Minimum pension more critical for dual-phase SMSFs

minimum pension phase

SMSFs with both accumulation and pension-phase interests will suffer more significant disadvantageous tax implications from failing to meet the minimum pension requirement.

Meeting the minimum pension requirement is more important for SMSFs with both a retirement-phase and accumulation-phase interest due to the resulting adverse tax implications members will suffer from non-compliance with this obligation, a technical manager has said.

“Remember, if you fail to meet the minimum [payments], then the pension account [must be] rolled back to accumulation,” SuperConcepts SMSF technical and strategic solutions executive manager Philip La Greca told delegates attending a recent technical webinar.

“[So] if you’ve got someone with a pension account and an accumulation account, and they’ve failed to meet the minimum [payment required], the pension account is rolled into the accumulation account, which means the tax components get consolidated.”

According to La Greca, this would present a significant disadvantage from a tax perspective if, for example, the accumulation interest in question was 100 per cent taxable.

“[That means] when you want to start a new pension it will no longer be tax-free because it will have merged with a taxable component and the new pension [as a result] will have a different tax-free proportion,” he noted.

“So it becomes much more tricky when dealing [with these types of funds].

“This is a good reason to make sure you don’t fail your minimum pension levels.”

Conversely, he pointed out an SMSF that is entirely in pension phase would not suffer the same consequences should its trustees fail to meet the minimum pension obligation.

“If all you’ve got is pension accounts, that’s not a problem because [when you roll the pension into accumulation phase you’ll] create a new accumulation account,” he said.

“It means the tax component of that accumulation account [will be] exactly the same as the pension account that you had beforehand.”

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