Return to full SMSF article list
HomeFree weekly newsletterFree newsletter archiveContact usLogin AllThingsConsidered.biz

Self Managed Super Fund (SMSF) Article
Rolling back in six easy steps

By Tony Negline.

This article may be out of date.

14th April 2010

Click here to buy - A How To Book of SMSF's by Tony Negline

Last week this column began a series of articles about certain types pension transactions.  Thus far we've looked at cashing out a lump sum of money.  This week we're going to look at a pension transaction often referred to as "rolling back".

This effectively means moving some or all of a pension's account balance back into the growth or accumulation part of a super fund.  In general this accumulation part is taxed at 15% inside the super fund whereas the pension part is taxed at 0%.

Rolling back some part of a pension's account balance into the accumulation part of the super fund will effect future pension income payments.  Obviously if all of the account balance is rolled back then all future income payments from that pension will cease.

The purpose of this transaction is either to eliminate the payment of excess income or to seek protection from creditors.  Creditors can often claim income payments, including pension payments, to repay debts but may find it harder to use attack a super fund account balance.

All account based pensions can be rolled back including Transition to Retirement Pensions to the accumulation phase.

In some rare cases the rules of a pension do not allow it to be stopped for any reason.  This typically applies with death benefit pensions and is designed to stop a spend thrift spouse wasting all the money.

The amount rolled back from the pension will not be a contribution for super law purposes and it cannot be used to satisfy the minimum pension payment rules.

Before the pension is rolled back, the super fund trustee must make sure that the pro-rata minimum pension has been paid.

Once the lump sum has been paid, some people recalculate the annual required minimum pension payment.  Ordinarily this minimum pension amount is worked out each 1 July.  The rules don't allow the minimum pension to be recalculated.  To be explicit, the minimum pension payment is not recalculated because of a lump sum commutation.

Now lets look at some of the tax issues involved with rolling back a pension.  As this type of transaction is conducted within a super fund no part of the account balance rolled back will be taxed in the super fund member's hands.

The amount rolled back will form a member interest within the super fund separate from the member's pension interest.  If the member already has a growth interest then the amount rolled back will be added to it.

There will be no adjustment to the dollar value of the Tax free Component the pension if the whole pension account balance is rolled back.  The Taxable Component will be the balance.

A slightly different rule will apply if part of a pension's account balance is rolled back.  In this case the original amount of Tax-free Component remains unchanged and is split between the amount rolled back and the remaining pension account balance.

As noted above the amount rolled back will not be a contribution for super law purposes.  The rolled back amount will also not be a contribution for tax law purposes and hence will not count towards the member's concessional and non-concessional contribution limits.

From the financial services law point of view the rollback transaction is deemed to be similar to the purchase of a financial product.  This means that if a licensed financial adviser has recommended the transaction then they should issue a Statement of Advice and detail why rolling back is an appropriate course of action as well as all the costs involved.

Depending upon the relationships involved some financial advisers might be able to rely on replacement product advice rules.  Typically these rules reduce the amount of material that has to be disclosed again to an investor.

In most cases rolling back will involve issuing a financial product.  This means that a super fund trustee should only roll back the pension after receiving an eligible application from the member.  A Product Disclosure Statement must also be issued unless an exemption can be used.  For example, the member already has the current PDS and it provides all relevant information.

How are these transactions typically completed?  It's generally a six step process:

Return to full article list of SMSF articles

 

Share this article
Click to share this article on Facebook Click to share this article on Twitter

If you would like more SMSF articles like this by email, subscribe! It's free.

[Bold fields are required]

Your details

Your alternate email address is used only if messages to your primary email address are returned to us.

Industry

Do you work in the financial services industry?

This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

 
 
Site design by Raycon