1. Convert TTR pensions to retirement phase
A TTR pension can convert to retirement phase by the earlier of:
• the member notifying the super provider that they have met a condition of release in relation to retirement, permanent incapacity or terminal illness, or
• the member’s 65th birthday. In contrast to other conditions of release stated above, there’s no requirement to notify the super fund under the ‘attaining age 65 condition’. A TTR pension will automatically convert to retirement phase once the member turns 65.
Once a TTR pension converts to retirement phase:
• pension balance will be credited to member’s transfer balance account, and
• investment earnings on assets supporting the retirement pension will be tax exempt.
2. Taking amounts exceeding the minimum as lump sum commutations
Where a client requires amounts in excess of the minimum pension payment, they should consider taking the additional amounts as lump sum commutations rather than pension payments.
The reason is that for transfer balance account purposes, regular pension payments are not debit events and have no impact on a member’s transfer balance account. In contrast, lump sum commutations from a retirement pension can create “debit” events which can reduce the member’s balance in their transfer balance account.
The reduction in a member’s transfer balance account could enable additional accumulation benefits to be transferred to the tax-free retirement pension phase, or a higher amount of deceased spouse’s death benefit to be received in the form of an income stream.
3. Making sure the minimum pension payment is paid
Unless a pension commences on or after 1 June 2019 (where no payment is required to be made in the current financial year), the required minimum pension amount must be paid in cash to the member by 30 June 2019.
It has been a relatively common issue for SMSFs to fail to meet the minimum pension requirement. The consequences can include:
• For income tax purposes, the account-based pension is taken to have ceased at the start of the income year. The fund loses the tax exemption on investment earnings on assets supporting the pension for the entire financial year.
• For transfer balance cap purposes, a debit will arise when the fund fails to meet the minimum pension standards, which is generally 30 June. This debit event must be reported to the ATO by the trustee of the SMSF.
• If the relevant rules are again complied with in a following income year, this results in the commencement of a new pension for tax law purposes. The trustee of the SMSF will need to revalue assets at market value and recalculate the taxable and tax-free proportions.
• The commencement of the new pension (for tax law purposes) is a credit event and the trustee must also report this event to the ATO.
There are limited circumstances in which the Commissioner of Taxation’s general administrative powers may allow a pension to continue even though the minimum pension standards have not been met.
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It’s also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.