Question: My wife and I have run an SMSF since 1985. The fund is now in pension mode. For a variety of reasons, we decided to liquidate the assets within the SMSF and roll the proceeds into an industry super fund. We opened accounts with an industry super fund on 5/07/2017, with approximately 70% of the funds in the SMSF on 30/06/2017, with the balance to be rolled over before 30/06/2018. We have made provision for our pension payments for the current year based on the value of the fund on 1/07/2017.The industry fund has told us that we need to withdraw a minimum pension for each of us (5% of the sum invested with them) in the current financial year. This would result in us having to withdraw 5% each from our SMSF as well as from the industry fund. This would mean that we would be withdrawing 10% of our total funds in superannuation in this financial year. My understanding is that minimum pension withdrawals for any year are based on account balances on 1 July of that financial year and therefore we would not have to draw a pension from our industry super fund until after 1/07/2018. I would like to know whether my interpretation of the rules is correct.

Answer (by Paul Rickard): Unless the pension occurs in the last month of the year (June), the pension payment is pro-rated so that the minimum amount for the first year is worked out proportionately to the number of days remaining in the financial year, including the start day. That is, for a pension commencing on 5 July, the payment will be based on the account balance multiplied by 5% multiplied by 361 and divided by 365 (Account balance x 5% x 361/365).

The pension balance for minimum amount purposes will be the amount that you have in the industry fund on 5 July. Your Industry Fund is correct.

With your SMSF, you would probably do a partial commutation of your pension and then commence a new pension, and re-calculate the minimum pension payment based on the 30%. For the very brief period where 100% was held in the SMSF, you would base the minimum account on the full amount for those number of days.

In total, you should only need to withdraw a minimum of 5%.

Question: I was of the understanding with the new transfer balance cap (TBC) at $1.6 million — that once we were safely past 1 July, 2017, satisfying the cap, it would not matter should the balance of our funds supporting our pension grow past that amount (hopefully) by increased capital gains etc.

However, in an email I received today from the ATO requesting feedback on “SMSF event-based reporting”, Point 43 states the following “This means that SMSFs will not be required to take any action or lodge any additional reports to the ATO during the period 1 July 2017 to 30 June 2018. However, members must monitor the value of income streams to ensure they will not be in excess of the TBC from 1 July 2017 onwards”.

So, I take this to mean that we must be continually monitoring the value of our SMSF, particularly in improving market conditions, and moving funds out to stay under the TBC ON AN ONGOING BASIS.

Is this correct? I do note that the TBC is supposed to be indexed each year around $100,000 though.

Answer (by Graeme Colley from SuperConcepts): Under the income tax law, which determines when a person has a transfer balance cap and a transfer balance account that pensions in retirement phase are measured against, it works as follows:

• For pensions in place prior to 1 July 2017 – the value of the pension on 30 June 2017 or in the case of a reversionary pension 12 months after it became payable, and
• For pensions commencing on or after 1 July 2017 – the value of the pension at the date it commences or in the case of a reversionary pension, 12 months after the pension became payable.

This is covered in section 294-25 of the Income Tax Assessment Act ‘97.

There is no requirement in the legislation to report changes in the account balance of the pension because of pension payments, investment gains or investment losses.

I notice that the quote from the ATO publication is referring to the ‘value’ of the pension, which is required to be reported as above rather than the ‘account balance’, which is ongoing and not required to be reported.  In some cases, the value and account balance at the time the pension commences can be the same amount as in the case of an account-based pension.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.