SMSF pension payments: A little bit under is OK

SuperGuide often receives questions from readers asking what happens if they don’t withdraw the minimum pension amount required to be paid each year from their pension account, especially when the underpayment is due to an honest mistake, or due to circumstances beyond their control.

Before January 2013, the black and white answer to this popular question was: for the financial year in which the minimum pension payment rules were not met, the super account holding the pension money would not be considered to be in pension phase. The consequences of the change of status to the pension account were that the earnings on the assets funding the pension account were not exempt from tax for that financial year (which means the earnings on that account would be subject to 15% earnings tax for the year). In addition, the fund member had to commence a new pension the following financial year with a new calculation of the tax-free and taxable components for future super benefits paid. (Later in the article, I list SuperGuide articles that explain the how the pension phase works and the main pension rules, including the minimum pension payment requirements.)

Since January 2013, and taking effect retrospectively from 1 July 2007, the Australian Tax Office has decided to show leniency and exercise the ‘Commissioner’s powers of general administration (GPA)’: in certain circumstances, where a super fund member fails to withdraw the minimum annual pension amount in a financial year, the pension account will not lose its tax-exempt status and the pension is deemed to continue, rather than cease.

Note: The tax-exempt superannuation pension income is officially known as ‘exempt current pension income (ECPI)’

When is it OK to underpay minimum pension payment?

According to the ATO, if the minimum pension payment standards have not been met, that is, total payments to a pension fund member in an income year (June to July) are less than the annual minimum payment amount, then the fund member will no longer be able to claim ECPI unless the following conditions are satisfied:

  • Failure to pay the minimum pension amount is due to an honest mistake, and involves a small underpayment. (The ATO considers a small underpayment to be one that does not exceed one-twelfth of the minimum payment in the relevant financial year.), OR failure to pay the minimum pension amount is due to matters outside the control of the trustee.
  • Apart from the underpayment, the pension was compliant with the super rules
  • When trustee became aware of the underpayment, the trustee makes a catch-up payment as soon as practicable (within 28 days of becoming aware of the underpayment). In relation to matters outside the trustee’s control, then ‘as soon as practicable’ means within 28 days of the trustee being in a position to be aware of the underpayment.
  • If the catch-up payment had been made in the previous (and correct) year, the pension was compliance with the super rules.
  • The catch-up payment is treated as if it was made in the correct year (and does not count towards the pension payment for the later year in which it is made).

If the trustee satisfies the conditions above then the existing superannuation pension is deemed to continue to operate which means that the trustee can continue to claim the tax exemption on pension asset earnings, and the taxable and tax-free components of the pension account do not need to be recalculated. Also, any payments during the year that the minimum pension payment rules were not met, are still considered pension payments rather than lump sum payments.

Do you need to tell the ATO about the underpayment?

According to the ATO, you can self-assess the ATO’s discretion subject to meeting the conditions listed earlier, and subject to you not having previously been granted the Commissioner’s discretion for failing to meet the minimum requirements.

You will need to actively apply for the discretion in writing, however, if your underpayment is not due to an honest mistake or not beyond your control, or your underpayment is more than one-twelfth of the annual minimum pension payment amount, or you paid the underpayment later than 28 days after discovery, or you have previously underpaid the minimum pension amount.

Continue reading this article to find examples where the ATO exercises its GPA concession, and where it does not exercise its GPA (scroll down beyond the article links).

For more information on the superannuation pension rules, minimum pension payments and the tax treatment of super pensions see article links below:

ATO examples – underpayment of minimum pension amount

Set out below are 9 examples of the underpayment of annual minimum pension payments. The first 4 examples illustrate when the ATO will allow a trustee to self assess, and the next 5 examples illustrate when the ATO won’t allow a trustee to self assess a pension underpayment.

Example 1: Transposition error results in small underpayment

The ATO will allow the trustee to self assess and apply the GPA concessions because:

  • Payments were made during the year and failure to meet minimum pension payment requirements by 30 June were due to an honest administrative error
  • Amount of underpayment was small
  • A catch-up payment was made as soon as practicable, in the following income year

Although the super fund failed to meet its obligations under the super law, because the trustee satisfied the conditions of the GPA concession, the super pension continues and the trustee continues to claim the exempt current pension income.

Example 2: Trustee on jury duty and the case ran longer than advised

The ATO will allow the trustee to self assess and apply the GPA concessions because:

  • Payments were made during the year and failure to meet minimum pension payment requirements by 30 June were outside the control of the trustee
  • Amount of underpayment was small
  • A catch-up payment was made as soon as practicable, in the following income year
  • Trustee had not previously been granted the GPA concession

Example 3: Trustee incorrectly calculates the minimum pension amount

The trustee made an honest administrative error: he used the incorrect minimum pension payment concession (50% instead of 25%) to calculate the July 2011 pension payment, as this was the percentage he had used in the previous year, and his computer system had not yet updated.

The ATO will allow the trustee to self-assess because he meets the conditions of the GPA concession, namely, honest administrative error, small underpayment and a catch-up payment was made as soon as practicable in the following income year/

Example 4: Trustee made urgent overseas business trip and missed June monthly pension payment

The ATO will allow trustee to self assess because:

  • Trustee made an honest mistake
  • Underpayment is small (does not exceed one-twelfth of annual minimum pension amount)
  • Trustee has always met minimum pension payments in the past
  • Trustee made a catch-up payment as soon as practicable

Example 5: Trustee is overseas and does not make annual pension payment

The ATO will not allow trustee to self assess because this is not a small underpayment as it exceeds one-twelfth of the minimum annual pension payment. The trustee needs to actively apply for the GPA concession and demonstrate that matters outside their control affected their ability to meet the minimum pension requirements.

Example 6: Trustee has previously made incorrect or late minimum pension payments

Trustee will have to actively apply for the GPA concession, and the ATO will consider the circumstances can determine whether to exercise the GPA concession again/

Example 7: Trustee makes payment by cheque that is dishonoured

A dishonoured cheque is not beyond the trustee’s control and the ATO holds the view that trustees should run the super fund in a way that ensures sufficient funds are in the super fund’s bank account. The trustee cannot self assess, and if the trustee applied to the ATO, the ATO would not exercise its GPA concession. The superannuation pension will be deemed to have ceased at the start of the income year for income tax purposes.

Example 8: financial institution error

According to the ATO, if the trustee can demonstrate all reasonable steps were taken to ensure the pension payment would be processed prior to 30 June, and it was something outside the trustee’s control that prevented the payment from being made, the ATO may consider exercising the GPA concession.

Example 9: Trustee records payment as an accrual but does not pay out the pension payment

The superannuation pension will be deemed to have ceased at the start of the income year, and no self assessment is possible, and the ATO will not consider exercising the GAP concession.

© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.


IMPORTANT: SuperGuide does not provide financial advice. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.

Comments

  1. GRAEME HILLIER says:

    HI Trish , Wife is about to join our SMSF and go into the pension phase,as I already am. I have your Dummies book as my Bible. Do any of your other publications deal with the mechanics or strategies for the new member joining? (She is a trustee already ). Best wishes Graeme

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