Ensure your pension clients have secured their baggage as the year comes to a close – make sure they have met their pension compliance requirements:
Each income stream in the self-managed superannuation fund (SMSF) must have paid a pension payment in form and effect in the 2014-15 financial year, unless it commenced on or after 1 June 2015. For account-based income streams commenced after 1 July 2014 the minimum payment is prorated.
This payment must be cashed by 30 June 2015 for the pension standards to have been met. Follow up with your clients to ensure payments are made prior to 30 June to avoid the fund paying extra tax.
If your clients do not make their minimum payment due to an honest mistake or due to factors outside of their control, there are very limited circumstances under which the commissioner will exercise his general powers of administration discretion, to allow the income stream to continue.
It is important to note that the minimum pension standards include not exceeding the 10% maximum pension payment for transition to retirement pensions. Exceeding the maximum payments can lead to the pension being deemed to cease at the start of the year, losing the tax exemption on income and raising further issues regarding conditions of release. Make sure your clients are aware of their obligations in relation to these pensions.
A fund which contains a pension that has met the pension standards is eligible to claim ECPI in the SMSF annual return for that year. The amount of ECPI claimed reduces the fund’s assessable income, thereby reducing the tax liability of the fund.
A fund that uses the unsegregated method to claim ECPI must obtain an actuarial certificate to certify the proportion of the fund’s income that can be claimed as exempt income. A fund is generally unsegregated where it contains a combination of pension and accumulation assets during the financial year and no assets are set aside to solely support the pension liabilities for the entire financial year. If an actuarial certificate is not obtained prior to lodgement, trustees may face compliance action from the ATO, including losing the ECPI exemption.
Where the minimum payment for an income stream was not made in a financial year, the ATO will cease the income stream at 1 July and the interest will not be considered a pension for the year, any payments made will be treated as lump sums.
Importantly the SMSF will lose the ability to claim ECPI for that income stream and income on the assets will be assessable not exempt.
If the member meets the pension requirements in the following year a new income stream will need to be commenced. Ensure that appropriate documentation is completed to recommence the income stream. For example, if you have a pension that does not meet the standards in 2014-15, the trustee must have appropriate documentation completed stating the commencement value of the income stream and the terms of the income stream (i.e. whether it is automatically reversionary) in order to recommence the income stream at 1 July 2015.
It is not sufficient to simply treat an income stream which did not meet the minimums as continuing and becoming eligible to continue to claim ECPI in subsequent years. Accurium have sought clarification from the ATO on trustees obligations should they fail to meet the minimum pension standards in a particular year. We received the following response:
‘It is strongly recommended that where a trustee is paying an income stream, appropriate documentation is maintained at all times. Where the regulatory rules such as meeting the minimum payment amount for a superannuation income stream were met in the following income year, a new pension would be taken to have commenced. At a minimum, the trustee would be required to have new documentation evidencing the revaluation of assets at market value and the recalculation of the minimum payment amount required. Additionally, the trustee would be required to have records reflecting the recalculation of the tax free and taxable components of the superannuation interest supporting the superannuation income stream’.
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.