A technical specialist has highlighted the significant tax consequences SMSF trustees may face if they fail to meet the minimum pension requirements and urged practitioners to address this issue in their advice to help clients maximise the fund’s concessions.
“The key thing [with exempt current pension income (ECPI)] is we’ve got to always pay the minimum pension [as] the non-payment of the minimum pension will ultimately result in the loss of the ECPI [benefit],” Smarter SMSF education and technical manager Tim Miller noted during a SuperGuardian webinar held today.
“The loss of the ECPI will be dated from 1 July. You actually lose it for the full year, so it’s critical that we get it right.
“ECPI from a tax deduction point of view is one of the best tax benefits that the super system does provide, but if we fail to meet those rules, then we will ultimately end up in a situation where we will lose that tax exemption.”
Miller added trustees often misunderstand the impact of not meeting pension payments and it is essential for practitioners to clarify this as a starting point in discussions with their clients.
“Over the years that I’ve been talking to clients, there is often a fear factor among trustees and members that if they fail to pay their pension, the fund’s going to be non-compliant,” he noted.
“However, failing to pay the minimum pension is not something that’s actually going to result in the fund being non-complying, particularly for an account-based pension. All we’re doing is going back from a tax-free environment to a taxable environment.
“Ultimately, we’re talking about the difference between zero and a maximum 15 per cent tax rate, so it’s part of all of our responsibility to be able to engage with trustees to say it’s preferable you pay a pension because often a lot of planning has gone into that pension and there’s taxation considerations.
“Often when you can relay that to the individuals, they might be upset by not paying the minimum, but it’s not devastating.
“It’s one of those areas where [the trustee may say:] ‘I understand now we need to look at what the ramifications are and what actions we need to take to get ourselves back into that exempt pension environment.’”
Other SMSF technical specialists have previously warned trustees they may have limited options to appeal to the ATO for missed ECPI if they fail to meet the minimum pension requirements.
