An SMSF technical specialist has urged trustees to be aware of a critical change in how the ATO will treat an income stream if the minimum pension requirement is not met, warning of potential adverse tax consequences if they fail to comply.
Heffron head of education and content Lyn Formica highlighted the recent amendment to Taxation Ruling (TR) 2013/5 appears to offer limited recourse for trustees where they fail to make the minimum pension payment in a particular income year and then attempt to rectify the error later.
“We don’t know how the ATO intends to deal with superannuation funds that have applied the original view [in TR 2013/5],” Formica noted during a recent briefing held by her firm.
“This is a very odd ruling in the sense that normally when there seems to be a change of opinion, the ATO acknowledges that in the ruling and they’ll make a comment that they won’t take any compliance action in relation to anyone who’s done this in previous periods.
“That doesn’t exist in this revised version of this ruling. What the [ATO is] saying now is that not only does the pension stop for tax purposes, it stops meeting the Superannuation Industry (Supervision) rules as well and that a new pension doesn’t automatically start. Essentially it’s not until the trustee realises they’ve got a problem and tells the member.”
She added not understanding the update correctly could have implications for a fund’s transfer balance cap and ability to claim exempt current pension income (ECPI).
When asked if a trustee could seek discretion from the regulator to potentially reclaim any ECPI they may have missed out on due to the error, she advised against relying on this option, noting it was not guaranteed to produce a favourable result.
“It takes time and you’re not going to be able to do the pension stop and restart until you’ve got the answer from the ATO if you go down that path,” she noted.
“For me it’s really a case of how big of a deal is the exempt income. If you apply for discretion and it takes until December to get an answer from the ATO, then you’ve got no ECPI in respect of that pension account until December.
“You might just want to jump in and start the pension today or stop the pension and start a new one and know that you’ve got exempt income going forward.”
