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ATO, Compliance, Pensions

ATO concessions critical to avoid pension penalties

ATO concessions death benefit

Trustees of funds that have underpaid their death benefit income streams should make rapid use of ATO administrative concessions to avoid penalties.

SMSF trustees who have failed to meet their minimum pension payment requirement for a death benefit income stream can avoid compliance action by acting quickly under ATO administrative concessions, according to SMSF online service provider SuperCentral.

The comments follow last week’s update from the ATO reminding trustees that underpayments for death benefit income streams may mean they are unable to satisfy the compulsory cashing requirements for their SMSF.

In a blog post on its website, SuperCentral said once an underpayment had occurred, trustees should first determine whether the ATO’s administrative concession would apply, and added an underpayment could potentially be ignored if immediate action was taken.

“The concession applies if the underpayment is one-twelfth of the correct payment, the fund has not previously used the concession and the underpayment is promptly paid when discovered,” it said.

It pointed out two consequences for trustees if the administrative concession did not apply:

  • fund earnings supporting the pensions would not be entitled to the earnings tax exemption for the whole financial year, and
  • the ATO would consider the underpayment a breach of the ‘benefit access/cashing standards’ as the pension was a death benefit pension.

“The first consequence involves no contravention: it is merely a loss of a tax concession.  The second consequence does not constitute a contravention of the mandatory operating standards,” it noted.

“The ATO has indicated that, as to the second consequence, so long as the contravention is promptly rectified on a forward-looking basis, the contravention will not give rise to any compliance action.

“The unstated premise is the contravention is a once-only occurrence and action has been taken to ensure that it does not happen again.”

It highlighted the ATO’s view that a corrective action by the trustee would be either a full commutation of the death benefit pension to a lump sum payment or restarting the death benefit pension.

“Clearly restarting the death benefit pension would be the preferable solution as once a death benefit is paid out as a lump sum, it cannot be returned to the super system except as a new contribution,” it added.

The ATO has since updated its online guidance on underpaying death benefit income streams, stating the information provided was specifically in relation to reversionary pensions.

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