ATO highlights key pension issues
The ATO has identified some of the key problem areas relating to pensions for SMSFs that are invested in property, and has urged professionals to assess their clients’ circumstances for major risks.
The tax office has reiterated it will target SMSFs in pension phase as part of its SMSF compliance program.
Last week, the ATO’s director of superannuation, Mary Simmons, expressed concern about SMSFs in or transitioning to pension phase that hold illiquid assets such as real property.
“The big issue that we’re seeing now though, in meeting the minimum pension requirements, is around liquidity issues,” Ms Simmons told delegates at the SMSF Association’s state technical conference in Sydney.
“We’re concerned by funds that have moved into pension phase but haven’t necessarily adjusted their investment strategy to take into account that ongoing pension payment.
“The biggest issue we’re finding is where real property is the major asset of the fund,” she said.
Ms Simmons said that in the “simplest of cases” the ATO is finding the net rental income return on a fund’s real property investment is insufficient to cover pension payments.
“It might start off OK in the early years, but as your pension drawdown increases and you’re not adjusting your investment strategy, that’s where the problems become more and more serious,” she said.
Professionals should also keep in mind that, in times of economic downturn, such as the global financial crisis, generating sufficient rental income can be particularly problematic, Ms Simmons said.
Ms Simmons also pointed to a common and “surprising” issue that persists with SMSF pensions.
“It’s very simple, but you would be surprised at how many people get it wrong – the simple application of the wrong pension drawdown percentage,” Ms Simmons said.
“That could be because people have turned a different age, perhaps they are on the cusp or they just apply the same rate as the year before.”