The final updated version of Taxation Ruling (TR) 2013/5 contains an amendment that looks like significantly changing how income streams are managed should trustees fail to meet the minimum pension requirement in a particular year, an SMSF technical specialist has noted.
Specifically, TR 2013/5 determines when an income stream commences and ceases and Accurium head of SMSF education Mark Ellem pointed out the latest version of the ruling contains a significant change to the treatment of an existing pension when a breach in the minimum payment obligation has occurred.
Paragraph 20 of the ruling is the concerning element and now stipulates if trustees fail to make the minimum pension payments in one particular income year and then rectify this oversight in the subsequent financial year, the existing income stream in question cannot simply be recommenced as had previously been the case.
“From my initial reading of this revised paragraph, it appears that the ATO is making it quite clear that for the failed pension to be fixed, the member must consciously commute the pension and commence a new pension,” Ellem observed in his most recent blog post.
To this end, he warned TR 2013/5 will have significant implications regarding an individual’s transfer balance account (TBA) management and SMSF tax treatment.
“While the failed pension will end for TBA purposes on 30 June of the relevant income year, it will only effectively recommence when it is known that the pension failed for that income year. This could be sometime after 30 June,” he said.
“[Also] the TBA debit arising on 30 June and the TBA credit arising when the member restarts their pension are likely to be different amounts and potentially give rise to an excess TBA amount.
“In addition to the fund not being entitled to claim ECPI (exempt current pension income) for the income year the pension failed, it would potentially also not be entitled to claim ECPI in respect of the pension until it was commuted and restarted by the member.”
According to Ellem, the current version of TR 2013/5 will mean trustees will have to recalculate tax components for the restart of the failed pension and each benefit from it as well.
Further, he alerted advisers to the fact they may need to reissue a new statement of advice to address the commutation of the failed income stream and the commencement of the replacement pension.
“This new version of the ruling is likely to see additional costs borne by the member and the SMSF to ensure the [new] approach is followed and that any new pension is indeed a superannuation income stream, both for income tax and SIS (Superannuation Industry (Supervision)) purposes,” he said.
He acknowledged the analysis above has only considered the effect of TR 2013/5 on account-based pensions and the revised ruling will likely have implications for transition-to-retirement income streams and legacy pensions.
