What happens if I don’t take the minimum pension?


The Australian Tax Office (ATO) in January 2013 released guidance on the consequences of trustees not paying minimum amounts from account based pensions, including the loss of tax exempt status. It has issued two documents on starting and stopping a superannuation income stream (pensions) for self-managed superannuation funds. Tax Free

The guidance was another positive step from  the ATO following on from last year’s mid-year economic and fiscal outlook (MYEFO) measure that proposed an amendment to the law to allow the exempt current pension income (ECPI) provision to continue following the death of a super fund member until the deceased member’s benefits are paid out of the fund.

The two new documents outline the rules which will determine whether an income stream is a pension in accordance with the Superannuation Industry (Supervision) Act (SIS Act) and focus on what happens if the minimum amount has not been paid to the pension member during a specific income year.

If a trustee fails to meet the minimum pension payment requirements under the SIS regulations, the superannuation income stream will be taken to have ceased at the start of that income year for tax purposes. Accordingly, any payments made during that year will be superannuation lump sums for both income tax and SIS Regulations purposes. The fund would not be entitled to treat the income or capital gains as ECPI (exempt current pension income) for the year. In the following year if the fund satisfies the minimum pension payment amount, a new pension is taken to have commenced requiring a resetting of the values and pension documents.

The good news is that the Tax Commissioner, may exercise his general power of administration (GPA) to allow the superannuation fund to continue its use of the ECPI provisions, despite not having satisfied the minimum pension requirements.  In these circumstances, all payments will be considered income stream payments and the superannuation fund will avoid having to re-start the pension and apply the proportioning rule again.

The documents outline that the Tax Commissioner is unlikely to excise this power unless all of the following conditions are satisfied:

•    The minimum payment was not paid due to an honest mistake resulting in a small underpayment (for
example where the amount does not exceed 1/12th of the minimum annual payment) or due to
matters outside the control of the trustee.
•    Access to the ECPI provision would have continued but for the trustee failing to pay the minimum
payment amount.
•    The trustee makes a catch up payment as soon as practicable (for example within 28 days of
becoming aware of the underpayment).
•    The catch up payment, if taken in the correct income year, would have satisfied the minimum
pension requirement.
•    The trustee treats the catch-up payment, for all other purposes, as if it was made in the correct
income year.

The Commissioner will allow all trustees to self-assess the GPA concession if:

•    not meeting the minimum payment rules was an honest mistake or outside the trustee’s control
•    the underpayment is small (as defined above)
•    all of the conditions listed above have been met.

For trustees of SMSFs, the ability to self-assess is only available where they have not previously been granted such a concession. So another one-off concession for genuine mistakes.

Trustees may apply in writing to the relevant regulator if they do not meet the requirements for self-assessment, but believe that the circumstances warrant exercise of the Commissioner’s discretion.

The document contains a number of useful examples, illustrating situations where the ATO considers the use of the discretion (via self-assessment or otherwise) would be justified. Click here  to access the documents on the ATO site.

As always please contact me if you want to look at your own particular situation as we specialise in cleaning up the mess other’s make. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype.

Liam Shorte B.Bus SSA™ AdvDipFS

Financial Planner & SMSF Specialist Advisor™

 Follow SMSFCoach on Twitter  Liam Shorte on Linkedin  NextGen Wealth on Facebook  Google+

Verante Financial Planning

Tel: 02 8853 6833,  Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 

ABN 20 060 778 216 • AFSL No.232686

Liam Shorte is a partner in VERANTE, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216.

Important information :

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

Leave a comment

6 Comments

  1. Great explanation, (when the ATO info can be a litte wordy and unclear at times). well done!

    Like

    Reply
  2. Liam, I’ve had people ask me questions like this about pensions. I know where I can send them now for the comprehensive answer.

    Like

    Reply
  1. The Ultimate SMSF End of Financial Year Checklist 2016 | The SMSF Coach
  2. SMSF End of Financial Year Checklist 2015 | The SMSF Coach
  3. SMSF End of Financial Year Checklist 2014 | The SMSF Coach
  4. SMSF End of Financial Year Checklist 2013 | The SMSF Coach

Let us know what you think? Have you got a question based on the article? Let me know

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: