The SMSF Association has highlighted the need to amend Taxation Ruling (TR) 2013/5 Income tax: when a superannuation income stream commences and ceases with regard to its impact on death benefit and transition-to-retirement pensions.
In her most recent blog to members, SMSF Association head of technical Mary Simmons recognised the application of the tax ruling to a situation where the minimum required drawdown not being made for a death benefit pension actually leads to a further and unavoidable compliance breach for the trustees involved.
“TR 2013/5 confirms that where there is an underpayment, the pension is deemed to have ceased at the start of the financial year, meaning all payments made during the year are treated as superannuation lump sums instead of pension payments,” Simmons noted.
“This triggers an unavoidable breach of the compulsory cashing rules under the SIS (Superannuation Industry (Supervision)) Regulations, which limits death benefit lump sum withdrawals to a maximum of two payments per beneficiary. This is not a breach that can be rectified.
“Historically, the ATO has provided informal administrative relief, allowing trustees to treat the benefit as being cashed ‘as soon as practicable’ if they acted swiftly after identifying an underpayment. This has given funds the ability to reset compliance by either commencing a new death benefit pension, cashing out within the two-payment limit or rolling over to another complying fund.”
She made a similar call with regard to how TR 2013/5 applies to under or overpayments involving a transition-to-retirement income stream (TRIS) not in retirement phase.
“For those receiving a TRIS not in the retirement phase, the consequences [of TR 2013/5] can be severe. [In these situations] such a pension failure will result in a breach of the preservation rules,” she explained.
“Withdrawals originally intended as pension payments are instead treated as lump sums and if the member has not met a full condition of release, this amounts to early access. These payments are then taxed at marginal rates and the member cannot return the funds to super without impacting contribution caps.”
These tax ruling anomalies indicate the need for further ATO guidance on the subject or even a change in legislation.
“Given the significant compliance risks for SMSFs, we are pushing for ATO confirmation that this remains their position and calling for clear guidance that provides certainty to the industry,” Simmons said.
“This is why the development of ATO advice and guidance must be a priority – to provide the SMSF industry with clear, workable solutions. While we accept that some things may need a law change, without a definitive ATO view, we cannot effectively engage with government – leaving the industry stuck without a path forward.”
