ATO’s 2020 pension ruling will hurt retirees

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A self-managed super fund expert believes the way that the Australian Taxation Office (ATO) treats excess pension payments this year will disadvantage some retirees.

According to SMSF Association technical manager Mary Simmons, the changes to the minimum pension drawdown amounts that were announced by the federal government on 24 March would negatively affect those who elected to receive lump sum pension payments before that date.

Ms Simmons wrote on the SMSF website that the ATO’s ruling that pension payments already received by a member could not be reclassified would hurt some retirees.

Normally any amounts above the prescribed minimum pension drawdown in a financial year are treated as a lump sum withdrawal.

“Essentially, pension payments made up to 24 March 2020 (the date of the government’s announcement) in excess of the new reduced minimum annual payment will be treated as pension payments in 2019/20 and cannot be treated as lump sums,” Ms Simmons explained.

“More importantly, the ATO have confirmed that this treatment also applies where a valid election was in place as far back as 1 July 2019, requesting that the trustee treat any payment over the minimum pension amount required for the year as a lump sum.

“In this situation, only payments made to a member, after 24 March 2020, in excess of the reduced minimum annual pension drawdown, can be treated as a lump sum.”

The ruling from the ATO means that those retirees who took out more than the reduced minimum amount as a pension before 24 March, even if they elected for payments over this amount to be treated as lump sum commutations, would only be able to do so for the payments made after this date.

To explain the differing treatments retirees will receive due to the COVID-19 changes, Ms Simmons offers the following case study.

“Simon aged 66 instructed his fund to treat any withdrawal from his account-based pension, in excess of the minimum pension drawdown amount, as a lump sum. Simon’s pension balance on 1 July was $1m and his minimum pension withdrawal was originally calculated as $50,000 for 2019/20. His reduced minimum was re-calculated to $25,000.

“Simon had arranged to withdraw $5000 on the last day of every month for 2019/20. As at 24 March 2020, he had withdrawn $40,000 from his SMSF. Even though this amount was greater than his reduced minimum, he must treat the entire $40,000 as a pension in 2019/20. The remaining withdrawals, valued at $20,000, could be treated as lump sums.

“Had Simon opted to withdraw his benefits in two equal payments, one in December 2019 and the other in June 2020, then only the $25,000 received prior to 24 March 2020 will need to be treated as a pension payment. The entire $25,000 received in June 2020 could be treated as a lump sum because, at the time of the payment, Simon’s reduced minimum had already been paid.”

Were you negatively affected by the government’s change to the minimum annual pension drawdowns in response to the COVID-19 pandemic? Do you think the ATO should treat drawdowns for last financial year differently?

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Written by Ben


Total Comments: 32
  1. 0

    Who can have faith in a retirement system where everything changes continuously? Once a decision regarding retirement is taken at 65 it is very hard to adjust all investments at the whim of authorities. Could a 40 Year old trust in the future of his retirement in a scenario like this? I did the right thing by spending my super money from age 60 to 65 – I am more and more convinced of it.

    • 0

      Very smart move on your part. In order to received the equivalent of the centrelink aged pension a couple would need over $2 million in financial assets.

    • 0

      -“Once a decision regarding retirement is taken at 65 it is very hard to adjust all investments at the whim of authorities.”
      Damn right there Mariner. But, they don’t give a frog’s dump how it affects retirees. Like a bunch of hyenas they just like crushing the bones out of retirees….It doesn’t affect the government authorities own retirement plans at all because, they are protected by a separate favourable retirement plan designed just for them. So why should they care about the ordinary retiree?

    • 0

      Stupidity johnp. Your argument only works if the person(s) intend to die with the $2 million intact. However, if you ignore the interest rate, spending the $2 million at the rate of the pension draw will last 59 years. Anyone with that amount would not be relying on bank interest but would be invested in shares. the long term return is 5%, which gives a return of approx. $100,000 per annum. So wasn’t that a brilliant comment of yours?

    • 0

      I say daft where’s your emergency fund now
      Only a poor financial thinker would think like this
      You have no respect or responsibility for your own security

  2. 0

    I don’t think I’m affected by this, but it’s VERY VERY wrong. The rules should not be changed in such a way that they trap people who have been complying with law. It’s a disgrace.

    In any case, the change to the minimum drawing should have been entirely optional and with no penalty applicable to those who chose not to reduce, as many would be unable to live on the new minimum.

  3. 0

    This change to drawdowns, as I read it, is voluntary, not compulsory. In the case study shown, the election was to withdraw $60,000pa to suit the needs of the retiree so what difference the voluntary change would make to the retiree escapes me.

  4. 0

    I thought the halving of the normal allocated pension was voluntary. As the crash in March already meant that I would receive about $5000 less than the previous year, I opted to receive the regular amount. I cannot live on about $12,000 a year. Even the higher amount the previous year did not cover my living costs. No increase in Age Pensuin either, as I was a borderline pensioner losing the part age pension on 1/1/2017, thanks to that lier PM, Tony Abbott.

    • 0

      If you lost the part pension in 2017 you certainly do not have to live on $12000 a year. Unless you want to preserve your capital for your offspring you can always start using some of it like most of us on the part pension. To lose the pension entirely you have to possess quite a bit of assets and/or income. Just check the figures often given on YLC pages here.

    • 0

      Only partly true, Mariner. Some folk have non-liquid, non-income-producing assets that Centrelink values unfairly, leaving them in difficult circumstances. I know someone who had an unsaleable block of land (due to a Council planning error). Centrelink assessed it at $400,000, but it generated no income and could not be sold.

      Depending on age, people might be wanting to preserve assets for future needs. A couple retiring at age 67 with $900,000 is unlikely to feel confident that their savings will cover all their needs for, potentially, up to another 30 years. It’s not about leaving capital for offspring. It’s about ensuring your own needs are met now and into the future. If inflation takes off again, $900,000 might be a very small amount of money a decade from now. Try to have a little more empathy.

    • 0

      Example given is a one out of the box, Youngagain. Does not often happen but I take your point. If it was me, my decision would be giving the land to the council as a present and collect the full pension with all the associated benefits coming with the Age Pension. No point having an “asset” that has proven a millstone around my neck. I could not afford to wait for the council to change its mind, at my age.

    • 0

      Yes it is voluntary.

    • 0

      Mariner, if you did that, the ‘gift’ would be assessed for five years under the gifting provisions. Unfortunately, anyone caught in that situation has no valid options at all. And there are many other situations where assets are assessed by C/link at high value but they cannot be sold and do not generate income.

    • 0

      Point taken but at least after 5 years he would have something, now he’s got nowt for ever the way it looks. This ‘gifting’ can become a problem for sure.

  5. 0

    Since the ATO has no legal status (i.e. They are not recognised as a legal entity by the court system) how can the make and enforce any conditions like this? From a legal standpoint they can’t.

  6. 0

    re superannuation pension and age pension interface: Social Security does not look at your actual income from the superannuation pension – they look at the asset value of the pension and ‘deem’ the amount you receive. So when the govt directed that those taking a minimum payment from their super would have that payment halved (to preserve it for later years?), there was no increase in the pension to compensate for the lost real income. So many who have carefully adjusted that income will now be readjusting it up to the previous amount as they actually need it to live. Not up to 75% of the original amoutn as I had but to 100%!

    • 0

      Yes. It’s a disgracefully unfair and cruel system. Many could not reduce their drawings because they actually need to eat!

    • 0

      Your minimum pension drawdown is 2.5% but deeming rate only 2.25% so you should be getting m9re pension.

    • 0

      What are you saying, Willie? The deeming rate has no relevance to a self-funded retiree drawing super to live. A couple with $900,000 in assets, drawing 5%, has $45,000 to live on. If they have to halve that, they have only $22500 – not even equal to the single pension!!! How can a couple live on that?

  7. 0

    Only a fool would trust this Government i know as we have been caught.

  8. 0

    We took the mandated 5% at the start of the financial year as a lump sum. I would prefer take less this year but because the drawdown rules changed after we had our money we missed out. We should have been allowed to recontribute 2.5% rather than being disadvantaged.

  9. 0

    As soon as the word Pension is said you can guarantee it is not good

  10. 0

    I agree with Horace Cope – I can’t see the problem. Can someone please explain the problem to this old codger.

    • 0

      I’m no expert, but I think the issue is that a larger part of his super becomes taxable on his death if it passes to anyone other than his spouse. Also, maybe this impacts differently on people in different circumstances (e.g. folk under pension eligibility age but retired and drawing super). I don’t really understand it, and I think that’s a major problem. When it’s too complicated, it’s bad.

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