Jason Hurst, superannuation technical adviser for Knowledge Shop, said in a recent webinar that although lump sum pension payments may not be an issue for account-based pensions for individuals over 60, they can be an issue with the transition to retirement (TRIS) unless there is unrestricted and non-preserved trustees can’t pay out a lump sum.
“That can cause an issue with the payment standards, because we’ve failed to meet the pension minimum for 1 July,” Hurst said.
“Rather than that income being allocated across the pension based on those taxable, tax-free proportions, it will all go to the taxable component because we no longer have a pension. You would then need to recalculate those tax components when you do recommence that pension.”
Hurst said an update to TR 2013/5 paragraph 20 stated that rather than waiting until 1 July to restart a pension, it must be rectified as soon as it is discovered that minimum payments have not been met.
“In the past, when people discovered that the minimum had not been paid, usually sometime around this time of year, if they were lucky they would be comfortable that there’s no ECPI and report a T bar credit, which should be the same value as the debit with no change to their overall transfer balance cap,” he said.
“The update in the tax ruling now states the pension needs to restart when the issue is discovered which generally is going to be much later, and is going to make those credits and debits different. You then need to follow those normal requirements to start a pension again including the pension requests and documentation.”
The SMSF Association, Hurst added, has been trying to lobby the ATO to reconsider this new requirement to reduce red tape and reiterated the importance of reminding clients that they must meet the minimum pension standards to avoid compliance issues.
“The ATO has some discretion regarding a small underpayment rule where trustees can self-assess and make a catch-up payment as soon as they become aware of the issue, but this only applies to a small underpayment,” he said.
“A small underpayment is not more than one-twelfth of the required annual minimum pension payments, so what this is probably designed to do is say, ‘Okay, you made the first 11 payments if you’re paying monthly, but you forgot the June one’.”
However, Hurst said underpayment issues usually are a larger portion and if it is more than one-twelfth, it may be necessary to apply to the Commissioner of Taxation – if there are grounds – to say it was outside of the member’s control.
