Under Paid Pensions – ATO Concession

1/8/2013 8:00AM

Under Paid Pensions – ATO Concession

If a SMSF pays a pension, or if it intends on commencing a pension in the near future, the following information is essential reading.

The ATO has announced an important administrative concession dealing with the consequences of the shortfall in payment of an account based pension minimum pension in a financial year.

This concession is significant in that previously the ATO had taken the view that if there was an underpayment of the minimum pension, regardless of the amount of the underpayment, the pension is treated as having terminated at the start of the financial year, with the following consequences:

  • Payments made will be treated as superannuation lump sums for both income tax and SIS regulation purposes;
  • Earnings on assets supporting the pension will not be tax exempt;
  • The pension interest is merged with any accumulation interest of the relevant member; and
  • The proportioning rule will have to be reapplied when a new pension is commenced.

The concession now provided by the ATO means that where there is a “small” pension underpayment, or an underpayment outside the control of trustees, the pension will not be treated as having terminated.

The concession applies to Account Based Pensions (ABP) only – it does not apply to Allocated Pensions (AP) or Market Linked Income Streams (MLIS).

  • For SMSFs still paying a pension under the old Allocated Pension rules (i.e. min/max applies) this may be an excellent reason to consider converting from an AP to an ABP.

The conditions for self assessment and application of the concession include:

  • The underpayment is, either “small” and due to “an honest mistake” of the trustee, or, has occurred due to matters outside the control of the trustee;
  • The only reason the pension is treated as terminated is because of the underpayment;
  • The trustee makes the “catch up payment” as soon as practicable after becoming aware of the underpayment;
  • If the “catch up payment” had been paid in the earlier year, the minimum pension would have been satisfied;
  • The trustee must treat the “catch up payment”, for all other purposes, as though it had been paid in the previous year; and
  • The trustee has not previously been granted the Commissioner’s concession for failing to meet the minimum pension requirements.

If the circumstances of the underpayment do not meet all of the above conditions the exercise of the Commissioner’s general powers of administration would not be relevant for the purposes of self assessment.

The concession can only be used once. If the self assessed concession has been previously used, then the ATO may view that subsequent underpayments are not due to an honest error, but due to carelessness or indifference.

If the underpayment is outside the conditions for self assessment, then the trustee can still write to the ATO outlining the reasons for the failure to meet the minimum pension requirements and to request consideration of the exercise of the Commissioner’s powers of general administration, but there is no certainty that the ATO will apply the concession. Each case would be considered on its own merits.

If all the concession conditions are met, then:

  • The pension is taken to have continued and a new pension is not commenced in the following year;
  • The proportioning rule does not need to be reapplied to determine the tax free and taxable components;
  • The trustee can continue to claim an income tax exemption on earnings of the assets supporting the pension; and
  • Any payments made during the relevant year of income are treated as pension payments, not lump sum payments.

Following is an explanation of terms used above, and some examples of these terms:

  • “Small” means at most 1/12th of the minimum pension payment for the relevant year.
  • “An honest mistake” – e.g. a transposition error when making a payment, or incorrect calculation of the minimum pension by using the 50% concession rate instead of 25%.
  • “Matters outside control of the trustee” – e.g. the trustees are incapacitated due to a car accident just before the final pension payment for the year is due, or the trustees had to travel overseas on short notice due to a family or business crisis and did not make the June pension payment until the following financial year.
  • “Catch up payment” – e.g. the catch up payment for the 2011/2012 year may be achieved by the designating the July 2012 pension payment as the underpaid amount, however, the minimum pension for the 2012/2013 year must still be made.
  • “As soon as practicable” – If due to an honest trustee error: The payment needs to be made within 28 days of the trustee being aware of the underpayment. If the underpayment is outside the control of the trustee: The payment needs to be made within 28 days of the trustee being in a position to be aware of the underpayment.

What trustees should do going forward

For funds administered by Super Plus using our ongoing regular processing service with a Macquarie or DDH Graham account (ie not annual work), a pension “health check” is conducted at the end of May each year so that remedial action can be undertaken before 30 June.

If your SMSF is not processed on a regular basis, i.e. you are using an accountant or administrator that does adhoc or annual processing, then it is essential that the trustee assess during the relevant year whether SMSF have met the minimum pension payment requirement for relevant the year, before 30 June.