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ATO clarifies minimum shortfall rules for pensions

In the Draft Taxation Ruling 2010/D3 the ATO proposed a position that if a superannuation fund did not meet the minimum pension payments for a member in a given year, then the fund could not treat that member balance amount to be in pension phase from the beginning of the financial year and thus not claim exemption on the fund earnings in respect of that account balance.

On 23 January 2013 the ATO published a series of Questions and Answers outlining how this was to be practically implemented.

The first key point is that the position of a shortfall, meaning the pension does not exist for the whole financial year, still applies. Importantly the ATO has specified that in certain circumstances it is possible to “catch up” the shortfall and not lose the pension status.

The key elements of this “discretion” are:

  • The shortfall is less than 1/12 of the minimum payment for the year, in effect one months payment (a good reason to set up periodic pension payments rather than make ad hoc payments)
  • it occurred due to an honest mistake or matters beyond the trustees control
  • The shortfall is rectified within 28 days of becoming aware of the shortfall. This means the shortfall may be paid in the next financial year or allocated from pension payments in the next financial year
  • it is treated as if it was made in the correct year in terms of all other matters such the accounts, member balances, tax return and reporting

A final aspect is that it is possible for a SMSF to self assess this discretion but only once. If a shortfall happens again then written relief from the ATO must be sought.

If discretion is not given then:

  • the pension does not exist, and the balance would need to be merged with any existing accumulation account in the fund for that member from the start of the financial year,
  • no earnings tax exemption would be granted in respect of the assets relating to that member balance, and
  • any payments made will not be treated as pension payments but lump sum amounts (this could be an issue if the pension was a transition to retirement pension as the member may not meet a lump sum condition of release)

If you would like more information about SMSFs or other matters, please contact Multiport Technical Services on 1300 364 672 or SMSFconsulting@multiport.com.au.

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