Most Self Managed Superannuation Fund (SMSF) members would be aware that in order for their SMSF to receive an income tax exemption on investment earnings of assets or a capital gains tax exemption from the sale of assets, their SMSF would need to use the assets to fund a retirement pension. The retirement pension would also need to satisfy the requirements of the income tax and superannuation laws.
One of the requirements of the taxation law is that an annual minimum pension payment must be made from an SMSF for the pension recipient member. The minimum pension payment is calculated based on the pension recipient’s age and the pension account balance at the commencement of the pension or at 1 July of each year thereafter.
A pension can be paid weekly, fortnightly, monthly, or annually. However, the series of periodic payments must be paid in cash and cannot be made using assets such as an in-specie benefit. Whereas, a lump sum superannuation benefit can be made using cash or assets.
Prior to 1 July 2017, SMSF members who wished to receive their pension payment as asset transfers would commute part of their pension to receive the commutation amount as a lump sum in-specie benefit. The law at the time allowed the commutation amount to satisfy the minimum pension payment requirements. Also, if the pension recipient wanted the commuted amount to be taxed as a lump sum superannuation benefit, they could make such an election under Regulation 995-1.03 of the Income Tax Regulation 1997. The Australian Taxation Office confirmed such treatments of commutation pensions in their publication Self Managed Superannuation Fund Determination (SMSFD) 2013/2. However, this publication has been withdrawn effective from 1 July 2017.
The income tax law (subsection 307-65(2) of the ITAA 1997) was also amended so that any commutation of a pension, whether paid in cash or in-specie, no longer satisfies the minimum pension payment requirements from 1 July 2017. This means a partial commutation of a pension will be treated as a lump sum superannuation benefit and taxed accordingly.
For example: Ethan (aged 66) is a member of an SMSF and receives a retirement pension. The balance of his pension account as at 1 July 2017 was $400,000. During the 2017/2018 financial year, Ethan requested the SMSF trustee to pay a $50,000 lump sum by way of an in-specie transfer of shares. This amount exceeds his minimum annual pension payment requirement of $20,000. There was no other pension payment made during the financial year.
The following explain the impact of the in-specie pension payments, pre and post 1 July 2017:
- Pre 1 July 2017
The $50,000 in-specie transfer counts towards the minimum annual pension payment requirement of his retirement pension.
- From 1 July 2017
The $50,000 in-specie transfer does not count towards the minimum annual pension payment requirement of his retirement pension. The SMSF is still required to make the mandatory minimum annual pension payment in cash to ensure that Ethan’s retirement pension does not cease.