Author: Emma Partenza, Manager, TAG Financial Services
Now is the time for trustees to act to ensure all pensioners have met their minimum pension requirements well before 30 June 2021.
The primary tax concession for an SMSF that pays a retirement phase pension is the partial or potentially full exemption from fund income tax (15%) on eligible assessable income. However, this is put at risk where the minimum pension standards are not satisfied, as failing to pay the relevant minimum pension is a pre-requisite to the fund making the relevant claim for ‘Exempt Current Pension Income’ (ECPI).
The requirements
Trustees must ensure at least the minimum required pension payment is made to the member on an annual basis (as either a one off yearly payment or a series of payments over the financial year) for the retirement phase income stream to be eligible for the following tax concessions:
- Earnings received from assets held to support retirement phase pensions are tax exempt (fund can claim ECPI).
- Pension payments are taxed as a superannuation income stream benefit payment (i.e. as a pension payment rather than a superannuation lump sum).
If you wish to keep your pension in existence, do not let it fail the requirements! Now is the time for trustees to act to ensure all pensioners have met their minimum pension requirements well before 30 June 2021.
When underpayment occurs
In situations where the underpayment is not small, ordinarily pensions will cease for tax purposes as of 1 July in the income year where the underpayment occurred and ECPI claim disallowed. There is very little grounds for appeal with the Commissioner in these circumstances based on being an honest mistake and outside the control of the trustees. The ATO take a very hard line approach to failing to meet minimum pension requirements. In most cases retirement phase income streams will need to be re-commenced.
There may be instances where the Commissioner of Taxation will allow the retirement phase pension to continue where the minimum pension standards have not been met. These are:
- The trustee failed to pay the minimum pension amount in that income year because of either:
- An honest mistake made by the trustee resulting in a small underpayment of the minimum payment amount for a super income stream; or
- Matters outside the control of the trustee.
A small underpayment is no more than 1/12th of the annual minimum pension amount. In this instance a trustee may self-assess. In such an instance, ECPI could continue to apply and the pension deemed to have not failed the requirements.
Whilst the Government extended its announcement of a temporary 50% reduction to the required minimum pension for certain pensions until 30 June 2021, the pre-requisite minimum pension requirement still applies.
Payment of an income stream to a member is a significant responsibility of a trustee. Failing to ensure the minimum annual required pension payment is made to the member can have potentially disastrous implications for the SMSF and the affected member.
If you have any questions, please contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.