Timing miss-match flagged with pension values
Where an SMSF member fails to pay their minimum pension and the income stream ceases, there is an important difference in timing for when the pension value is calculated for ECPI versus the transfer balance cap, according to an industry lawyer.
Speaking in a webinar, DBA Lawyers director Daniel Butler said that around this time of year, a lot of SMSF administrators and accountants are collecting information from clients and are putting together their accounts and may discover that the client has failed to pay the minimum amount required for their pension in the previous financial year.
While the client might not have any problems where it is a small underpayment that does not exceed one-twelfth of the minimum pension payment in the relevant income year, where it does exceed this amount they could have an issue on their hands, he cautioned.
“The explanatory memorandum for the legislation that introduced these reform measures explains where you do not comply with the minimum, you lose your tax exemption, and you also get a debit equal to the value of the pension arising to reflect the fact that that income phase is no longer in retirement phase,” Mr Butler explained.
For the pension to once again become eligible for the tax exemption it must be commuted in full and a new pension that complies with the standards started, he said.
“To enable this to happen, the EM and Treasury says that a debit arises in the transfer balance account, and this debit is at the end of that income year. So it’s taken to be at the end of the income year in which that failure occurred and it ceased to be a pension. The debit arises at the end of the year because in most cases, because it’s only once the income year has passed that it can be determined that the pension has not met the standards,” he explained.
However, the superannuation income stream benefit ceases for both tax and ECPI from the start of the financial year, he said.
“Therefore from the ECPI viewpoint, you lose your exemption from the get go, whereas from a TBC viewpoint you lose it at the end of that year.”
SMSF practitioners need to be aware of this difference and monitor when the value of the pension is being recorded in the software that they use.
“You need to keep an eye on your software and [determine] whether it’s disclosing it at the beginning of the financial year for both ECPI and TBC or at the end of the financial year for ECPI and TBC. You have to check with your particular software,” he said.