The ATO has released a news alert which clarifies a number of the uncertainties surrounding pensions that are deemed not to have existed in a year in which the SIS standards were not met. Once an account based pension commences, there is an ongoing requirement for the trustee to ensure the minimum pension standards in the SIS Regulations are met. If any of the requirements of the SIS Regulations are not met in an income year both of the following apply:
- a super pension ceases for income tax purposes, and
- the ATO consider the trustee has not been paying an pension at any time during the year.
If a fund fails to meet the minimum pension payment requirements for a pension in an income year, the super pension will have been taken to have ceased at the start of that income year for income tax purposes. From the start of the income year the account is no longer supporting a super pension and any payments made during the year will be super lump sums for both income tax and SIS Regulations purposes. (A significant problem if the pension is a transition to retirement pension and the member is not eligible to receive a lump sum). This is the case even if the member remains entitled to receive a payment from the fund for the pension under the governing rules or under general trust law concepts.
This means the fund will not be entitled to treat income or capital gains as exempt pension income for the whole of the year.
The ATO alert indicates that if the total payments in an income year to a member are less than the minimum payment amount for a super pension, the Commissioner’s powers of general administration may be exercised to allow the fund to continue to claim exempt pension income where all of the following conditions are satisfied:
- The trustee failed to pay the minimum pension amount in that income year because of :
- an honest mistake made by the trustee resulting in a small underpayment of the minimum payment amount for a super pension, or
- matters outside the control of the trustee.
- The entitlement to the exemption would have continued but for the trustee failing to pay the minimum payment amount.
- 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 income year; or treats a payment (intended prior year payment) made in the current income year, as being made in that prior income year.
- Had the trustee made the catch-up payment in the prior income year, the minimum pension standards would have been met.
- The trustee treats the catch-up payment, for all other purposes, as if it were made in the prior income year.
If all of the above mentioned conditions are satisfied then:
- The super 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 applied again to determine the tax free and taxable components.
- The trustee of the fund can continue to claim an income tax exemption for earnings on assets supporting that pension, notwithstanding the fund’s failure to meet its obligations under the super law.
Any payments made to the member during that income year are treated as super pension payments and not lump sum payments.
If the circumstances of the underpayment do not meet all of the conditions set out above, then the Commissioner’s general powers of administration would not be relevant.
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. 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.
The ATO will allow the trustee to self-assess and apply the concession if all of the following apply:
- failure to meet the minimum pension requirements was an honest mistake or was outside the control of the trustees.
- the underpayment is only small (that is, does not exceed one-twelfth of the minimum annual pension payment).
- all of the other conditions have been met.
- the trustee has not previously been granted the Commissioner’s concession for failing to meet the minimum requirements. So where the fund has previously failed to pay the minimum pension the trustee cannot self-assess and apply the concession.
In all other cases the trustee will need to write and outline why they did not meet the minimum pension requirements and seek the Commissioners discretion.
The ATO alert is available at http://www.ato.gov.au/content/00343757.htm and does provide some examples. Unfortunately none of the examples, or information contained in the alert, refers specifically to transition to retirement breaches of the maximum pension payment, it does however provide a level of useful information for anyone not meeting the minimum pension standards.
In summary the Commissioner has provided limited discretion where a fund has failed to pay the minimum pension. The discretion applies where the pension shortfall is a small amount and resulted from an honest mistake or resulted from matters outside the control of the trustee. It appears that the discretion may not apply to transition to retirement pensions. As a safeguard we would recommend that in all cases that trustees pay the minimum pension.