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ATO sitting on SMSF pension changes

The Australian Taxation Office’s (ATO) controversial tax ruling impacting pensions has stalled and it seems it will remain this way for some time. So what is it about, and what’s happening?

According to the future publication schedule of ATO rulings, the release date of the final document is ‘To Be Advised’ – a status it has held since mid-July.

The ATO says the ruling has been delayed because “administrative issues raised by the ruling are being considered.”

It’s a bit difficult to know for certain what this comment really means. According to the minutes of the National Tax Liaison Group’s (NTLG) Superannuation Technical Committee meeting for June 2012, the Tax Office claims that the final ruling won’t contain any major revisions, but will probably have some refinements.

Potential changes to SMSF rules

Some of these refinements are:

• Instead of a retrospective 1 July 2007 start date, the ruling might have a 1 July 2013 start date on some of the bigger ticket items such as what happens upon the pensioner’s death.

• Partial commutations (that is, taking a small lump sum payment from your pension’s account balance) may not automatically be taken to be a lump sum. Instead you would have to elect to have such payments treated as a lump sum. This is an important issue if you’re under 60 because the tax treatment of lump sums and pensions isn’t the same from a tax perspective.

• The timing of any pension commutation may depend on the facts of each case. Currently, the draft ruling says commutations are deemed to take place when your super fund trustee receives a commutation request from you. If commutations occur as soon as a request is received, then it will give rise to asset sales in the accumulation phase (15% tax part of your super fund), not the pension phase (0% tax part of your fund). This has obvious capital gains tax (CGT) implications when asset sales occur.

• The next possible area of refinement involves what is counted towards the minimum income payment each year. The draft tax ruling says partial commutations will count towards the minimum income payment, but full commutations won’t. The NTLG’s Super Technical Committee minutes say this interpretation may not change, but it might be placed into another ATO publication rather than the tax ruling.

• The draft ruling currently says that failing to pay the minimum income payment during a financial year means the pension hasn’t been paid during that whole year. This view would cause the income and realised gains on the pension assets to be taxed at 15% for that year. The final version of the ruling may say that small minimum income payment breaches will be ignored. It might also say that this new rule won’t apply if the minimum payment can’t be paid because of something outside the fund’s control. We’re yet to see specific details on how these new suggestions might work in practice.

When does a pension stop?

In other recent commentary about the pension ruling, one high profile SMSF industry participant, Meg Heffron, stated that the ATO’s draft pension ruling may lead to some legislative changes, principally concerning when a pension is deemed to cease in the event of death.

The draft ruling says a pension ceases on the pensioner’s death if there is no nominated reversionary or the reversionary is ineligible, causing the remaining account balance to move back to the accumulation part of your super fund.

Legislative change

The potential for legislative change is probably the main reason for the ATO delaying this important ruling and I think it will be some time before we see the final document.

What should you do in the meantime?

Whilst I think some parts of the draft pension ruling are unreasonable (for example, that pensions automatically cease when the pensioner dies), it would be dangerous to ignore it.

It’s useful to remember that whilst the minutes of NTLG meetings are important because they often contain interesting information, they aren’t official ATO documents. Until the ATO or the Government releases the official documents on this subject, I believe you should apply the draft ruling to your personal and fund circumstances.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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