Mark Ellem Accurium Education

Written by:
Mark Ellem
Head of Education (SMSF)

Whilst the focus was on end of financial year matters, the ATO released the final updated version of their pension ruling TR 2013/5: when a superannuation income stream commences and ceases on 26 June 2024. It appears that it has somewhat flown under the radar with yours truly only looking at it in the past day or so, but there is an interesting, and some may say concerning, concept that has been included in the final version, that was not in the original draft.

Could this updated ruling change the obligations and costs for SMSFs which fail to meet the minimum pension rules? I think it does… read on to find out why.

It was generally understood that the update to this ruling was to simply:

  • Incorporate the legislative amendments flowing from the 2016 Budget announcement of the transfer balance cap, which limits the superannuation interests that a person can have in retirement phase;
  • Clarify how the general principles in this ruling apply in the context of successor fund transfers; and
  • Remove practical compliance approaches that are no longer current.

The draft update, published 27 September 2023, included these updates. In the main, from an SMSF perspective, nothing new and nothing that would require a change to approach when dealing with pensions paid from an SMSF. However, it’s one particular paragraph in the final version that gives pause to consider the potential implications where an SMSF fails to pay the minimum pension for an income year.

We know that where the minimum pension is not paid that the consequences are:

  • The pension ceases for income tax purposes from the start of the income year in which the minimum pension was not paid. The fund will not be able to claim exempt current pension income (ECPI) in respect of the failed pension.
  • The pension ceases for transfer balance account (TBA) purposes at the end of the income year in which the minimum pension was not paid. This is a reportable TBA event which will give rise to a TBA debit equal to the value of the pension at 30 June.

The original version of the Ruling further stated at paragraph 20 that:

“If the requirements are again met in the following year this results in the commencement of a new superannuation income stream.”

The draft version of the updated Ruling merely removed the word “again” from the paragraph. Further, there were varying views on what was required for the “requirements are met in the following year”.

In the final version of the updated Ruling, released on June 26, paragraph 20 now says:

“If a superannuation income stream ceases for income tax purposes for the reasons outlined in paragraph 18 of this Ruling, it cannot recommence meeting the SISR requirements in a future year. This means it will not be a superannuation income stream for income tax purposes from the time of cessation, even if the member remains entitled to receive payments from the superannuation fund. For the member to receive a superannuation income stream, any income stream payable from the superannuation interest must cease (for example, by commutation) and a new superannuation income stream must commence under the principles in paragraphs 9 to 13 of this Ruling.”

Paragraph 18 refers to a superannuation income stream ceasing for income tax purposes if any of the SIS requirements are not met, e.g., failure to pay the minimum pension.

From my initial reading of this revised paragraph, it appears that the ATO is making it quite clear that for the failed pension to be fixed, the member must consciously commute the pension and commence a new pension. If this is the case, then there are potentially the following implications:

  • Whilst the failed pension will end for TBA purposes on 30 June of the relevant income year, it will only effectively re-commence when it is known that the pension failed for that income year. This could be sometime after 30 June.
  • The TBA debit arising on 30 June and the TBA credit arising when the member re-starts their pension are likely to be different amounts and potentially give rise to an excess TBA amount.
  • In addition to the fund not being entitled to claim ECPI for the income year the pension failed, it would potentially also not be entitled to claim ECPI in respect of the pension until it was commuted and restarted by the member.
  • There will be a requirement to re-calculate tax components for the restart of the failed pension, as well as for each benefit payment from the failed pension.
  • There may be a requirement for a new Statement of Advice in respect of the member ceasing their (failed pension) and commencing a new pension.

This new version of the Ruling is likely to see additional costs borne by the member and the SMSF to ensure that the approach in the Ruling is followed and ensure that any new pension is indeed a superannuation income stream, both for income tax and SIS purposes.

Finally, for now, this is just looking at the potential implications for an account-based pension. We also need to consider what effect this will have on other pensions: transition to retirement pensions and for those SMSFs with legacy pensions.

We will be looking at this Ruling in depth and what implications it will have for SMSF members; their accountants and advisers as part of our upcoming SMSF Compliance Day series. For information on attending at one of our three in-person locations or via the online option, click the banner below.

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