SMSFs warned on pension payment issues with rent relief
SMSFs have been warned that the ATO’s compliance relief for rent reductions does not extend to the minimum pension requirements where the provision of rent relief for tenants has resulted in cash-flow issues for the fund.
In late March, the ATO announced that for the 2019–20 and 2020–21 financial years, it would not undertake compliance action where an SMSF provides a tenant with rent relief due to the impacts of COVID-19 in relation to some of SIS Act implications that can arise from a reduction in rent.
However, where an SMSF has provided rent reductions or waivers to a tenant and this has resulted in cash-flow issues for the fund, the ATO’s compliance relief will not extend to the fund’s failure to meet the minimum pension requirements, according to actuarial certificate provider Accurium.
“Where the cash flow of the SMSF is not sufficient to meet the reduced minimum pension requirement, due to temporary COVID-19 rent relief provided by the SMSF to a tenant, there is no further relief available,” Accurium explained.
The government has reduced the minimum annual payment required for account-based pensions and annuities, allocated pensions and annuities and market-linked pensions by 50 per cent for the 2019–20 and 2020–21 financial years due to significant losses in financial markets as a result of the COVID-19 crisis.
Depending on the circumstances of the fund and its members, Accurium explained there may be other options or strategies for the fund to explore.
The SMSF, Accurium said, could consider whether assets in the SMSF could be sold to provide sufficient cash to ensure the reduced minimum pension is paid for the income year.
“[However], the sale proceeds would have to be deposited to the SMSF’s bank account and the required amount paid to the member by 30 June,” Accurium said.
The SMSF could also consider the use of the temporary borrowing rule under SIS Act section 67(2), it said.
“This allows a superannuation fund to borrow for the purpose of making a benefit payment, provided the period of borrowing does not exceed 90 days and the total amount of the borrowing does not exceed 10 per cent of the value of the assets of the fund,” it explained.
“From a practical perspective, this would be useful close to the end of an income year where it is determined that the SMSF will not be in a cash position to meet the minimum pension requirement and where the member had sufficient cash funds outside of super, but was unable to contribute to the SMSF, either due to the contribution acceptance rules or their prior 30 June total superannuation balance meant a non-concessional cap of zero. Relevant loan documents would need to be prepared.”
Where the pension is an account-based pension, it can be fully commuted, Accurium said, but retained within the SMSF in the relevant member’s accumulation account.
“This will mean that there is no ongoing minimum pension standard to comply with; however, the SMSF must pay a pro-rata minimum pension payment prior to the full commutation to meet the pension standards for the income year,” the SMSF service provider noted.
“Further, the SMSF will not be able to claim exempt current pension income (ECPI) in relation to the pension from the date it was fully commuted. Ceasing a pension may also have Centrelink entitlement ramifications, particularly if the pension was grandfathered pre-1 January 2015. Consequently, this should be taken into consideration.”
Accurium also suggested that a member with an account-based pension could, after ensuring a pro-rata minimum payment is made, fully commute the pension back to their accumulation account and restart the pension at a lower balance such that a reduced minimum pension can be funded by the SMSF’s reduced cash flow for the remainder of the year.
“Note that this same outcome cannot be achieved where there is a partial commutation of the pension, as the minimum pension for an existing pension is based on its value at the start of the income year and a partial commutation does not cause the existing pension to cease,” it cautioned.
Where the pension is commuted, and also if re-commenced, Accurium noted that there will be transfer balance account transactions with relevant transfer balance account reports (TBARs) required to be lodged.
“Given the expected downturn in property values, the TBA debit would be expected to be much lower than the original credit (earliest being 1 July 2017) in relation to that pension. Earnings on pension capital that has been commuted back to the member’s accumulation account will be assessed against the member’s transfer balance cap (TBC) once a new pension is commenced from benefits in their accumulation account,” it stated.
Accurium also pointed out that some pensions simply cannot be commuted back to a member’s accumulation account.
“These include old legacy defined benefit pensions and market-linked pensions (also known as term allocated pensions),” it warned.
“This category includes death benefit pensions. While the death benefit pension may be an account-based pension and can be commuted, the cashing requirements of a death benefit mean the commuted amount must be withdrawn from the super system; that is, the commuted amount cannot be kept within the super system in the member’s accumulation account. SMSFs with these types of pension should be reviewing their cash flow to formulate a strategy to ensure that at least the reduced minimum pension amount can be paid each year.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.