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Sent: 13-07-2010 10:14:06
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Tapping Higher Gold Prices: Bullion or Equities?A How To Book Of Self Managed Super FundsEmail Marketing WorkshopsWhere to now with pensions?Email Marketing Business Opportunity - Helen Bairstow
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Where to now with pensions?

Click here to buy - A How To Book of SMSF's by Tony Negline
Tony Negline

On 28 July the Tax Office is due to release three important draft rulings.

Two of these rulings involve pensions and the third deals with excess contributions.

The only idea I have about the two pension rulings is the published minutes for the various ATO liaison committees it runs.

Some of the minutes refer to various issues that arise about when a pension is actually a pension. I dealt with this issue in an article for my DIY Super column in The Australian last year.

That article dealt with the thorny issue about pensions not paying the required minimum:

A very common problem for Self Managed Super Funds paying pensions is that some income might be paid to a pensioner but less than the minimum pension is actually paid over a financial year. Another variation of this problem occurs when a trustee has to pay a defined income to a pensioner member and pays less than this amount.

A trustee will pay less income than required because a mistake is made (such as the trustees forget to make the income payments) or the fund doesn't have sufficient cash to actually make the required pension payments.

In some cases trustees actually don't make any income payments. Has the pension not been paid due to negligence or did unforeseeable circumstances prevent it being made?

The underpayment or non-payment of a pension are technically a breach of the minimum income payment requirements and will mean that the fund has not met the super law pension paying standards.

An unwritten industry practise has developed around these errors. Most accountants will make the unpaid income payment an accrued liability in the super fund's financial accounts and the trustee is then instructed to pay this liability as soon as possible in the following year.

Although this is technically a breach of the super laws, the auditors of most super funds which make these mistakes would conclude that the error is not a significant breach and hence would not consider reporting it to the Tax Office.

Recently the Tax Office was asked, via an industry liaison forum, if the practical industry developed solution is acceptable.

The ATO said that in their view this industry practise is unacceptable.

It says that the minimum payment rules must be satisfied in relation to a pension both in "form and effect". The super laws do not say that unpaid pension income payments become an accrued liability that can be settled in the following year or later years.

Consequently, the tax office says that "it is not enough for the rules of the pension to state a payment will be made in each year if the payment for a particular year is not actually made. Where a trustee does not pay the pension benefits as required by the [super laws], the payment will not be regarded as a superannuation income stream benefit for the purposes of the [income tax laws], and the fund will not be entitled to the exemption for income relating to their current pension liabilities."

This means that a fund making this mistake would loose the tax exemption on earnings from the assets used to pay the pension.

This issue has very large implications for many Self Managed Super Funds.

Three issues which remain unresolved in relation to this issue are as follows:

It is to be hoped that the ATO documents deal with these issues. Perhaps these draft rulings will also deal with CGT aspects on lump sums paid when a pension is partially or fully commuted.

Finally please consider purchasing a copy of my book. You can look at the contents page at the following link:

The second edition has just been released.

Two options are available - once only subscription - $55 inc GST - or an annual subscription will gives you access to all the updates made throughout the year ($120 inc GST). The book can be purchased at the following link:

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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