Heffron | Re-think Treatment of Amounts in Excess of Minimum

Re-think Treatment of Amounts in Excess of Minimum

Prior to 1 July 2017, as a general rule, where an individual was age 60 or over and wanted to draw monies from their pension account in excess of their minimum pension requirements, the excess was simply treated as an additional pension payment.  This is because, whilst the payment was tax free regardless of whether the amount was treated as a pension payment or a lump sum commutation, pension payments didn’t necessitate any additional paperwork whereas lump sum commutations did.

However, since 1 July 2017, individuals aged 60 or over who need/want to take more than the minimum amount from superannuation are often inclined to:

  • firstly, take monies from their accumulation account (if any eg the excess above the $1.6m which they “rolled back” to accumulation on 30 June 2017), and
  • once the accumulation account has been exhausted, treat subsequent payments over the minimum pension as a partial lump sum commutation from their retirement phase pension.

This approach firstly maximises the portion of the fund generating tax free income by leaving as much as possible in the pension account.  Secondly, partial lump sum commutations create “cap space” by reversing some of the amount that has used up their $1.6m Transfer Balance Cap.  This will help an individual leave more in superannuation should they inherit a spouse’s superannuation in the future.

However, the ATO expects SMSF trustees to be able to identify whether a payment is a pension payment, a lump sum from accumulation or a lump sum commutation from pension the moment the payment is taken.  We have developed documentation which can be put in place at the start of each financial year which dictates how each payment from the fund is to be treated in that financial year.  If you are drawing more than the minimum from your retirement phase pension, and have an accumulation account or think it would be worthwhile treating some of the payments as a partial lump sum commutation, please let us know so we can prepare the necessary paperwork for you.