ATO pension discretion needs care

ATO pension discretion

Best practice dictates advisers adopt a conservative approach where an SMSF client is relying on ATO discretion regarding a minimum pension breach.

Advisers need to be proactive in managing a situation where an SMSF client has not met their minimum pension payment obligation and is applying for ATO discretion to forgive the compliance breach due to the timeframes usually involved, an industry lawyer has said.

“The question is when you’re talking about going to the commissioner, we’re talking about [a situation relating to] the prior financial year. [Also] it’s quite likely it is considerably after 30 June that you’re starting to learn about this failure to pay the minimum [pension],” DBA Lawyers director Daniel Butler told attendees of an SMSF Online Update held last Friday.

“Then you lodge a submission with the commissioner and then the question is how long will the commissioner take to get back to you and how much time will be involved with the commissioner’s requisitions and you supplying further information before the commissioner is in a position to make a final decision.”

Butler suggested the process could realistically be expected to take anywhere between one to six months.

“The turnover time we’ve been witnessing lately from the ATO, and what I’m hearing from colleagues, is the ATO hasn’t been very quick [to address these issues],” he said.

As such, he recommended the best course of action for advisers to adopt in these circumstances is a conservative and proactive one that would see the pension in question commuted and a new pension subsequently commenced.

“That’s the safest bet if you discover the minimum underpayment early in July. The worrying thing for your clients is if you discover [the breach] four or five or six months down the track, the reality as an adviser is you don’t want to be facilitating a backdating [or fabrication],” he said.

According to Butler, starting a new pension that is conditional to the ATO responding negatively may be another option open to advisers, but would have to be managed very carefully.

“There are some questions about [conditional pensions] so if you were at [that course of action], get some advice on that because it has other aspects to it, like is it a condition precedent, is it a condition subsequent and what happens to the TBA (transfer balance account),” he warned.

At the same event, Butler warned SMSFs with a limited recourse borrowing arrangement in place that includes a loan guarantor may result in a compliance breach of the Superannuation Industry (Supervision) (SIS) Act in the event of the fund no longer being able to service the original liability.

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