With failure to pay minimum pension payments for TRISs potentially resulting in illegal early release and significant penalties, SMSF practitioners have been urged to pay close attention to their clients’ pension payments.
Speaking in a webinar, DBA Lawyers director Daniel Butler said SMSF clients who have a transition to retirement income streams (TRISs) and have not yet retired can land themselves in serious trouble where they fail to meet the minimum pension payments.
Where a client fails to make the minimum pension payments, the pension ceases for that income year and the withdrawn amounts become a lump sum, he explained.
Typically, most TRISs contain preserved money only, and it is only possible for a member to take preserved money as a lump sum once the member has retired, he said.
“If it is preserved money then effectively you have an early release on your hands,” warned Mr Butler.
Therefore, unless the member has an unrestricted non-preserved amount, the fund has contravened a very important operating standard and the ATO could decide to “apply the full force of the law”, he cautioned.
“[Consequently], the client could get slammed with fully assessable income, even though the money from the TRIS was tax-free,” he said.
“Not only that, but they could potentially get an admin penalty of $4,200, so that’s a hefty penalty. If the client doesn’t have a corporate trustee, then that penalty amount could be doubled or tripled depending on the number of members in the fund.”
Mr Butler said it is vital therefore that SMSF practitioners stress to their clients the serious consequences that can arise from failing to make the minimum pension payments for their TRIS, especially where the client hasn’t retired.
Heres my view. The problem is one for continuing TRIS income streams. Since TRIS are now accumulation account withdrawals, within limitations, short term TRIS are required. This might be a one year TRIS taking out 10% of the TRIS/accumulation account. But do monthly payments. Then next year do TRIS at start of income year based on member accumulation account. TRIS is not a set and forget strategy anymore now the pension exemption is dust.