SMSF advisers must go through the entire documentation process again for clients who had underpaid their pension where the amount breached the one-twelfth rule, according to a specialist SMSF lawyer.
“This is a very topical issue because the Australian Taxation Office (ATO) has only recently clarified this one, that is, where you have a pension and the member may fail to underpay that pension during the year, like if there’s a slight underpayment,” DBA Lawyers director Dan Butler said during the DBA SMSF Online Update webinar earlier this month.
“Technically what happens is that pension ceases automatically.”
However, the ATO had a “one-twelfth rule”, which allowed the pension to continue if the underpayment did not exceed one-twelfth of the minimum pension payment in the relevant income year, Butler said.
“The question is, if you do fail the minimum, what’s required from a documentation point of view?” he said.
“That really hasn’t been covered in the marketplace to date and I’ve been involved in committee meetings with the ATO over the years and we haven’t gotten a straight answer from the ATO, but we do now have clarification on that point.”
According to Tax Ruling 2013/5, a superannuation income stream, a pension, ceased for income tax purposes if any of the requirements of the Superannuation Industry Supervision (SIS) Regulations relating to the payment of the pension were not met in a financial year.
That was the case even if a member remained entitled to receive a payment from the superannuation fund in relation to the purported pension under the governing rules of the superannuation fund, or under general trust law concepts, the ruling said.
“We now have a response from the ATO, which does provide certainty and it’s probably not the news you’re expecting,” Butler said.
“The ATO says yes, you have to go through that documentation process again if you fail the minimum – all the recalculations, the market value [of the assets] – and document this from a rollback position because technically when you fail to pay the minimum, it was a rollback from the start of the financial year and it was a fresh pension in the following 1 July if you then get back on the straight and narrow.”
According to the ATO, it was strongly recommended that where a trustee was paying an income stream, appropriate documentation was maintained at all times.
“[The ATO response says] 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 for the purposes of the regulatory and income tax law,” Butler said.
“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 under clause 7 of schedule 7 to the SIS Regulations.
“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.”
