ATO, Compliance, Pensions, SMSF

Limited discretion for pension shortfall

Minimum pension

SMSF trustees have limited opportunities to seek ATO discretion when they fail to meet their minimum pension requirements.

SMSF trustees with account-based pensions can expect little flexibility to address a minimum pension shortfall through ATO discretion, except in cases where it is their first offence and the underpayment is minor.

“The question that’s often asked is: what sort of relief is available from the ATO where there is a minimum pension shortfall? The ATO has given us a very small window of opportunity for the first time that a SMSF breaches the minimum pension requirements,” Smarter SMSF technical and education manager Tim Miller told attendees at a SuperGuardian pension planning webinar yesterday.

“And that small window of opportunity is if the shortfall is less than 1/12th of the annual minimum payment and they are a first-time offender. [In that case] you can effectively self-assess and catch up the payment as soon as possible, usually within 28 days of becoming aware.

“This is always the quandary in the SMSF space: what is that 28 days and when do you become aware?

“In theory, as trustees, you should be aware from 30 June when you fail to pay the minimum, so realistically you really want to get that catch-up done before the end of July to not have to do a ‘please explain’ from a regulatory point of view.”

Miller pointed out that if an SMSF fund fails to pay the minimum pension for the second time, the options for seeking ATO discretion are limited. Exceptions are rare unless trustees can demonstrate the failure was beyond their control and the fund has a strong compliance history.

“If you don’t meet that 1/12th rule and you don’t meet that first-time offender rule, then the reality is that you have very limited circumstances to be able to apply any sort of discretion other than going to the tax office directly and write to the ATO and seek their discretion to state that effectively the pension did exist,” Miller noted.

“Now there’s a couple of examples [where there might be exemptions], such as someone going through incapacity or a trustee was overseas or there are transposition errors.

“[However], in those sets of circumstances, be aware that the tax office feels that from a SMSF point of view these issues are far less relevant or far less likely to give you that discretion than in an APRA (Australian Prudential Regulation Authority) fund, particularly in the case of a transposition error.”

Trustees should be aware the minimum pension drawdown rates, which were reduced by half while COVID relief measures were in place, have returned to their normal settings as of 1 July.

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