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Self Managed Super Fund (SMSF) Article
Self Managed Super Funds and minimum pension payments
By Tony Negline.
This article may be out of date.
25th November 2009
In the last couple of weeks the ATO has issued some very important information for Self Managed Super Funds paying pensions.
Under the superannuation laws a super fund must pay a minimum amount of income every year to each member of the fund receiving a pension. Some allocated pensions and market linked pensions which commenced before July 2007 might also have a maximum income determined by similar statutory rules.
The minimum income, and maximum income if relevant, is determined by the member's age and is worked out each 1 July based on the member's account balance. When working out the member's account balance the super fund must value the assets at net market value (NMV).
(This does not mean that the trustees of a Self Managed Super Fund have to use net market value of assets in their fund's financial accounts. It simply means that a pension's minimum and maximum income payments are determined using NMV.)
For example super fund trustees using the Post June 2007 minimum payment rules have to pay at least 5% of a member's NMV account balance during a financial year if the member is aged at least 65 but under 70 and is receiving a pension.
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:
- When exactly would a pension cease to be paid because the minimum has not been paid and the assets begin to be taxed inside the super fund?
- For super funds now know they have a problem, should they be checking their income tax affairs and re-doing financial accounts and over what period of time?
- Did this rule apply before Howard Government's Better Super changes took effect in July 2007?
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