Although prevention is better than cure when it comes to ensuring you take your minimum pension payments each year, the ATO this week has released information in regards the circumstances in which they will overlook a small underpayment in pension payments.
Information on SMSF minimum pension relief 2020
We’ve released a detailed article on minimum pension draw-down relief for the 2020 financial year due to Coronavirus (COVID-19) impact.
Refer to the following article for more information: SMSF minimum pension 2020 drawdown relief
Why is this so important?
Failing to meet the minimum pension requirements for a financial year has a huge impact for SMSFs who are claiming a tax exemption on income from assets that support a pension or pensions within the fund. If the minimum payments are not made during the financial year, the ATO will deem that the pension stopped at the start of that year (1 July).
For most SMSFs, this means a tax payable bill for the year instead of $0 tax. If the fund receives franked dividend income, it will mean tax payable rather than a refund of franking credits of many thousands of dollars.
In addition to the SMSF losing its tax exemption on income generated from pension assets, any amounts that have been taken from the SMSF will be treated as lump sum payments.
When can the ATO apply discretion?
The cases where the Commissioner can disregard the fact that the SMSF underpaid the pension to the member are very limited. The following criteria has been taken verbatim from the ATO website:
- 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 and,
- The entitlement to the ECPI (‘exempt current pension income’ – i.e. tax free income) exemption would have continued but for the trustee failing to pay the minimum payment amount and,
- Upon the trustee becoming aware that the minimum payment amount was not met for an income year, the trustee makes a catch-up payment as soon as practicable in the following (current) income year; or treats a payment (intended prior year payment) made in the current income year, as being made in that prior income year and,
- Had the trustee made the catch-up payment in the prior income year, the minimum pension standards would have been met and,
- The trustee treats the catch-up payment, for all other purposes, as if it were made in the prior income year.
Please note that all five of the above criteria must be met to enable the trustee of the SMSF to self-assess in regards to the underpayment of the pension. Alternatively the SMSF trustee can apply in writing to the ATO if they believe that their situation warrants special consideration.
The following terms have special meanings:
Small under payment: The Commissioner considers a small underpayment to be one that does not exceed one-twelfth of the minimum pension payment in the relevant income year.
As soon as practicable: Generally, if the underpayment is due to an honest trustee error, the Commissioner considers ‘as soon as practicable’ to be within 28 days of the trustee becoming aware of the underpayment. If the underpayment is due to matters outside the trustee’s control, ‘as soon as practicable’ is considered to be within 28 days of the trustee being in a position to be aware of the underpayment.
Ensuring pension requirements are met:
As we know, prevention is always better than cure. We always recommend our clients use the following procedure when drawing a pension from their SMSF:
- Set up a regular, fixed periodic (monthly, fortnightly, weekly) payment from your SMSF bank account to your personal bank account
- The regular amounts will be your minimum annual pension divided by the number of payments per year (e.g. 12 payments if monthly)
- When your SMSF accounts are completed each year, and we advise you of the updated annual minimum, update the regular automatic payment and make a catch-up payment to ensure the minimum payment standards are met
- Take any extra payments you wish throughout the year, provided you do not exceed the 10% maximum payment limit if applicable (if you are receiving a ‘transition to retirement’ pension)
- Check your pension payments against your required minimum online via FundWeb – our secure online SMSF accounts portal: https://www.superfundpartners.com.au/client_login
If you have any questions or comments, please do not hesitate to contact myself or any member of the Superfund Partners team.