Automatic min pension correction unsound

Sector specialists participating in a technical panel discussion have recommended SMSF trustees not rely on clauses in fund documents potentially allowing them to trigger an automatic action to remedy situations where the minimum pension payment obligation has not been satisfied.

“What we’re getting at here is whether trustees can set up documents when they start a pension that dictate if anytime you fail to pay the minimum pension down the track, there’s an automatic commutation and commencement of a new pension on the following 1 July,” Accurium head of SMSF education Mark Ellem recognised.

“It’s effectively the old industry approach.”

Fellow panellist Accurium senior SMSF educator Anthony Cullen indicated he was not convinced this would be an effective approach.

“I’m not a lawyer, but I do have an issue with that strategy. I don’t believe that you can put in place mechanisms to pretend an error in the future didn’t occur,” Cullen told delegates at SMSF Professionals Day, held recently along the east coast of the country.

“The requirement is that the member has to consciously commute the pension if the minimum payment has not been met and whether then putting a document in place before there is this sort of an issue constitutes a conscious decision to commute is questionable.”

Cullen suggested the strategy was similar to one that was put forward but unsuccessful when the contribution caps were first introduced.

“At that time we started seeing clauses built into trust deeds that stipulated if the fund received a contribution in excess of the cap limits, then it would hold that money on trust and record it as a contribution and would return it to the member, and the ATO pretty much responded to that approach and said you can’t do that,” he explained.

“So generally when you put paperwork in place to avoid a compliance issue in the future, it’s going to fall down when you get to the ATO.”