The SMSF Association has continued to push for clarity around the issue of minimum pension underpayments and recommended a legislative amendment be made to deal with the complex proportioning rules that must be addressed before starting a new pension.
The professional body put forward the recommendation in a pre-budget submission to Treasury in which it noted that following a June 2024 update, Taxation Ruling (TR) 2013/5 now dictates if SMSF trustees fail to satisfy their minimum pension, it must be commuted and a new income stream restarted for the members to retain exempt current pension income.
“Given the fund’s financial accounts and annual tax return are normally not completed for several months after the end of the income year, it is not uncommon for pensions which fail to pay the minimum pension in a particular income year to remain undetected for several months into the following income year,” the submission stated.
“By the time the trustees become aware of the pension underpayment for the previous financial year, several pension payments may have already been received by the member in the new income year.
“This means pension payments received not only during the income year in which the pension failed, but also in the new income year prior to the pension being commuted, are required to be reclassified as lump sum withdrawals and a retrospective calculation of the taxable and tax-free components undertaken for each withdrawal.”
The association added the requirement for a retrospective recalculation was not aligned with practical fund administration and a legislative amendment should be made to remove the need for those calculations.
“This could be achieved, for example, by allowing the proportioning rule as determined on 1 July to apply to all withdrawals from the failed pension interest for the entire income year,” the submission added.
“This approach would not materially affect tax outcomes and preserves the integrity of the proportioning rules while removing a substantial administration burden.”
The association’s submission also called for further work on the non-arm’s-length expenditure rules that deal with specific fund expenditure and non-arm’s-length capital gains, which create disproportionate tax penalties.
“These are the result of poor legislative design. This is in part due to the lack of cohesion across intersecting elements of the tax act or an ability to isolate a non-arm’s-length element. As a result, the law does not operate as intended,” it said.
Calls to simplify personal transfer balance caps (TBC) to a single cap for all superannuants, alignment of the disregarded small fund assets threshold to the general TBC and a reduction in the number of total super balance thresholds, which have featured in previous submissions, were restated.
Other issues flagged that also remain unresolved were the need for a legislative instrument to provide interim relief and certainty around the operation of the wholesale investor rules and SMSFs, and the reform of residency rules which was first announced in the 2021 Budget.
