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If you could ask an SMSF expert three questions, what would they be?
Ask an SMSF Expert
Our three ‘Ask an SMSF expert’ questions are about pension v lump sum payments, deductibility of SMSF expenses and the Superfund Look-Up.
Kathy Evans – partner at Findex in Albury / Wodonga and leading their superannuation specialist division – kindly agreed to answer our three ‘ask an expert’ questions.
Here is what we learned but please listen in as Kathy Evans explains this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Question # 1 What Payment?
There are commutations, pension and lump sum payments. How is one different from the other?
Commutation
A commutation is moving funds from pension back into accumulation. Think of it as an ‘internal’ transfer. It is not a payment. No cash leaves the super environment.
A commutation reduces your transfer balance account (TBA) and hence needs to be included in your next TBAR reporting.
Pension Payments
Pension and lump sum payments on the other hand are actual payments. They both move cash out of super. Think of them as ‘external’ transfers.
And the two might look the same when done in cash – just a bank transfer from your SMSF to a personal bank account. But they are completely different kettles of fish.
A pension payment comes out of your pension account and counts towards your minimum pension payment. That is the good news. The bad news is that it doesn’t reduce your TBA and hence doesn’t give you additional cap space.
Lump Sum Payments
A lump sum payment is different to a pension payment in five ways. A lump sum payment…
1 – Comes out of accumulation, while a pension doesn’t.
2 – Doesn’t count towards your minimum pension, while a pension does.
3 – Might affect your transfer balance account (TBA) when precedented by a commutation, while a pension never goes near your TBA.
4 – Can be done in-specie or in cash, while a pension is always in cash.
5 – Requires documentation before payment, while a pension doesn’t.
So recognise payments up to the minimum as pension payments and treat any excess as a lump sum. But you need to document this before you actually make a lump sum payment. If you don’t, the payment is treated as a pension payment by default.
When you take a lump sum out of pension, you actually go through a 2-step process. You commute the amount from pension back to accumulation (step 1) and then do a lump sum payment out of accumulation (step 2).
Trust Deed
Any payment is treated as a pension payment by default unless documentation – prior to the actual transaction – shows a lump sum payment. To avoid this default mode, get your deed to state that any payments above the minimum are lump sum payments.
Question # 2 Deductible SMSF Expenses?
For the deductibility of SMSF expenses there are two sets of rules. There is the general deduction rule in s8-1 and then there are specific rules.
General Rule s8-1
The general deduction rule in s8-1 ITAA 97 is straight forward.
s8-1 ITAA 97: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; …
(2) However, you cannot deduct a loss or outgoing under this section to the extent that: …(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income;…
So this give you an easy rule of thumb:
All accumulation = All deductible.
All pension = None deductible.
Mix of pension and accumulation = Apportion.
Most operating expenses fall under this general rule. From audit, actuary and management fees over interest and bank charges to repair and maintenance.
However, this need to apportion only applies to expenses that are deductible under the general deduction per s8-1. It doesn’t apply to expenses covered by a specific rule.
Specific Rules
If an expense is deductible under a specific provision, then the general rule doesn’t apply. Instead, the specific provision will determine whether an apportionment is required or not.
For example, supervisory levies as well as costs to collect and process contributions are fully deductible, no matter your ECPI percentage.
Question # 3 Why Superfund Look Up?
The Superfund Look Up started on 1 October 2019 and lists all SMSFs and super funds with an ABN. The ATO had been chasing late lodging SMSFs for many years. The Superfund Look Up is to put an end to late lodgements.
Funds are now put into one of two groups. SMSFs with up to date lodgements receive the status ‘Complying’. These funds can receive super guarantee (SG) contributions from employers as well as rollovers from APRA funds.
SMSFs with annual returns overdue by more than two weeks receive the status ‘Regulation Details Removed’. These funds can neither receive SG contributions nor rollovers from APRA funds.
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So these were our three questions in this ‘ask an SMSF expert’ episode. If you have a question re SMSFs, please let us know and we will try to find you an expert who can answer your question.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 29 April 2020
Tax Talks spoke to Kathy Evans - Senior Partner - SMSF at Findex - for more details.
