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Clive Todd - Director
"The ATO is about to get tough on self managed superannuation's funds (SMSFs) that fail to pay the minimum required pension amount each financial year," says Hanrick Curran Director of Superannuation Services, Clive Todd."When a SMSF begins to pay an account based retirement pension or a transition to retirement income stream to a member, the tax rate on earnings on investments of the fund supporting that pension reduces from 15% to nil, including an exemption from tax on capital gains on fund investments sold during the pension years," he said.

"This very generous tax concession comes with a number of conditions imposed by regulations, the most important being that the SMSF must pay to the member at least the annual minimum pension calculated each financial year," he went on to say.

 In a recent ATO guidance release, the ATO have announced that if the minimum pension amount is not paid at least once in a financial year they will consider the SMSF not to be entitled to the exemption from tax on investment earnings. The SMSF will be required to pay tax at 15% on all investment earnings for that entire financial year.The ATO also detailed how they will exercise their discretion to overlook a failure to pay the minimum pension amount and for the first time have quantified what they consider to be a "small underpayment" of a pension. If your SMSF fails to pay the minimum pension, the tax concessions can be retained provided all of the following conditions are satisfied:

  • The underpayment is only small i.e. no more than one-twelfth of the minimum pension amount; and
  • The trustee pays a "catch-up" pension payment as soon as practicable in the following income year, within 28 days of becoming aware of the shortfall; and
  • The failure to meet the minimum pension requirements was an honest mistake or was outside the control of the trustees.

SMSF trustees will be able to self assess their entitlement to the ATO's discretion provided all of these conditions are met. However if it is not the first time that the fund has made this error they cannot self assess and must apply to the ATO in writing for exercise of discretion, providing all necessary written evidence.

Chris Campbell - Partner
Hanrick Curran Partner and experienced superannuation specialist Chris Campbell says, "The most difficult of these requirements is likely to be demonstrating that failure to meet the minimum pension payment requirement was 'an honest mistake' or was 'outside the control of' the trustees.""The ATO provides a number of examples in their guidance note however it is clear that simply forgetting to make a pension payment is unlikely to be sufficient grounds for relief," he said.

With the loss of tax free earnings status on your pension investments for an entire financial year at stake, Chris suggests some practical tips: "A regular or scheduled direct transfer payment via internet banking of the minimum pension amount, well before 30 June each year is advisable."

"If your SMSF is paying a pension or income stream, we urge you to ensure that you pay at least the minimum pension amount prior to 30 June," advises Clive Todd. "If you are unsure of your annual minimum pension amount or require assistance in tallying your pension payments made to date, please contact us."

This article was published in the Autumn 2013 Horizon. For a pdf version of the newsletter please click here.