Self-managed superannuation fund (SMSF) trustees can find themselves falling foul of the pension drawdown rules if they choose to extinguish excess contributions tax (ECT) liabilities out of the fund while they have a transition-to-retirement arrangement in place, according to an industry technical expert.
The reason being these types of payments from an SMSF with an account-based pension in place are considered drawdowns in regard to compliance rules, Heffron head of technical services Leigh Mansell said.
"If you go to your fund and say 'yes please I'd like my fund to pay this tax' SIS (Superannuation Industry Supervision Act) will release it but it's a benefit payment," Mansell said.
"So potentially someone who pays their tax from the fund will be using up some of their minimum pension payment amount because it has been paid from the pension."
Mansell pointed out this might not be the most serious consequence of this course of action.
"What's the worst thing that can happen though? Impacting the minimum payment limit might not be that big of a deal. But if a trustee has physically drawn the maximum already and also pays the tax they'll have blown their maximum limit," she said.
The maximum drawdown limit of transition-to-retirement pensions is 10 per cent of the account balance every year.
There are two ways in which to avoid this situation, one of which was for trustees to pay the tax liability out of their own pocket without reimbursement from the super fund, Mansell said.
"Also if you've got unrestricted non-preserved benefits you could roll the amount to cover the liability back to the accumulation part of the fund first before paying it because rollovers don't count towards the minimum or the maximum when we are dealing with account-based pensions."
