New super rules a taxation puzzle

Last week I phoned the Tax Office superannuation help line to check whether a super fund could pay a pension as an in-specie distribution.

The answer did not accord with what I had been previously told, but I took it at face value. It turned out that answer was wrong.

A reader has raised doubts about my plan to start a pension based on taking in-specie distributions of bottles of wine. He referred me to a circular from the Australian Prudential Regulation Authority, the body charged with regulating superannuation funds, other than self-managed super funds, which the Tax Office regulates.

Not being sure that the Tax Office had placed a different interpretation on rules for SMSF pensions, I contacted APRA for clarification. APRA advised that the circular had been prepared two years ago in consultation and with the agreement of the Tax Office.

The circular stipulated pension payments could be taken only as cash, while lump sum payments could be made as in-specie transfers.

APRA also advised that the Tax Office, after checking with APRA this week, had stated that its position had not changed and that the Tax Office still agreed with the circular.

This may seem like a simple mix-up but it highlights a major problem that trustees of SMSFs face. The rules and regulations that govern what the trustees of a SMSF can and cannot do have two sources. The first is APRA and the second is the Tax Office.

The problem is that APRA's rules are mainly designed to protect members of large super funds who have little or no direct control over administration. SMSF trustees must also be members and therefore have direct control over what happens to their funds.

This prohibition on a super fund making in-specie distributions as part of a pension makes sense when applied to large externally managed super funds. But it makes little or no sense when applied to a SMSF. This is not the only example of where bureaucratic compliance and documentation imposed on trustees of SMSFs is excessive.

To have a situation where a member must write to himself or herself as a trustee to request a pension, have a meeting with their trustee's hat on to acknowledge the receipt of a letter from themselves requesting the pension, passing a motion as trustees allowing the payment of the pension to themselves, and then writing a letter as trustees to themselves as members to confirm that the pension has been approved, would be too ridiculous even for Yes Minister.

The complexity that this imposes on trustees of SMSFs means they must get help from somewhere to discharge their duties. One would have thought that a major source of reliable help should be the Tax Office. But as this example of the advice given by the Tax Office relating to in-specie pension payments indicates, this source of advice cannot always be relied upon.

What is needed is a further overhaul of the superannuation system that results in a clear separation and further simplification of the regulation of superannuation funds.

One set of rules should be issued and administered by APRA to protect the members of large superannuation funds. Other rules, set and regulated by the Tax Office, should ensure that SMSF trustees use superannuation for retirement purposes, instead of

bogging them down in useless administration.

Questions can be emailed to

max@taxbiz.com.au.

Tax for Small Business: a survival guide, by Max Newnham, is now available in bookstores.