In March this year, the ATO told SMSF Adviser that pensions are a key focus of its compliance activities, particularly as the pool of SMSFs in pension phase continues to grow.
“If you get pensions wrong, there are financial consequences, which we don’t want people to have,” an ATO spokesperson said. “As more people move into this phase, we want to make sure they get it right."
Late last week, an ATO spokesperson told SMSF Adviser that pensions will remain on the regulatory radar for the 2015-16 financial year, with specific areas of focus including non-compliance with the pension rules and inappropriately claimed income tax deductions when a fund is in pension phase.
“Our focus on income tax and regulatory issues arising during pension phase has increased as more SMSFs move into pension phase and start to pay income streams to members,” the ATO stated.
The ATO outlined some key problem areas relating to SMSFs and pensions, including the failure to correctly calculate minimum pension payments.
“One of the most common reasons for an SMSF in pension phase not being entitled to applicable income tax exemptions under the ECPI provisions is because the trustee fails to pay the required annual minimum pension amount to a member. If the fund doesn’t pay the minimum amount then the payments are not considered to be income stream payments,” the ATO said.
It is critical that trustees plan well in advance of commencing to pay a pension from their fund to ensure the fund will have sufficient liquidity to pay and will meet the minimum pension payment requirements when the fund moves from accumulation phase into pension phase.
“Furthermore, trustees should also continually monitor and review the ongoing liquidity requirements of their SMSF at the outset when starting a pension as well as throughout the life of the pension. For example, if the SMSF’s only asset is property, making a cash payment and thus meeting the minimum pension payment requirements can be extremely difficult,” the ATO stated.
“An in-specie asset transfer from the fund is not the answer to liquidity concerns and associated difficulties with meeting the minimum pension payment requirements."
The SMSF Association’s Graeme Colley told SMSF Adviser that practitioners should be well aware that pensions are likely to remain a focus of the ATO for the foreseeable future, particularly given the growing levels of revenue that are at stake.
He also noted that the ATO will be keen to ensure the government’s goals for superannuation – to provide income in retirement – are met, and non-payment of pensions compromises that goal.