Q: I have my own super fund and when it came to the end of the year I was supposed to withdraw $22,000. I only withdrew $12,000 and I can catch up this year. Is this a reportable breach to the Tax Office?
For the benefit of other SuperGuide readers, I’ll first explain the background to your question. I assume that you’re referring to the annual minimum pension payment associated with an account-based pension.
How account-based pensions work
The main feature of a regular account-based pension is that you can take out as much money as you like, as often as you like, subject to withdrawing a minimum amount each year.
The annual minimum payment is calculated on 1 July each year using a percentage linked to your age and your pension’s account balance.
The formula is:
Minimum payment = account balance x percentage factor.
For example, if a fund member is aged 64 on 1 July, their percentage factor is 4%. For example, on a $300,000 account balance as at 1 July 2017, the minimum pension amount for the 2017/2018 financial year for a 64-year-old is $12,000 (and the same percentage factor applies for the 2018/2019 year). If a fund member is aged 65, the percentage factor is 5%, or $15,000 (and the same percentage factor applies for the 2018/2019 year).
On a $550,000 account balance as at 1 July 2017, the minimum pension amount for the 2017/2018 financial year for a 64-year-old is $22,000. If a fund member is aged 65, the percentage factor is 5%, or $27,500 (and the same percentage factors applies for the 2018/2019 year).
Note: The same age-based percentage factors also applied for the 2016/2017 year, the 2015/2016 year, the 2014/2015 year and the 2013/2014 year.
We explain the how the minimum pension payment rules work in more detail in the SuperGuide articles Minimum pension payments for 2018/2019 year (and for 2017/2018 year) and SMSF pension: How do I calculate my minimum pension payment?
Note: The minimum pension payment rules also apply to transition-to-retirement pensions (TRIPs), a special type of account-based pension. TRIPs also have maximum withdrawal requirements. For information on the particular rules that apply to transition-to-retirement pensions (TRIPs), including the change in tax treatment for TRIPs since July 2017, see SuperGuide article Less tax, more super? A transition-to-retirement pension is no longer the answer.
Benefits of retirement phase
A super account in retirement phase doesn’t pay any tax on investment earnings, including capital gains. The deal with a retirement phase superannuation pension account enjoying tax-exempt earnings (in addition to the member enjoying tax-free super benefit payments) is: a super fund must follow the minimum pension payment rules. If a pension account doesn’t pay the minimum pension amount, then the tax-exempt earnings are at risk. If a super fund fails to meet the pension requirements, then the super account involved may not be considered to be in retirement phase. For more information about the retirement phase, see SuperGuide section Retirement phase (formerly called Pension phase).
Note: Since 1 July 2017, the earnings from assets financing transition-to-retirement pensions are not exempt from tax, because such pensions are not treated as being in retirement phase. Regular retirement phase super pensions will continue to enjoy tax-exempt earnings on pension assets. (For more information on the change to the tax treatment of TRIPs, see SuperGuide articles Less tax, more super? A transition-to-retirement pension is no longer the answer and TRIPs: 10 important facts about transition-to-retirement pensions).
Important: Since July 2017, if you have more than $1.6 million in superannuation and you moving to retirement phase, you will be required to retain or redirect the excess amount above $1.6 million, in accumulation phase, and pay 15% tax on the earnings from those excess assets, OR withdraw the excess from the super system. For more information on this significant change, see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap.
Separately, the payments of superannuation benefits are tax-free when received on or after the age of 60, regardless of whether a fund member takes a lump sum or pension (with the exception of ‘untaxed benefits sourced from certain public sector funds’). The benefit payments you receive from a super pension are a different concept to the investment earnings derived from pension assets. For more information about the tax treatment of super benefits, see SuperGuide articles Tax-free super for over-60s, except for some and Retiring before the age of 60: the tax deal.
Failing to pay the minimum pension amount
You ask, if a super fund must report the breach of the super rules (failure to pay the minimum pension amount) to the ATO. The ATO uses the term ‘contravention’ to describe a breach of the super rules.
First, we need to explain the implications of not paying the minimum pension amount, which can be huge. Further, if anyone finds themselves in this situation, we suggest you seek advice from an accountant who is familiar with the superannuation pension tax rules, or contact the ATO.
Before January 2013, failing to comply with the minimum pension payment rules meant that the superannuation pension automatically failed to meet the definition of a super pension, and consequently the earnings on the pension assets would lose their tax-exempt status for that financial year. In addition, the individual would have to start a new pension in the following financial year with a new calculation of the tax-free component and taxable component.
Note: The tax-exempt superannuation pension income is officially known as ‘exempt current pension income (ECPI)’.
Since January 2013, and taking effect retrospectively from 1 July 2007, the ATO has exercised the ‘Commissioner’s powers of general administration (GPA)’, namely, in certain circumstances, where a super fund 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.
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 (July to 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, 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 in 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 component and tax-free component of the pension account do not need to be recalculated. Also, assuming the conditions listed above are met, 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 have to report the breach to the ATO?
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.
Important: You will need to actively apply to the ATO 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 (in earlier financial years) the minimum pension amount.
For more information on the ATO’s approach when dealing with the underpayment of minimum pension payments, and examples of when the ATO exercises its GPA concessions, see SuperGuide article SMSF pension payments: A little bit under may be OK.
Background on general approach to contraventions of super rules: During a fund audit, if the approved SMSF auditor is of the view that a super fund breaches the superannuation laws, he or she must notify the trustees of the super fund upon discovery of the breach. In some cases, the process also involves the super fund’s approved SMSF auditor reporting the breach to the ATO, subject to satisfying some preliminary steps. Not all super breaches have to be reported to the ATO, but an approved auditor of a self-managed super fund must follow strict guidelines to determine whether a contravention of the super rules should be reported to the ATO. You can read about the reporting criteria on the ATO website here.
Generally speaking, if a contravention involves a financially insignificant amount, and it is a first ‘offence’ then an approved SMSF auditor is not required to report the breach to the ATO, except when the auditor is concerned about the fund’s financial position, or when the auditor believes that a contravention of the super laws may otherwise affect the interests of the fund member. Generally speaking, it appears failing to meet the minimum pension requirements does not automatically fall under the standard reporting tests for super breaches but it is likely that such a contravention affects the interests of a fund member. A fund auditor may then use their professional judgement and report the breach to the ATO. Reporting the breach to the ATO doesn’t necessarily mean that a super fund will be penalised for breaking the rules, particularly if the SMSF takes immediate action to rectify the situation.
Important: If a super fund is in its first year of operation, the fund’s auditor must report any breach to the ATO, regardless of the whether the breach is minor from a compliance point of view
Without knowing the particular circumstances of your fund, and since SuperGuide is an information website, rather than a website providing financial advice, we suggest you contact your adviser/accountant, and your fund’s auditor about what reporting steps are required in the particular circumstances affecting your super fund.
You can also contact the ATO directly to confirm how the ATO deals with such a contravention.
For more information…
For more information about the current minimum pension payment rules, including the implications of breaching those rules, see the following SuperGuide articles:
- Minimum pension payments for 2018/2019 year (and for 2017/2018 year)
- Annual Minimum Pension Payment Calculator
- SMSF pension: How do I calculate my minimum pension payment?
- Minimum pension payment: At what date do you determine the age for payment calculation?
- SMSF pension payments: A little bit under may be OK
- Super pensions: Is there an upper limit to how much we can withdraw?
- Retirement and tax: What are the minimum pension payment rules?