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Self Managed Super Fund (SMSF) Article
Don't count on funds to fully pay your dues

By Tony Negline.

This article may be out of date.

6th May 2009

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Suppose for a moment you think something is not quite right with your super fund.  How do you go about fixing it?

A few weeks ago, a financial planner of my acquaintance contacted me with a particular problem that he had attempted to solve but had come to a dead end.

This financial planner, who we will call Dimitri, had recommended that a couple put their super assets into one of the very large retail super funds and start a pension for the husband and another pension for his wife who we will call Joan.  The pensions started in May 2008.

In September 2008 the husband died when he was over 60.  As part of the process of starting his pension the husband's had nominated Joan (who is still under 60 years of age) as his reversionary.

In an ideal world the nomination of a reversionary means that on the death of the super pensioner the pension's income payments automatically continue and are paid to the nominated individual.  Only a spouse can be a reversionary pensioner.  These reversionary nominations cannot be made once the pension has commenced.

Under current tax laws, any income payments from a pension paid to a person as a result of death of another person will be tax-free as long as the recipient was a dependant of the deceased who was aged at least 60 at the time of death.  A spouse is automatically considered to be a dependant.

Also under current tax law if a super pension's income payments are taxed then the super fund's trustee must withhold this tax and only remit the net amount to the recipient.  Obviously no tax should be withheld from tax-free pension payments.

Both of these tax measures were brought in on 1 July 2007 as part of the Better Super reforms.

However when Joan began receiving income payments from her husband's pension the super fund had deducted income tax.  The planner asked that this be corrected and after much toing and froing the tax was refunded.

Between September 2008 and June 2009 the planner and Joan on several occasions changed the amount of income paid out of the reversionary pension.  Everytime they made these adjustments the fund deducted income tax from the next income payment.  Dimitri then spent time fixing the error.

In early 2009, Dimitri sat down with Joan to review her affairs.  Joan mentioned that after her 2008 income tax return had been submitted she had to pay tax on her dead husband's super pension and specifically asked Dimitri to make sure this didn't happen again.

He said she shouldn't be paying tax on it and undertook to see what had gone wrong.  Dimitri spoke to her tax agent who said that the super fund had issued a PAYG Statement for the income paid to her from her deceased husband's pension.  This meant that income was automatically included in her income tax return.  After processing her return the ATO asked Joan for this tax.

Dimitri realized that when the super fund had been refunding the income tax it should not have deducted between September 2008 and June 2009, it was not reducing the amount of income subject to tax.

The problem was never going away unless Dimitri pushed for it to be fixed.  He made numerous phone calls and sent numerous emails to the super fund's various customer services centres.  He was told his understanding of the rules was incorrect and that the income had to be taxed.

The super fund's staff seemed to have blind faith that their administration system was correct and refused to let him talk to relevant responsible managers.

He spent time trawling through all the relevant laws and was sure he had understood the "Better Super" rules correctly.  He decided to contact a rival super fund's technical team.  Their comment was that the fund in question was probably right and he was probably wrong.

His final throw of the dice was to contact me.  I did some research and agreed with Dimitri's view that Joan's death benefit pension payments should be tax-free.  I checked with a colleague to make sure the Tax Office hadn't released anything which had escaped my attention.

Fortunately I know the right people in the organization to speak to and processes have begun to sort out his problem.  A residual problem has emerged.  A few weeks ago income payments on Joan's death benefit pension were suspended until all the outstanding issues were resolved.  At first blush this seems reasonable but how is Joan meant to live in the mean-time?  Why is it taking so long to fix?

One of Dimitri's biggest gripes is that fixing all these problems has taken his business many hours.  He normally charges an hourly rate for his services but can't charge Joan for any of this remedial work.  Perhaps the fund manager might like to pay for his time?

This type of issue happens everyday in one way or another.  Dimitri thinks many advisers would have given up and told Joan that her husband's pension was taxable.

Many financial planning businesses spend lots of non-chargeable hours fixing errors of commission or omission made by fund managers and super fund administrators.  Only a minority of superannuants receive financial planning advice.  Who is checking to make sure the majority are being treated correctly?  Super fund auditors don't check what happens at member account level.  The government regulators rarely check.

Perhaps Senator Sherry's latest super review might address this glaring oversight in the administration of Australian super funds.

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