When minimum pension payments are not physically made to fund members within the relevant financial year, there can be substantial tax consequences for the fund (therefore impacting the member’s account). It is important to make sure that the minimum is paid to avoid these consequences.
Where the minimum is not paid, the implications can be as follows:
- the assets that were supporting that pension lose their tax exemption;
- this means that any realised capital gains and any income earned with respect to those assets will be subject to the accumulation rates of tax, rather than a nil rate of tax;
- instead of being classified as pension payments, any payments that were made will be classified as lump-sums, which may have consequences for Transition to Retirement Pension accounts, as such accounts are generally ineligible to make lump-sum payments.
The ATO view is that any underpaid amount can’t be carried forward to the next financial year, and where the minimum is not made, the entire pension is deemed to have ceased on 1 July of the relevant year.
However, there is a concession available whereby the minimum will still be considered to have been met where:
- it is a small underpayment (less than one-twelfth of the total required for the year);
- an honest mistake resulted in the payment not being made, or the underpayment was outside the control of the trustee;
- the catch-up payment was made as soon as detected; and
- it is the first time the underpayment has occurred.
Where the above are all met, the fund can self-assess under this concession, which would result in the pension exemption remaining with respect to the assets supporting the pension.
Where any of the above are not met, this concession can’t be used, however there may be other options available to manage any issues associated with losing the pension exemption.
Given the consequences of losing the exemption, it is important to monitor and manage the minimum pension amounts to ensure that at least the minimum amount is paid each year.
Jemma Sanderson is a Director of Cooper Partners Financial Services, and is one of Australia’s most prominent advisers on SMSFs and superannuation.