SMSF pension payments: A little bit under may be 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, if the fund member wanted to continue be in pension phase, then 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. Before January 2013, another super whammy was that any payments made from the super fund from the start of the financial year, when the pension phase was deemed not to exist, would be treated as lump sums under the super and tax laws, with no flexibility.

Since January 2013, and taking effect retrospectively from 1 July 2007, the Australian Tax Office 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.

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

Note: 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.

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 (1 July to 30 June) 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 (due to honest mistake and small underpayment OR beyond the control of trustee), 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 compliant with the super rules, that is, apart from the underpayment, all other rules had been followed.
  • 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 financial year in which the minimum pension payment rules were not met, are still considered pension payments rather than lump sum payments.

Important: Both political parties (ALP and the Liberals/Nationals) intend to introduce a cap-of-sorts on the amount of tax-exempt pension earnings that can be generated from a super pension account. From July 2017, depending on which party wins the 2016 Federal Election, if you have substantial assets in pension phase, you may have to pay 15% tax on some of your pension earnings. For more information on this proposed change, see SuperGuide article 2016 Federal Election update: What superannuation and retirement policies can you expect? and more specifically, see SuperGuide articles Liberals to impose $1.6 million cap on pension start balances, if win election and ALP to tax pension earnings above $75,000 a year, if wins election.

Note: The minimum pension payment rules, and special conditions, also apply to transition-to-retirement pensions (TRIPs), a special type of account-based pension and TRIPs also have maximum withdrawal requirements. For information on the particular rules that apply to transition-to-retirement pensions (TRIPs), including the proposed change in tax treatment for TRIPs from July 2017, see SuperGuide article Less tax, more super? A transition-to-retirement pension may no longer be the answer.

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.

Note: You will need to actively apply for the ATO discretion in writing, however, if your underpayment is NOT due to an honest mistake, or your underpayment is more than one-twelfth of the annual minimum pension payment amount, or your underpayment is NOT beyond your control, 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 when a trustee actively applies for the discretion, 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 SuperGuide 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, rather they will need to actively apply for the discretion.

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

Outcome: 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

Outcome: 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 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 in these circumstances 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.

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

The ATO will allow trustee to self-assess in these circumstances 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 to the ATO that matters outside their control affected their ability to meet the minimum pension requirements.

The ATO states that each case is considered on its merits.

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

Trustee will have to actively apply for the GPA concession, since self-assessing the concession is not available. The ATO will consider the individual circumstances of case to 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.

Outcome: 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.

Note: The ATO has indicated that if a trustee writes a cheque for the payment on 30 June, and issued the cheque to the member on 30 June, but the funds were not available in the super account on that date, the minimum payment requirements would not be satisfied. This ATO approach applies even if the cheque is presented at a later date, and honoured. According to the ATO, the lack of available funds on 30 June means that payment is made in the following year rather than 30 June.

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.

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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