PAYG case provides clarity on pension payments for SMSFs

Last month, the Federal Court of Australia handed down its decision in the case of Price v Commissioner of Taxation [2019] FCA 543.

DBA Lawyers director Daniel Butler said the case involved an employee who failed to establish an entitlement to pay as you go (PAYG) income tax credits in respect of amounts allegedly withheld from his wages. However, it is also relevant to SMSFs paying pensions, he said.

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“Mr Price lost his claim as his evidence did not support the conclusion that amounts had been withheld by his employers,” Mr Butler explained.

The case is relevant to SMSFs, he said, as funds need to ensure that they pay the minimum pension amounts for each member prior to the end of each financial year.

“[For example], each SMSF paying a pension to a member under 60 years must pay the minimum pension amount before 30 June 2019,” Mr Butler said.

“Moreover, SMSFs paying capped defined benefit pensions also generally have an obligation to register and comply with applicable PAYG obligations in relation to members whether they are under or over 60 years.”

Defined benefit income, he reminded SMSF professionals, is taxed differently to account-based pensions and is subject to the defined benefit income cap which is currently $100,000 per financial year.

“Fifty per cent of any defined benefit income a member receives from a capped defined benefit income stream that exceeds $100,000 for each financial year is subject to tax at the member’s marginal tax rate plus applicable levies,” he said.

“This applies even if the amount reflects a tax-free component.”

Mr Butler said that when an SMSF trustee is seeking to pay the minimum pension amount prior to each 30 June, consideration is not typically given to how any PAYG amount is treated when making such a payment as the PAYG amount is not generally payable to the ATO until 28 July.

“This raises the question –– what do SMSF trustees have to do to ensure they have discharged the minimum pension amount prior to 30 June each FY when there is invariably a PAYG amount payable to the ATO after the end of the financial year,” Mr Butler said.

The PAYG withholding amounts can be substantial amounts, he said, which may have an impact on whether the requisite minimum pension payments have been satisfied.

“When we refer to the legislative schema in the Taxation Administration Act 1953 (Cth) (TAA), we note that broadly the obligation to pay a withholding amount to the ATO arises when the withholding payment is made,” he explained.

“In particular, an SMSF trustee must withhold an amount in respect of a pension payment it makes to a member under the TAA.”

Mr Butler said the Price decision provides clarity around what evidence an SMSF trustee should have on hand to prove that it did withhold the requisite amount as prescribed under the PAYG withholding obligations in respect of each relevant FY.

In his decision, Justice Tom Thawley referred to an earlier decision by Justice Edmonds in David Cassaniti, which considered what would constitute a withholding.

In the David Cassaniti decision, Justice Edmonds stated that a withholding may be evidenced by actual funds held by the payer on behalf of the employee pending payment to the commissioner or wage records and books of account of the payer as an accounting entry.

“Where an amount has been set aside by the payer and is quarantined in a bank account pending its remission to the commissioner, clearly the presence of the funds so designated will demonstrate that a withholding has been made,” Justice Edmonds said.

“Where the withholding is reflected in accounting entries, the question whether a legitimate process of withholding has occurred will depend upon a close examination of the books and records and the surrounding circumstances. A mere journal entry in the absence of other evidence may not be sufficient evidence, having regard to the surrounding circumstances, that there has been a payment of salary and wages and a withholding from that payment.”

Mr Butler said the Price decision demonstrates that SMSF trustees should maintain relevant bank account or accounting entries to provide clear evidence that the relevant PAYG amount was actually withheld from each relevant pension payment prior to each 30 June.

“The best evidence is obviously by paying the relevant PAYG withholding amount to the ATO prior to 30 June,” Mr Butler explained.

“However, most SMSF trustees do this after the end of the financial year, in which case they will typically have to rely on their accounting records as the best available evidence.”

Mr Butler cautioned that, if there is insufficient evidence, SMSF trustees and the members risk severe downside consequences including loss of the pension exemption for the entire financial year.