Peter Burgess, chief executive of the SMSF Association, says one change in the tax ruling (TR 2013/5) caught the industry’s attention, relating to when a member ceases to meet their minimum pension payment standards during the course of the year and is required to commute that pension and start a new one.
“That’s a process, commute, restart. We’ve all worked on the basis that if a member has failed the pension in this income year, as long as they start paying the minimum pension in the next year, it’s all good. There is no need to commute and restart,” he said.
“The ATO has now said that unless you have commuted and restarted a new pension, then you don’t have a new pension. So why does that matter? It is because the pension payments that have started in the new financial year are not actually pension payments. They’re lump sum payments, because you don’t have a new pension unless you’ve gone through this process properly.”
Burgess said it was “an inconvenience” and a problem from an administration point of view, for no real revenue benefit from the ATO perspective.
“We have consulted with the ATO on this and led the charge on behalf of the industry and have put a few questions to them.”
“The first is on retrospective application. We don’t want this applied retrospectively because this is not the way the industry has worked in the past. We don’t want the ATO going back and saying, ‘well, because you didn’t commute, you restart that pension that had failed the minimum pension standards’.”
The ATO has said it will take a “no compliance approach”, which essentially means it will not go looking for these situations that may have occurred before 30 June 2024.
“We’ve asked the ATO to make a public statement about this, but it said it won’t do that,” Burgess added.
“The ATO told us it is not making any more public statements about this, but it is also not going back and looking for these cases. But of course, if it happens to audit the fund and finds that this has occurred, then it can’t ignore it in those situations.”
Furthermore, Burgess said the association has also asked the ATO to “have a level playing field” with APRA funds if an APRA fund member doesn’t meet the minimum payment standards.
“That might happen because of an admin error and the member hasn’t met their minimum pension standards. APRA funds should be subject to the same rules and should have to commute and restart.”
“Additionally, there is a concern about legacy pensions, which are non-commutable, and questions around how to deal with these situations, because if you can’t commute they fail the minimum pension standards.”
He continued that the ATO has replied that the new ruling only applies to account-based pensions.
“[The ATO said] this interpretation doesn’t apply to defined benefit pensions, and also it is equal treatment with APRA funds. It is not aware of APRA funds being treated any differently than SMSFs, but we certainly don’t want to be treated differently to the APRA funds.”
Finally, Burgess said the SMSFA has also asked for a “practical, pragmatic compliance approach” wherein, if a member follows the minimum pension standards, and does not commute and restart pension payments that have been paid since the new financial year, it will not be necessary to then recalculate the tax-free and taxable component for each one.
“If we’re not treating these things as pension payments, if we have to treat them as lump sum payments, we have to go back and calculate the tax-free and taxable component for each one of those withdrawals.”
“We’re asking the ATO to let us determine those components at the start of the financial year, and it’s set for that year. Unfortunately, we didn’t have much success here. The ATO came back and said it cannot issue a legislative instrument that’s not consistent with the policy intent.”
At a recent seminar the ATO said that if a member has multiple pensions, that failing to pay the minimum on one pension also effects the others.
That is absolutely ludicrous!
Each pension is a contract of itself with the member, and has nothing to do with any other pension accounts/contracts.
For example, if you have enough pension paid to cover say 2 of 3 pension minimums, and one pension must suffer, so be it.
But to say all of those pensions have failed to pay the minimum is just stupid.