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Key compliance risk for SMSFs in 2016? Pensions! | Accurium

The Australian Tax Office (ATO) has re-stated that pensions and exempt current pension income (ECPI) will continue to be a strong area of compliance focus in 2016.

The ATO’s eye firmly focused on growing pool of SMSF pension assets

The number of Self-Managed Super Funds (SMSFs) in pension phase and the amount of benefits paid from SMSFs is on the rise. ATO statistics show that over the past five years to 2014 the number of SMSFs paying pensions increased by 55%[1].This trend is expected to continue as baby boomers continue to move into pension phase. Indeed, there are now over 1 million SMSF members and, in 2013-14, the average assets per SMSF reached over $1million for the first time[2]. With more members in retirement and larger balances, nearly $30.7 billion in benefit payments were made during the 2013-14 financial year, up 19% from 2012-13[3].

The increasing value of member balances and the continued focus from the ATO means that it is more important than ever to get things right when it comes to being in pension phase. In order to avoid scrutiny from the ATO, there are several issues which should be considered carefully for clients in pension phase:

Requirements for commencing a pension

With an increasing number of clients entering pension phase the compliance requirements of setting up and starting of a pension should not be overlooked.

Prior to starting a pension it is important to check that

  • the type and terms of the pension is actually allowed under the terms of the trust deed, and
  • all capital that will  be used to start the pension has been received by the member.

Once a member has applied to the trustee  to commence a pension appropriate written documentation setting out the terms of the pension can be completed. The market value of the assets supporting the pension should be calculated in line with ATO guidelines and the minimum pension payment for the financial year can be calculated. The pension documentation should include items such as:

  •  the type of pension being commenced
  • the date of commencement and the amount to be converted to pension
  • the tax free and taxable component of the pension
  • any reversionary or death benefit nominations

Make pension payments, don’t lose ECPI

Making pension payments during the financial year is a requirement in each year a member holds a pension interest, except in the first year where a pension was commenced in June.

If the minimum pension standards are not met during the financial year then the ATO will generally treat the pension as if it ceased on 1 July. The member will lose the eligibility to claim ECPI on that pension interest and hence may face higher tax bills.  Additional documentation will also be required to recommence the pension the following year. To avoid this outcome ensure that pension payments are made in form and effect by 30 June every year,

In the event of a shortfall check whether the SMSF is eligible to apply the Commissioner’s General Powers of Administration concession to continue the pension and make up the shortfall in the following year.

Take care with completing the tax return when claiming ECPI

ECPI is the largest tax concession available to an SMSF in pension phase. In 2012-13 nearly $17billion[4] of SMSF income was claimed as ECPI and therefore exempt from income tax. Due to the significance of this concession the ATO is focused on ensuring it is calculated and reported correctly.

Some key areas of focus identified by the ATO to be aware of for this financial year where funds are claiming ECPI are:

  • correct implementation of segregation
  • calculation of ECPI when the SMSF has non-arm’s length income
  • income tax deductions and carrying forward tax losses

Making a mistake with ECPI can have serious consequences, even if it is accidental. Remember, in order to accurately complete the annual return when claiming ECPI:

  • obtain an actuarial certificate when using the unsegregated method
  • where a fund has both pension and accumulation interests apportion general expenses as a fund cannot claim a deduction for expenses incurred in producing ECPI
  • carried forward tax losses from a previous year must first be offset by net ECPI before they can be deducted from assessable income
  • if the fund’s taxable income is a net tax loss this must be reduced by net ECPI before being carried forward to future years

Manage your client’s compliance risk

Ensure your trustees are aware of their responsibilities when it comes to meeting pension standards and the requirements of employing more complex strategies involving segregation. If you have questions relating to pensions or ECPI you can contact us on 1800 203 123.

[1]Australian Tax Office, Self-managed superannuation funds: A statistical overview 2013-14, December 2015, https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-superannuation-funds--A-statistical-overview-2013-14/

[2] ibid.

[3] ibid.

[4] Australian Tax Office, What’s ahead for SMSFs? The ATO perspective, July 2015, https://www.ato.gov.au/Media-centre/Speeches/Other/Whats-ahead-for-SMSFs-The-ATO-perspective/?page=1#Some_areas_of_focus

Tags: Pension phase, ATO

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.