Speaking at the SMSF Association Technical Summit, Dunn said when moving into retirement phase and commencing to pay a pension in an SMSF several things change.

“What do we have to start ticking off? We, of course, have to check the fund is eligible to commence to pay a pension. We need to understand the cash flow requirements coming out of the fund if the member is planning to take their minimums. And how might that impact the liquidity requirements of the fund?” she said.

“For a fund in accumulation phase, you probably have quite minimal cash or reserves from a liquidity perspective and that may need to change as we move into retirement. You have to decide if you need to sell assets to facilitate that liquidity in the fund, or whether you need to restructure the type of investments.”

Dunn said if the assets are to be sold, it may incur a capital gain, and it’s best not to rely on in-specie transactions because pension payments must be cashed.

“It’s important to take account of the liquidity requirement. You become eligible to claim ECPI, extremely valuable for SMSFs in the retirement phase, and of course, you have to get all the pension documentation right.”

In regard to restructuring investments for retirement in the context of the proposed Div 296 tax, Dunn said the strategies can be applied to a fund that has $5 million or $500,000.

“We know the tax is not going to apply until next financial year, but who has the option to avoid it?” she asked.

“If you've got $5 million in the fund, but you're in accumulation phase, you haven't met a condition of release, you can't take that money out. If you're in pension phase or a member who's met the condition of release, obviously, in retirement phase, you have that capacity to withdraw the money from the fund if you want to.”

She continued that if a member is considering withdrawing significant amounts of money from the fund, they need to do that now, by either selling an asset or withdrawing an asset in-specie, but if that will create a capital gains tax event in the fund, you need to think about how and when you do it to maximise ECPI.

“How are these types of funds claiming ECPI? By definition, we've got members over $3 million to take money out. We've got members who are likely in retirement phase, so they are eligible to claim ECPI now for funds with over $3 million. Do they disregard small fund assets?” she said.

“What are the rules of disregarded small fund assets? Does a member have more than $1.6 million at the prior 30 June and have a retirement phase account? Yes. By definition, these funds caught by Divi 296 are likely to have disregarded small fund assets, which means you have to use the proportionate method for ECPI.”

She added this then requires thinking strategically about how to maximize ECPI, which subsequently means understanding the proportionate method calculation.

“Under the proportionate method, the timing of when a capital gains tax event occurs doesn't matter, but the timing of any transactions, such as withdrawals that we make do impact the ECPI result,” she said.

“If the fund doesn't have disregarded small fund assets, it's different. A fund that doesn't tick that box to have disregarded small fund assets is eligible to use the segregated method. The reason we like the segregated method is because capital gains will be tax-free if they're segregated to a pension asset. So the timing of when capital gains tax events occur is important when we have a segregated fund.”