As we get closer to the end of the financial year, many SMSF members with pensions will be checking the amounts paid from their fund so far to make sure the minimum payment requirements will be met. Others, who only take payments right at the end of the year, will need to double check the amount that needs to be paid from their fund and make sure it all happens before midnight, 30 June 2019.
Two very common questions at this time of year are:
- What happens if I do an electronic transfer from my SMSF’s bank account on 30 June but it doesn’t show up in my bank account until early July?
- Can I make my pension payment by taking some of the SMSF’s assets (eg listed shares) and transferring them to my name? Or do I have to take my pension payments in cash?
There’s a strange answer to the first question.
As a general rule, a pension is only considered to be “paid” by electronic funds transfer (EFT) when the money appears in the recipient’s bank account.
Given that 30 June is a Sunday this year, leaving it to the last minute will generally be too late. Even transfers arranged on Friday 28 June might cause problems – it’s likely that the money won’t appear in the member’s bank account until at least Monday 1 July and possibly even later. This might seem surprising since most banks will actually take it from the fund’s bank account immediately. But the argument is that the pension is only really paid once the member has control of the money.
SMSF trustees that forget to make their pension payments until the weekend (29/30 June) do have one other option to make the payment on time - a cheque. For a pension to be paid by cheque, the trustee simply needs to ensure that a cheque dated 30 June or earlier is in the hands of the member before midnight, there is enough money in the fund’s bank account to cover it and the cheque is presented promptly (say the following week) by the member. It’s a strange “back to the future” outcome (how many people actually use cheques these days?) but again, the argument is that once a member has a valid cheque in their hands, they have control of the money.
The second question is simpler. Pension payments have to be made in cash. SMSFs can certainly transfer assets such as shares to members and have that amount treated as a payment out of a pension account but it’s a different kind of payment – it’s a “commutation” of the pension. Not all pensions can make these kinds of payments. For example, someone who has not yet retired and is receiving a transition to retirement income stream (also known as a TRIS) can’t take a payment like this. But someone who (say) has retired and is receiving a standard account-based pension can do so.
The trick here is that the commutation does not count towards the minimum pension payments required for the year.
So someone planning to transfer a large asset out of their fund would need to make sure that they also took their minimum pension payments (in cash).
This is easy to overlook because the rules were different until 30 June 2017. Back then, commutations did count towards the minimum rules. That meant that it was possible to meet all the pension payment requirements by transferring assets out of the fund each year rather than paying cash. The only catch was that there was some paperwork to put in place (flagging that the transfer was a commutation). Not anymore.
Making pension payments at the right time and in the right way is vital. Getting this wrong can have major consequences – not only will the fund be breaking the rules but it will often also lose the great tax concessions that come with paying pensions from superannuation funds (no tax on some or all of the fund’s investment income). It certainly pays to get it right.