While finalising a set of accounts for an SMSF client recently, I was reminded of an eternal battle that I have had with the Australian Taxation Office, when it comes to ensuring that my clients meet the requirements of both income tax law and superannuation regulations.

Unfortunately for Australian taxpayers and SMSF members and trustees, what they can and can’t do with regard to income tax and superannuation is influenced by the opinions of regulators such as the ATO and not necessarily what the relevant legislation states or intended.

On numerous occasions I have disagreed with the ATO’s interpretation of income tax and superannuation legislation. In one instance during the 1980s, it was not until mounting a large media campaign that resulted in amending legislation being passed that the ATO was forced to change their interpretation of the taxation of lump-sum termination benefits.

In my experience, there have been numerous other examples over the years where the ATO have, in my view, changed their interpretation. This has resulted in the ATO trying to force compliance through lore and not the actual law.

The online English Oxford Living Dictionary defines lore as, “A body of traditions and knowledge on a subject or held by a particular group, typically passed from person to person by word of mouth”.

Of course, when it comes to the ATO, their knowledge or opinion of the law is passed on through taxation rulings that taxpayers and professionals are meant to follow. Unfortunately, when these rulings are slavishly followed by professionals, the best interests of the ATO in maximising revenue collection is placed ahead of a client’s best interest.

The situation I came across with my client was the making of a pension payment by an in specie transfer of a term deposit from their SMSF into their personal name. The client had done this with the intention of meeting their minimum pension payment requirement and, if the in specie transfer could not be classed as a pension payment, the fund would have to pay $3300 more in tax due to not meeting the minimum pension payment requirement.

When it comes to interpreting law, the ATO is not alone. APRA has also issued its interpretation of super legislation. They both take the view that a pension payment must be made in cash and cannot be made as an in specie payment.

Upon checking the relevant SIS legislation and reading an excellent article by Bruce Figot published in Professional Planner, it is clear that the term “lump sum” includes an asset, but unfortunately, the legislation is silent on whether the term “pension payment” includes an asset.

It is these grey areas of income tax and superannuation legislation that the regulators interpret for their own interests. Knowing this, I contacted the auditor of my client’s SMSF who agreed with me that there was nothing in the legislation that would stop us using an in specie lump sum payment for the pension. She even commented that the deed of the SMSF specifically allowed for an in specie pension payment.

On the basis of the discussion with the auditor, and my understanding that there was nothing specifically in the legislation that banned an in specie pension payment, I contacted the client.

He was given the choice of either paying the $3300 in extra tax by accepting the ruling and interpretation by the ATO and APRA, or accepting my interpretation that was backed up by the auditor. I did warn him that this in specie payment could possibly be challenged by the ATO in the future. It is not surprising that my client decided to go with his original intention and class the in specie transfer as a pension payment.

Max Newnham has worked in public accounting for almost 40 years. He is a financial planning specialist with the Institute of Chartered Accountants and a specialist adviser with the SMSF Association of Australia.
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