No 12: Failing to meet minimum pension requirements

In mid 2011 the ATO issued a draft taxation ruling which represented the Commissioner’s preliminary view about the way in which the relevant taxation provisions applied upon the commencement and cessation of a pension or, as it is referred to in the draft ruling, a superannuation income stream. Whilst there are aspects of the draft ruling which have proven to be controversial, the draft ruling was quite clear that in the event that the Trustee fails to make sufficient payments to meet the minimum pension obligations as set out in the superannuation regulations, the superannuation income stream ceases for income tax purposes from the beginning of the income year. This is the case even if a member remains entitled to receive a payment from the superannuation fund in relation to the superannuation income stream under the terms of the superannuation trust deed or under general trust law concepts.

In theory this could occur even if the minimum payment requirements were not met by a
small underpayment.

The ramifications of underpaying pensions include:

  • the fund’s income on the assets that were supporting the pension may not be exempt
    from tax in that income year;
  • the payments that were made in that year may not be taxed as income stream benefits
    and will instead be taxed as lump sum benefits.

This latter point may have a significant impact on pensions which commenced as Transition to Retirement pensions, particularly those which commenced with monies which were wholly or substantially preserved. In the event that the minimum pension payment obligations have not been met and the pension is deemed to have ceased, the member may have received lump sum payments which are considered preserved. The ATO considers this as unauthorised access to superannuation benefits and such access is generally subject to significant penalties.

The ATO has yet to finalise the draft ruling but has recently issued some guidance which clarifies the regulator’s stance with respect to breaches of the minimum payment requirements that warrant the exercise of the Commissioner’s powers of general administration. (Refer to Click Here.) If all five of the specified conditions are met, the ATO has the capacity to treat the pension as though it did not cease and the taxation benefits of the pension are able to be continued. Under some circumstances the ATO will allow the Trustee to self-assess if a further set of conditions are met.

The loss of the tax concessions associated with a deemed cessation of a pension can have a significant effect on a fund including the earnings being taxed at 15% rather than being exempt from tax. We caution all trustees of self-managed superannuation funds paying pensions that notwithstanding that small breaches may be able to be rectified with no loss of tax benefits, the ATO’s guidelines clearly do not allow for more significant breaches to receive the same beneficial treatment.

We strongly urge you to consult your advisor should you need any assistance in determining the minimum level of pension required to be taken. Trustees are solely responsible for ensuring at least minimum pension payments are made – we strongly recommend you record carefully all pension payments made and consult with your advisor prior to the end of the financial year to ensure that you have met the minimum requirements.