What happens when the minimum pension is not paid for an ABP?
Just because the minimum pension may cease for tax purposes if it fails to meet requirements, it doesn’t mean the pension has ceased as well, says a leading SMSF education specialist.
According to Mark Ellem, head of education for Accurium, whether the pension has ceased too will depend on the pension documentation and the trust deed.
“The member may still be entitled to payments, after all, the pension is effectively a contract between the SMSF trustee and the member, for which the SMSF trustee has not honoured that contract, as they failed to pay the required pension amount under that contract,” Mr Ellem said.
“It would be expected that the pension document/contract required payment of at least the minimum pension per the SIS rules.”
The rules in regard to minimum pension payment come under SIS reg 1.06 which sets out requirements for a benefit to be regarded as a pension.
One of the requirements is to meet the standards in SIS reg 1.06(9A), which includes the minimum pension requirement and a failure to pay this means a cessation for income tax purposes from the start of the relevant income year, a removal from retirement phase for transfer balance cap purposes at the end of the relevant income year.
It is also no longer considered a pension for SIS purposes.
Mr Ellem said under the SIS rules, the SMSF is unable to claim exempt current pension income (ECPI) in respect of the pension that failed to pay the required minimum pension.
“This is not an issue for a transition to retirement income stream (TRIS) that is not in retirement phase,” he said.
“But all payments from the pension interest are treated as superannuation lump sums. This is not a concern for a retirement phase account-based pension, particularly where the member was at least age 60 at the time of each payment.
“However, where the pension is a TRIS, not in retirement phase, this will likely result in a breach of the preservation rules, leading to all the payments being treated as assessable income under section 304.10 ITAA 1997.”
He added that for a retirement phase account-based pension, the fund will be required to prepare and lodge a transfer balance account report (TBAR). The ATO will then advise of the pension ceasing to be in retirement phase as on 30 June of the relevant income year for the value of the pension interest at that same date.
Additionally, the pension can then restart on a subsequent date.
“Generally, the pension is re-commenced from an income tax; retirement phase and SIS perspective the next day, being 1 July,” he said.
“Where the re-start is of a retirement phase pension, the SMSF is required to lodge a TBAR for the commencement of the new retirement phase pension. Further, a re-calculation of the tax components of the commencement value of the pension will be required.”
Mr Ellem said there is no need to draw up and lodge new paperwork for the re-start of a pension that failed to meet its minimum payment requirements but suggests that the trustee records the event in trustee minutes.
“It would not be uncommon for a new set of pension documents to be prepared for the re-start of the pension,” he said.
“However, in the scenario, the pension has ceased due to the failure to pay the minimum pension, not because the member has requested their pension to be fully commuted (ceased).
“Nor has the member requested to re-start their pension. From the member’s perspective, it’s the same pension, per the original terms and they’re owed the pension shortfall.”
Trustees, he said, should include in the trustee minute advice that the pension(s) did not meet the minimum pension standard for the previous income year as well as that the pension(s) ceased for tax purposes and the fund cannot claim ECPI in respect of the pension(s) for that previous income year.
It should also be noted in the minutes that the fund is required to lodge a TBAR for the value of the pension(s) at 30 June for the year the minimum pension was not met.
It should also be noted in this situation that the fund is required to re-value the assets and re-calculate the tax components of the pension as of 1 July of the following year as well as lodge a TBAR for the value of the pension on 1 July of the following year, which will give rise to a TBA credit in the member’s TBA account.
Although there are some consequences for not paying the minimum pension for the member, Mr Ellem said a statement of advice is not necessarily needed.
Rather, he suggests the adviser could simply reconfirm the original pension advice: that the pension is still suitable for them, confirmation there is a new pension for tax, SIS and transfer balance account purposes, confirmation of the new tax components, and ensure processes are implemented.
