
Jasmine has gained her Certificate III in Financial Services qualification.
Client Service Manager
Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.
Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.
Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.