What the ATO is keeping an eye on

 

A detailed look at why and how the ATO is turning greater attention to SMSFs in the benefits phase or those transitioning to retirement.

On 30 June 2014, there were one million SMSF members and approximately 39 per cent reported receiving pension payments. These payments were worth $19.1 billion. We also know that more than half of these members were aged 55 or older and that we can expect a further 250,000 members to be eligible for retirement benefits over the next 10 years.

These statistics provide great insight into the future of the SMSF sector and show why it is important for the ATO, the profession and trustees to increase our focus on the pension phase of an SMSF.

The biggest concession for SMSFs in this phase is that, if they pay a super income stream (a pension), the income on the assets backing that pension, including capital gains, is exempt current pension income (ECPI). This means that SMSFs must understand not only superannuation law but also relevant tax law.

These laws can be complex and present new challenges for trustees paying account-based pensions. One can view these challenges as retirement ‘potholes’.

The most surprising, yet also the most simple, of these potholes is when the required annual minimum pension payment is not made. In most cases it is just lack of attention on the trustee’s behalf but it can have significant tax consequences. The law is very clear: where the required annual minimum payment is not made, there is no pension and therefore an SMSF does not have ECPI that year.

In very limited circumstances, and subject to some conditions, the ATO may allow a pension to be taken to continue despite an underpayment of the minimum annual pension. This will allow the SMSF to have ECPI that year.

Where the underpayment is less than 1/12 of the annual amount required, a catch-up payment has been made as soon as possible, and it is the first time it has happened, we allow SMSFs to do this without even asking us.

Otherwise, a trustee must write to the ATO and show the underpayment was a result of circumstances outside their control. For example, we generally won’t accept that incorrect advice from a professional is a factor beyond a trustee’s control.

In addition, we generally won’t accept that the circumstances were outside the trustee’s control simply because 30 June fell on a weekend. The law requires that a payment must be ‘cashed’ (that is paid) by 30 June. Usually, a benefit is cashed when the member receives an amount and the member’s benefits in the SMSF are reduced. Avoid this by not waiting until the last minute to make the payment.

So far, the ATO has finalised 242 cases in which SMSFs have asked us to allow a pension to be taken to continue, despite an underpayment. Only 20 per cent could demonstrate circumstances outside the trustee’s control. The Commissioner’s refusal to allow a pension to be taken to continue is not valid grounds to object to an assessment denying ECPI to the fund.

We also see more complicated minimum pension errors, especially where account-based pensions are ‘restructured’.

For example, where a primary pensioner dies and there is a reversionary beneficiary automatically entitled to receive the pension, the trustee needs to make sure they still pay the minimum pension amount calculated at the start of the year of death. Where there is no nominated auto-reversionary beneficiary, there is no requirement for the trustee to pay a pro-rata annual minimum pension amount in the year of death.

Where a member nominates to fully commute their pension, a trustee must make sure they pay the pro-rata minimum pension payment separately first. The payment from a full commutation cannot count towards the minimum pension payment requirements.

Commuting a pension is complicated and presents other potential snags. For example, for there to be a valid commutation a member needs to make a conscious decision to convert some or all of their pension entitlement into a lump sum. We will not accept that a benefit is simply ‘re-characterised’ as a commutation after the event.

I mention this due to the large number of SMSFs that think it is okay to add contributions to an existing pension. The super laws are quite clear: once a pension has started, capital cannot be added to that pension and this includes by way of an internal rollover. So, if a member wants to increase the capital in a pension the trustees must first fully commute the pension. The capital can then be added and a new pension started.

Also, trustees must ensure that the pension is a pension type that can be commuted under the fund’s deed and the law. This can include a transition-to-retirement pension provided there are sufficient unrestricted non-preserved benefits. The issue here is a lack of understanding of how the priority of cashing rule operates. The law requires that all payments from a pension are firstly deducted from any unrestricted non-preserved benefits, so before a commutation is considered from a transition to retirement income stream, it is important to reconcile the remaining preservation classes.

Our main aim is to continue to work with trustees and professionals to avoid costly mistakes which may jeopardise an SMSF’s entitlement to exempt income.

Matthew Bambrick, assistant commissioner, SMSF segment, superannuation, ATO


Wednesday 8 July 2015
Columnist: Matthew Bambrick
smsfadviseronline.com.au

 

Any advice contained in this website is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice.

Rolanda has been my financial adviser for 20 years. I have always found her to be highly intelligent, knowledgeable and professional in her career. Rolanda is accessible at all times and patiently explains terms that I do not fully understand. I can highly recommend Rolanda and it is a pleasure to do so. I do this with the utmost confidence. Marcia Montgomery (Retiree – home duties and ex-clerk with Water Board)
I retired Oct 2012, and seeking Financial Advice for my retirement funds, I decided to have Rolanda look after my financial affairs, and so happy I did. Since my retirement I am extremely comfortable with Rolanda’s advice, experience and strategies and the returns on my investments. Rolanda is my "Breath of Fresh Air" at this stage of my life and she makes herself available 24/7 should you need to talk with her. Steve Hoad (Ground Engineer, Qantas)
In 1997 I left Energy Australia and decided to join Rolanda Adams Financial Services for the financial support and advice that I would need into the future. That decision has proved a very good one and I am still with Rolanda who has given me advice and friendship over those many years. The advice given has ensured that my investments have been protected and the major losses, of some, during the GFC was not felt by me unduly. Rolanda and her team are very easy to contact at any time and one is always received in a most professional manner. I would be most happy to recommend Rolanda Adams Financial Services to all who need financial services. Graham Fleeton (Manager, Property Insurance Group Energy Australia (Ausgrid))
Rolanda has been my Adviser for the past 18 years. Through her wide industry experience and professional expertise she has ensured the sound development and ongoing management of my investments. Her advice has invariably been sound, timely and entirely tuned to meet my personal needs in retirement. She has a friendly, engaging manner and is always readily available to address any of my concerns. I have no hesitation in recommending her. Neil O'Keeffe (Chief Inspector (retired), Australian Customs Service)

© 2019 Rolanda Adams Financial Services Pty Ltd. All rights reserved. Site by PlannerWeb.