SMSFs / Sep 12, 2023

Benefit Payment Allocations may present a risk to the Accountants, Advisors and Auditors

Kellie Smythe
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It’s not uncommon for SMSF members to have multiple pension accounts that isolate differing tax components, or to have an accumulation account left over after the member had reached their Transfer Balance Cap (TBC) limiting the amount of superannuation that could be used to commence a retirement phase pension in the fund. 
The challenge for Accountants and Advisors is how member withdrawals are allocated across the member accounts given the various outcomes that result. Each client will be different so it’s not just a one size fits all approach.    
For some members who have fully utilised their TBC, they may be trying to maximise the amount held in pensions to increase the fund’s  Exempt Current Pension Income (ECPI) percentage and reduce tax paid by the fund.  In this scenario it may be beneficial to first withdraw the minimum amount from each of the pension accounts, followed by withdrawing amounts in excess of the required minimums as lump sum payments from the accumulation account, effectively increasing the ECPI percentage and reducing the tax payable by the fund.
If the member does not have an accumulation account, but has multiple pensions, then it may be more beneficial to ensure that amounts above the minimum pension payments required are withdrawn from the account with the highest taxable component, especially where adult children beneficiaries have been nominated. 
Remembering that a debit to the TBC is achieved where amounts are commuted from the retirement phase pension accounts back to accumulation, it may be beneficial to classify excess withdrawals above the required minimums as commutations from the pension accounts with the highest taxable components to the accumulation account, prior to a lump sum payment being taken.  This strategy will effectively reduce the Transfer Balance Account (TBA) leaving room for additional contributions and potential use of the bring forward provisions where large amounts have been withdrawn in this manner. A non-concessional contribution is a tax free contribution to the fund and any subsequent pension commencement up to the members TBC will retain  the associated tax free and taxable components, which may be of substantial benefit to non-dependent beneficiaries. 
Each of the above scenarios will have various consequences both in the short term (ECPI), and longer term of the fund (Estate Planning and payments to non-tax dependent beneficiaries). 
One way for Accountants, Advisors and Auditors to mitigate risk to their firm is to have documentation confirming that the member has instructed the trustee to allocate their withdrawals in a particular way.  Such documentation removes any argument that administrative decisions have been made by professionals advising or providing accounting services to the fund.  It should also be noted that a Statement of Advice is not required where a decision has already been made by the member and acknowledged by the fund’s trustee.
Additionally, having these decisions documented will provide the Auditor with confirmation that the transactions being reviewed are in line with the members instructions and have been recorded correctly.
Failure to document these decisions could potentially be grounds for litigation if decisions result in adverse outcomes for the members or beneficiaries, or if it could be argued that decisions had been made without considering the best interests of the clients.  Documenting the members instructions to the trustee is the best way to eliminate the risk to your business while helping clients maintain adequate records.  Benefit Payment Allocation documentation can be ordered from the Constitute website from just $220 including GST. 

For any further information, please call our friendly team on 1800 799 666.

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