In this guide
There are certain situations where a member of a self-managed super fund (SMSF) may want to rollover their member benefits to another super fund.
This usually occurs where the member wants to leave the existing SMSF or where the SMSF is being wound up and all member benefits need to be moved to another fund.
The process itself would be relatively simple where member benefits are held in the accumulation phase of super as the balances would simply be ‘rolled over’ from the SMSF to the new fund chosen by the member. The SMSF trustees would carry out the rollover process and meet the reporting requirements using the SuperStream system.
The process is not so simple where a member is receiving an existing pension from their SMSF. In this case, we need to look at the required process around rolling over these pension benefits and cover the frequently asked question: Can a pension be rolled over directly to a new super fund or does the pension need to be ceased (commuted) first and then rolled over to the new fund from the accumulation phase?
Rolling over to an existing pension account
Where you have multiple existing pensions in more than one super fund, you can’t roll over any of those pensions into another existing pension, whether it be in the same or different super fund.
Both the pension standards set out by the SMSF regulator and the Superannuation Industry (Supervision) Regulations 1994, include a restriction on increasing the capital supporting an existing pension using contributions or rollover amounts.
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Moving a pension from one super fund to another
A more common scenario would be where a fund member wants to roll over an existing pension from one fund into another super fund.
This is where things start to get interesting.
It would be extremely helpful if there were specific superannuation rules that cover this issue concisely but, unfortunately, I am not aware of any.
The ATO provides information on the transfer balance account reporting requirements relevant to a ‘Rollover of account-based pensions from an SMSF to an APRA fund’. The information includes the following example:
“Saxon started a retirement phase income stream valued at $1.0 million on 1 July 2018 in the Saxon SMSF. The Saxon SMSF lodged a TBAR and reported this to us on 28 October 2018.
In August 2022 Saxon decides to commute his pension, roll it over to APRA Fund BBB and wind up the Saxon SMSF. At the time Saxon commutes his income stream it is worth $950,000 and he does not have an accumulation phase interest in the SMSF.
APRA Fund BBB commences Saxon’s new pension in August 2022. When the rollover is made, Saxon’s SMSF provides Fund BBB with an RBS message via SuperStream reporting income tax and contributions information …”
This suggests that an existing pension may need to be commuted before being rolled over to a new fund. This would seem to make sense when you think about the transfer balance account outcomes.
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Find out moreThere were also comments made by the ATO within documentation relating to a 2013 taxation ruling, including:
“The Ruling provides principles which can be used to determine if a commutation has occurred. Only a lump sum amount can be rolled over. The Ruling does not look, however, at what happens after the commutation occurs, for instance whether it is paid to the member or rolled over to either a new fund or to a new account in the existing fund.
This question therefore goes into a level of detail not contemplated by the Ruling and is out of scope. Further, advice can however be sought from the ATO in relation to particular circumstances if required.”
This wording suggests that a rollover needs to be carried out as a lump sum and not as an income stream or pension.
But is this actually the case?
What if the specific rules of a super fund allowed member benefits held in a pension in another fund to be rolled into their fund as an existing pension? Taking this one step further, what if specific rules of the existing fund paying the pension also allowed pensions to be rolled out to a new fund. Essentially, both funds allowing this to occur. What is stopping this from taking place?
Cue the crickets…
Important issues to consider
The lack of a formal position or specific guidance provides little comfort when you start to look at the bigger picture.
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For instance, consider an SMSF member who has both a pension interest (account) and an accumulation interest (account). If the member is required to first commute their existing pension and revert back to accumulation phase, the tax components relevant to each member interest would then be mixed together. Years of planning to keep these tax components separate would be undone and could not be restored easily.
Of course, a prudent SMSF member may look to first rollover their accumulation account to another fund BEFORE they commute their pension. This would mean that the accumulation account balance prior to the rollover would be $0, meaning the tax components of the pension would be maintained, albeit now in the members accumulation account.
The point here is that there could be a significant and negative outcome for a fund member if transactions are not carried out in the correct order.
Also keep in mind that earnings generated on member balances held in accumulation phase need to be allocated entirely to the member’s taxable component. Therefore, member balances that are moved from retirement phase to accumulation phase should then be rolled over to the new fund promptly and then used to commence a new pension as soon as possible in the new super fund.
When member benefits are held in retirement phase, the relevant earnings are allocated proportionately in line with the existing tax components of the pension. So where a pension is commenced with a 100% tax-free component, all earnings on that pension will be allocated to the tax-free component.
SMSF procedural requirements
Once a member has provided the trustees with all the information required to roll over their benefits, the SMSF trustees must carry out the rollover within three business days.
The regulator expects all SMSFs to have processes in place to deal with these requests and time frame requirements.
To ensure that the time frame requirements can be met, it would be a good idea to inform your SMSF admin provider or fund accountant BEFORE any formal rollover request is made by a fund member as there are administration issues that may need to be attended to before the rollover takes place.
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Find out moreRemember, being a member of an SMSF means you are also a Trustee, so don’t put yourself at risk of missing the required deadline!
Other SMSF considerations
It is extremely important for SMSF trustees to maintain appropriate paperwork around member rollovers. In most cases you would expect the following paperwork to be in place:
- A member request to rollover their benefits
- Trustee minutes to action the rollover and identify any fund specific issues:
- Fund and member balances brought up to date
- Identify any liquidity issues relevant to the rollover
- SMSF trustees should review their trust deed for any fund specific requirement as part of this step. Trustee actions should be carried out in accordance with the trust deed.
- Evidence around the actual payment of the rollover amount to the new fund.
Prior to ceasing a pension, whether that be a pension commutation or a rollover, SMSF trustees need to make sure that the pro-rated annual minimum pension has been paid to the pension member. By paying at least the pro-rated minimum, the SMSF trustees will have met their pension obligations and where relevant, allow the SMSF to claim exempt pension income (ECPI) on the fund earnings relevant to the pension.
If the minimum pension amount is not paid out before the pension comes to an end, then the regulator may deem that the pension was not in existence and can jeopardise any ECPI that may otherwise have been available.
Is the proportioning rule required?
The following question was raised by a member in one of our Q&A webinars.
Q: Sally manages her own SMSF, of which she is the only member. The fund is in the accumulation phase and is made up of one third tax free component and two thirds of taxable component. She decides to transfer only part of her benefits rolling over to an industry super fund.
Can she elect to transfer money from one component only, for example, from the taxable component, or is she obliged to use the proportioning and indicate in the rollover statement one third tax free and two thirds taxable components? I could not find any unequivocal authority setting up this particular matter.
Final comments
In my opinion, if super funds have mechanisms in place that can deal with a pension rollover, including meeting all reporting requirements, then arguably it could be possible.
However, I see this only being relevant to larger super funds and where these larger funds offer separate pension ‘products’.
It may be difficult to achieve a pension rollover where an SMSF is involved. I am not sure that many larger funds would be happy to take over the existing terms of a pension being paid from a SMSF.
Of course, as the ATO suggests, further advice can be sought from the ATO for particular circumstances if required.
The information contained in this article is general in nature. Your personal position has not been taken into consideration. You should seek personal advice before taking any action.
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