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Blog

February 1st, 2013
ATO clarifies position on minimum pension shortfalls by Daniel Martinez

A little while ago,  in Draft Taxation Ruling 2010/D3, the ATO stated that a member is not considered to be in the pension phase for any part of a financial year in which a superannuation fund fails to paythe minimum pension to that member.   The major implication of the ATO’s position is that the fund will not be able to claim any exemption on it’s earnings in respect of that member’s account balance for the whole financial year in which the shortfall occurred.

On 23 January 2013, the ATO published a series of Questions and Answers outlining the practicality of its position.

The first key point to note is that the ATO’s position in regards to a minimum pension shortfall has not changed.  In other words, if there is a pension payment shortfall, the ATO considers that there was no pension for the whole of that financial year.  In the Question and Answers announcement, the ATO stated the practical implications of this position as follows:

  • If the minimum pension is not paid, the pension does not exist and the balance would need to be merged with any existing accumulation account in the fund for that member from the start of the financial year.
  • No earnings tax exemption would be granted in respect of the assets relating to that member balance.
  • Any payments made will not be treated as pension payments but lump sum amounts (this could be an issue if the pension was a transition to retirement pension as the member may not meet a lump sum condition of release)

Importantly, in the Question and Answers announcement, the ATO did state that it is possible to catch up the shortfall and not lose the pension status in certain circumstances.

The key elements of this discretion are:

  • The shortfall is less than 1/12th of the minimum payment for the year, in effect one months payment (a good reason to set up periodic pension payments rather than make ad hoc payments).
  • It occurred due to an honest mistake or matters beyond the trustees control.
  • The shortfall is rectified within 28 days of becoming aware of the shortfall. This means the shortfall may be paid in the next financial year or allocated from pension payments in the next financial year.
  • It is treated as if it was made in the correct year in terms of all other matters such the accounts, member balances, tax return and reporting.

A final aspect is that it is possible for a SMSF to self assess this discretion.  This discretion is only available once. If a shortfall happens again then written relief from the ATO must be sought.

If you would like more information about SMSFs or other matters, please contact me.

Bye for now

Dan’s Corner

Source: Multiport

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