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Don’t fall foul of new pension rules
Peter Johnson, current as of: 10 December 2018.
You probably know that the ATO confirmed the consequences of not meeting the minimum payment requirements for pensions in SMSFR 2013/5. A pension ceases at the start of the financial year in which the minimum pension requirement is not met and will only recommence after new pension documents are executed. Most recently however, the ATO confirmed that the pension will cease for transfer balance cap purposes at the end of that financial year.
Why is this important? Ceasing and recommencing pensions now has impacts on your transfer balance accounts. Clients can be negatively impacted if they fail to meet their minimum payment obligations. To avoid this, it is essential that a new clause be inserted into the trust deeds of all pension paying super funds.
While it is relatively easy to recommence a pension, this rarely (if ever) happens on 1 July. During the period between the pension ceasing and recommencing, any changes in the balance in the member’s account will have a permanent impact on the member’s transfer balance account.
Let’s look at an example:
Assume I start a $1M pension just prior to 1 July 2017, with a minimum payment of 5% or $50,000. I take out $30,000 and the 30 June 2018 balance is $1.1M.
We all understand that the pension ceased on 1 July 2017, but from a transfer balance account reporting point of view, the debit occurs on 30 June 2018. So, if I recommence the pension on 1 July 2018, the debit and credit are the same and will not impact my transfer balance cap.
The issue is that the pension can only recommence when it’s documented through a meeting of trustees. When will you find out that the minimum payment wasn’t met? Most likely when the client sits down with you to discuss it, which could be several months into the following year during your annual review.
At this point, if you recommence the pension and backdate the documents to 30 June or 1 July, you could be raising flags at the tax office. You just can’t do it.
Let’s now say that the pension balance increases to $1.2M when you recommence the pension. On 30 June you had a debit of $1.1M and now you have a credit of $1.2M, so you have now transferred an extra $100,000 into pension phase. Clearly you remove any risk if you recommence the pension on 1 July, but how can you do that?
It has to be in the deed!
It is an absolute must that your clients’ deeds be amended to address this issue in relation to pensions. Acis has just updated our SMSF trust deeds so that, if a pension ceases in a financial year because the minimum repayment hasn’t been met, the pension recommences on 1 July the following year.
It’s in our deed and if you are a SuperDepot client, all your funds’ deeds now have this clause through an automatic update. Feel free to contact the team at any time if this impacts you and your clients.
Watch this video for Peter’s take on the changes to the pension clause and other SMSF updates.