Should the trustee(s) of an SMSF completely recalculate the tax-free and taxable portions of a member's superannuation interest when:
The ATO's view is that 'yes', the portions need to be recalculated.Nick Sulman
On 8 December 2010, the NTLG Superannuation Technical Sub-Group discussed the application of the 'proportioning rule' that applies when a pension has been ended and then later recommenced by a member of an SMSF. The relevant law is in section 307-125 of the Income Tax Assessment Act 1997 (Tax Act).
The Group put this situation to the ATO:
In response, the ATO confirmed that the SMSF trustee must recalculate the tax-free and taxable portions of a member's superannuation interest of the new pension which is to be paid.
The Tax Act [i] ensures that the tax free component and taxable component of a superannuation benefit are calculated by:
The Tax Act [ii] then deals with apportioning each superannuation benefit payment. For example:
The effect of these provisions is that the SMSF can't just:
(But for these provisions, that would be a nifty way to reduce the tax payable on any later death benefit – because those death benefits would be paid from tax free components and would be subject to less tax when paid to the beneficiary.)
In the above scenario, the biggest compliance challenge facing the SMSF trustee is how to calculate the tax-free and taxable components of the member's superannuation interest, at the time the new pension starts.
The question is whether:
The ATO's National Tax Liaison Group minutes record the ATO's response as follows:
Under a literal interpretation the trustee(s) of the SMSF are required to completely recalculate the tax-free and taxable proportions at the start of the new pension, without regard to those proportions that were applied to the original pension.
Under a more flexible interpretation the taxpayer must return to the original tax-free and taxable components that were calculated at the commencement of the first pension, and these proportions need to be taken into account when determining the proportioning rule of the new pension.
As set out above, the ATO prefers the literal interpretation.
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation or Tax and Revenue Team.
You can read earlier ClearLaw articles on a wide range of SMSF topics here.
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[i] Section 307-125(1)
[ii] Section 307-125(2)
Andrew is a lawyer in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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