What happens if you don’t meet your minimum pension payment obligations in your SMSF this year? In this article you will find what the minimum pension payment rules are, what happens if you break them, and how to fix the problem.
A benefit is taken to be a pension in accordance with the Superannuation Industry (Supervision) Regulations 1994 in Regulation 1.06 generally if:
- The payment occurs at least annually
- A minimum pension payment is paid for each member each year
- A further payment via a contribution or rollover does not directly go into the pension fund once a pension has commenced
The taxation benefits of being in a pension are substantial. If a member has commenced a pension, the investment earnings including capital gains that relate to the pension are tax free.
When the member has both an accumulation account (because they are for example making contributions into the fund) and a pension account, the assets will either need to be segregated (separated) into pension and accumulation assets, or an actuary certificate will be required.
The ATO has held the view that trustees failing to make a minimum pension payment would lose their pension status for the financial year in question, and all investment earnings would become taxable in that year. This stance was problematic, as failure to meet the pension payment inadvertently by a minor amount e.g. $1, would technically breach the regulations.
A practical solution
The ATO has issued some general guidance on what happens if a pension member does not meet the minimum pension payment guidelines. The Commissioner can exercise his discretion for the pension to not revert back to a taxable accumulation account if:
1) The trustee has failed to pay the minimum pension payment because
- An honest mistake was made resulting in a ‘small underpayment’ or;
- It was outside the trustees control
2) The entitlement to retain pension status would have continued but for the minimum pension payment failure.
3) The trustee makes a catch up payment as soon as practicable.
4) Had the trustee made the catch-up payment in the prior year, the minimum pension would have been met.
5) The trustee treats the catch-up payment as if it occurred in the prior year.
A ‘small underpayment’ is considered to be less than one-twelfth of the minimum pension payment. Also, a payment ‘as soon as practicable’ is thought by the ATO to be within 28 days of the trustee becoming aware of the underpayment.
Do you need to advise the ATO if you fail to make your minimum pension payment?
It depends on the circumstances. If the failure was an honest mistake or outside of the control of the trustee, the underpayment is only small, a previous breach of the regulation has not occurred in a different year, and all of the other conditions have been met, then we can self-assess and not advise the ATO. If all of the conditions have not been met, then the ATO will need to be advised.
The approach taken by the ATO on this issue is pragmatic and will solve the uncertainty for trustees in the vast majority of cases.
Hillyer Riches is a specialist accounting, business advisory and smsf firm located in Melbourne. We service areas in the eastern suburbs of Melbourne such as, Caulfield, Camberwell & Malvern. For more information email an accountant at email@example.com or phone us on 03 9571 5333.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified accountant or other suitable professional.
Superannuation Industry (Supervision) Regulations 1994 – Reg 1.06
Self-managed superannuation funds - starting and stopping a superannuation income stream (pensi