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29/10/2015 | Stephen Harvey pension, lump sum, superannuation, SuperDepot

Avoiding Confusion Over Super Payouts

Pension or lump sum payment?
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The Murray Financial System Enquiry is being given new life with the Turnbull government revisiting key recommendations. One of these was that people would no longer have access to their superannuation savings as a lump sum at the end of their working life but, instead, superannuation savings would be automatically transferred to a default fund designed to manage it in the pension phase and to provide a retirement income stream.

What exactly are, however, the current rules in relation to a SMSF's ability to pay benefits as pensions versus lump sum payouts? A great deal has been said about them, and we thought it timely to synthesise the takeouts before any changes to the lump sum rules occurs.

Some practitioners providing advice to clients in respect of SMSFs take the view that a SMSF with an individual trustee cannot make lump sum payments to members, without members receiving a pension from the fund, and then commuting the amount into a lump sum payment. This view arises due to some peculiarities of constitutional law.

The Superannuation Industry (Supervision) Act 1993 ("SIS") is based on two powers in the Australian Constitution - the Corporations power and the Pensions power. This is why the trustee of a SMSF must be a constitutional corporation or, if the trustee is an individual, must have the provision of old-age pensions as the sole or primary purpose.

This distinction suggests that a SMSF with individual trustees can only pay pensions (not lump sums) and that only a corporate trustee can pay a lump sum.

The key word here is "primary". SIS has always been interpreted to mean that, as long as the primary form of benefit is a pension, the fund can allow members the option to have a lump sum paid to them. In fact, the fund need never pay out a pension, so long as its primary benefit is styled as a pension.

Industry rulings and pronouncements

There have been quite a number of pronouncements on this issue.

From the ATO:

"In order to become a regulated fund, the trustee must ensure that the trust deed:

  1. requires the fund to appoint a corporate trustee....; or
  2. states that the sole or primary purpose of the fund is to provide old-age pensions. The trust deed may also permit (but not compel) benefits to be paid as a lump sum. Under this option, the trustees may be individuals."

And this from SMSFR 2008/2:

"73. The sole purpose test continues to operate at all times while the SMSF is in existence. Even after all the members have retired, the SMSF must still be maintained solely for the purpose of providing the benefits stipulated in subsection 62(1). Such benefits are required to be provided in the form stipulated under the SISA operating standards. That is, the benefits are to be provided in the form of one or more lump sums (which may be paid either in money or in-specie) or pensions (which cannot be paid in-specie)."

This is from the ATO website:

"Benefits from a super fund may generally be paid as an income stream (pension) or annuity or a lump sum, provided the member has satisfied a condition of release (for example, retirement). As long as the rules set out in the SMSF's trust deed allow it, benefits to members may be paid as a lump sum." 

And again, from the NTLG:

"Further clarification was sought from the Tax Office on whether, having regard to section 19 of the SIS Act, a SMSF with an individual trustee can make lump sum payments to members or beneficiaries of the fund, without the need for the members or beneficiaries to commence receiving a pension from the fund, and then commute the amount into a lump sum payment.

Tax Office response:...a self managed superannuation fund with individual trustees may provide members with an option to take a lump sum benefit....."

So the takeout here is that, provided the SMSF rules allow the payment of a lump sum, the trustee may pay benefits in that way regardless of whether the trustee is a company or individual. Of course, Acis trust deeds do allow the payment of a lump sum and always have.

For more information please contact Stephen Harvey on 1800 773 477.