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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This article may be out of date.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
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:
- Member requests rollback of pension or notifies that they have the right under the terms of the superannuation product
- The trustee confirms entitlement to rollback and acknowledges member election
- If required the trustee works out what the pro-rata minimum pension payment should be just before the lump sum is paid
- The trustee sells/transfers assets to make the lump sum payment
- The trustee adjusts the pension account balance
- If the super fund trustee uses segregated accounts for pension and non-pension assets then the trustee will need to ensure that appropriate assets are transferred between pension and non-pension accounts
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