SMSF advisers and trustees have been reminded to prioritise the minimum pension payment obligations for a death benefit pension should the fund be supporting multiple income streams in order to avoid adverse tax consequences.
Super Concepts SMSF technical and strategic solutions executive manager Philip La Greca noted if these payments are not ensured, the treatment of the relevant death benefit will have unwanted tax consequences as it will have to be paid as a lump sum.
“If you have multiple pensions in your fund and you have not paid the aggregate pension minimum, then make sure you pay the minimum for the death benefit pension first,” La Greca said.
“Because if you don’t meet the death benefit [standards], then technically you are supposed to pay out that death benefit. So it is really, really ugly.”
Unlike account-based pensions, which can stop and restart on 1 July according to the Taxation Administration Act 1953, he said the same method does not apply to death benefit pensions that have failed to meet the minimum standards.
“The only time that you are allowed to start the pension again is if what happened was the pension was reversionary and you failed to meet the minimum for that reversion,” he noted.
“If someone was to die, it [becomes] a reversionary pension and if for some reason we did not meet the minimum, we could restart. But technically if you do not meet the minimum and the death benefit pension fails that test, then what happens is much uglier. What you have to do is actually pay a lump sum death benefit outright because you cannot roll a death benefit back into accumulation.
“The only time you can roll a death benefit in is to start another death benefit pension immediately and we just do not have that capacity.”