From 1 July 2017, where pension members are withdrawing amounts above their minimum annual pension payment required, they will be diminishing the capital value of their pension account. Particularly if a member had already ‘maxed out’ their transfer balance cap (‘TBC’) of $1.6 million, they will likely have no opportunity to convert any further amounts into a tax-free pension phase environment.
Where a member also has an accumulation phase balance of superannuation, withdrawing pension amounts in excess of the minimum required will erode the overall percentage of income of the superannuation account balance that is exempt from income tax.
In comparison, if amounts withdrawn above the pension minimum threshold are instead treated as lump sum payments from a member’s accumulation phase interest, it will maximise the overall percentage of income of the superannuation account balance that is exempt from income tax.
For members in 100% pension phase, excess pension withdrawals should instead be treated as a partial commutation of the relevant pension account. A partial commutation equates to a debit in the member’s transfer balance account (‘TBA’) meaning that the member will have the ability to transfer further amounts into their TBA and thus maximise their pension account balance.
The ATO view on partial commutations (as expressed in LCR 2016/9) is that the member must consciously and validly exercise their right to exchange some or all of their entitlement to receive future superannuation income stream benefits for an entitlement to be paid as a superannuation lump sum. TR 2013/5 indicates that the ATO expect a request to be made before the commutation. Accordingly, the strategies listed above should be documented ‘before the fact’ to prove it was the member’s intention at the time of payment.
NOTE: From 1 July 2018, the ATO has introduced Transfer Balance Account Reporting (TBAR) which requires superannuation funds to report certain information to the ATO. While the strategy of withdrawing amounts in excess of the required minimum pension payment from accumulation phase rather than from pension phase will not create any TBAR obligations, commutations from a pension account will create a TBAR obligation for the superannuation fund. Depending on the fund’s member balances, TBAR obligations will need to be reported to the ATO either 28 days after the end of the quarter in which the transaction occurred or by the due date of the fund’s annual return. Effectively, this means that the strategy of adopting a partial commutation strategy will need to be made in real time.