SMSF pensions that fail to meet mandatory minimum pension amounts for the financial year are at risk of being taxed at full personal rates, an SMSF expert has warned.
SuperConcepts SMSF technical and private wealth executive manager Graeme Colley said a lack of understanding about the super rules for pensions could result in the income on the fund’s pension investments being taxed, instead of being tax exempt.
“Each type of pension has its own set of rules, so you need to know how the pension rules work in your SMSF or you could end up paying the price,” Colley said.
He highlighted account-based pensions and transition-to-retirement pensions (TRIS) as the main problem areas, and added SMSF members with either pension type needed to ensure they met the minimum pension amount for the financial year in order to remain compliant.
Account-based pensions that did not meet the minimum pension amount would be considered as having stopped from the start of the financial year and any pension payments received would be treated as a series of lump sums, and the income on assets supporting the pension would be taxed in the super fund at 15 per cent, he noted.
For TRIS arrangements, a failure to meet the minimum pension amount for the financial year would also result in the pension being considered as stopped and any pension payments being treated as a series of lump sums, he said. This would, however, lead to a breach of the preservation standards and any preserved components being treated as fully taxable at personal tax rates, he added.
Citing the ATO’s concession for underpayments attributed to a genuine mistake or because of circumstances beyond the pension recipient’s control as a potential safety net, he stressed the concession could not be automatically applied to all funds that failed to meet the pension super rules.
“The ATO’s concession applies only to underpayments of pensions and any pension overpayments of TRIS beyond the 10 per cent limit cannot be adjusted to allow it to comply with the pension standards,” he pointed out.
“Don’t think you can do the top-up every year as it applies only if it has not happened to the fund in the past. So it looks like it’s only available on a once-only basis.”
He urged members to stay on top of the pension amounts being paid from their SMSFs and said members could avoid issues related to underpayments by making a timely payment to cover any shortfalls in the course of the financial year.
“The obvious warning is don’t underpay your pensions otherwise there could be consequences,” he said.
