SMSF members drawing a pension can receive multiple sums throughout the year, but should clearly document this choice rather than just ensuring all payments add up to meet the minimum requirements of that income stream.
Smarter SMSF education and technical manager Tim Miller said trustees have the capacity to make regular pension payments during a financial year, rather than a single annual contribution, but an increased focus on these transactions by the ATO means they should declare their intentions each year.
“Annually is the go to [pension payment] for trustees, but they’ve got the capacity to make frequent or additional payments and those can be treated as a pension, and much of that is going to come down to how we document the payment discretion inside the fund,” Miller said a during a recent webinar hosted by SuperGuardian.
“A lot of this is material, from an ATO point of view, that’s been in place since 2013 and we have taken a fairly flexible approach to it, but in the post-transfer balance cap environment we now operate in, the ATO is scrutinising transactions far greater than they ever have before.
“If the ATO are scrutinising these things, then we as SMSF professionals need to make sure that we’re also scrutinising them and ensuring that trustees understand what needs to occur.
“All we have to do is read through the multitude of supporting material the ATO publishes in regards to these pensions to ensure that we’re doing the right thing.”
He said when SMSF practitioners are assisting trustees to set up a pension they should ensure that apart from meeting minimum payment requirements, all payments are correctly allocated and there are instructions as to how excess payments will be treated.
He noted there was “no right or wrong” way to treat an excess payment, but the ATO has stressed a pension may still not meet the minimum requirements if the excess amounts were incorrectly drawn down.
“If you’ve got $60,000 coming out of pension one and you’ve got $24,000 coming out of pension two, but the minimum for pension one is $40,000 and the minimum for pension two is $30,000, in your mind you’re thinking: ‘Well, I’ve paid out $84,000 so I’ve covered that $70,000 minimum,’” he added.
“The ATO are however saying no, since $60,000 came from pension one, but only $24,000 from pension two, you have a $6000 shortfall for pension two, and based on changes to Taxation Ruling 2013/5, that pension will cease.
“What you would be better off doing is identifying that each pension would be paid in full out of the fund and amounts will be allocated firstly to account-based pension number one and then any excess to number two.”
