When an account-based income stream fails to meet the minimum pension standards required under Subregulation 1.06(9A) of Superannuation Industry (Supervision) Regulations 1994 (SISR) it will not have met the requirements of being a superannuation income stream in that year.
ATO guidance is quite clear that the income stream will be taken to have ceased for income tax purposes at the start of the financial year and will lose eligibility to claim exempt current pension income (ECPI) in that year. Further, any payments made will be treated as lump sums for tax and SISR purposes.
What remains uncertain is how and when the income stream could again be a superannuation income stream and eligible for ECPI.
The ATO states in TR 2013/5 Income tax: when a superannuation income stream commences and ceases, item 101 that:
If in the following year the relevant rules are again complied with this in effect results in the commencement of a new superannuation income stream and the proportioning rule must be applied to that new superannuation income stream when it commences.
The ATO also answers the following question on their webpage SMSFs: Minimum pension payment requirements–frequently asked questions:
What if the trustees have failed to meet the minimum pension payments in one year but in a subsequent year are prepared to meet the minimum pension requirements as required under the SIS Regulations?
If the relevant rules are again complied with in a following income year, this results in the commencement of a new pension. The trustee will need to revalue assets at market value and recalculate the minimum pension payment required at the start of the new pension.
1 – What date does the pension recommence?
Alternatively, if the pension commencement is not automatic then a new pension may need to be commenced at the point the mistake is uncovered. For example, if a prior year shortfall was identified in September would this mean that any payments made in the current year should be treated as lump sums from accumulation until new pension documents and a TBAR done to commence the new income stream? The fund would also not be eligible for ECPI until the new income stream commenced.
2 – What are the terms of the new income stream?
If the new income stream does automatically recommence in the following year then do all the terms of the income stream stay the same or does the trustee have a choice to alter the terms? Indeed, are new pension documents required setting out the terms of the income stream? If so, can those documents be done in arrears to assume the pension recommenced on 1 July?
3 – Did the pension balance become an accumulation balance in the year the standards were not met?
We know that the pension will cease for tax purposes at 1 July of the financial year the pension standards were not met. What is uncertain is whether the pension balance should be treated as part of the accumulation interest from that time for tax and accounting purposes or does the income stream remain separate from the accumulation interest over that time. This will be important when working out the tax components of the accumulation interest for any payments made in the year and for working out the tax components of the new pension in the following year.
Generally, if a pension is fully commuted back to accumulation phase tax components of the commuted income stream will mix with the components of any existing accumulation interest and tax components would change over the year with earnings and any contributions received. Then when a new pension is commenced the tax components are recalculated based on the accumulation interest at that time. If the same process is followed here it means that at the date the new pension commenced the tax components would be recalculated and they would be different to that of the original income stream.
4 – What is the balance of the new pension?
If the pension automatically recommences, is the starting balance equal to the balance of the previous income stream, or could the trustee choose to recommence with a different amount? If the balance needs to be a continuation of the previous income stream and the answer to question 3 was that the balance does combine with any accumulation interest for the year, then it makes it tricky to work out an appropriate ‘end of year’ balance for the previous pension interest. If the new pension balance is a choice the trustee needs to make, then how can the new pension commencement happen automatically?
The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.