ATO warns on minimum pension payments

The Australian Taxation Office has issued a warning to trustees of self-managed super funds that lump sums, or partial commutations, no longer count towards a minimum annual pension payment.

The ATO says that if the minimum pension standards are not met in a financial year, none of the payments made during the year can be treated as super income stream benefits.

“Failing to meet the minimum pension payment standards now not only means that fund loses exempt current pension income for the year, there are also transfer balance account consequences,” the ATO says in an SMSF alert issued last week.

Under the account-based pension rules, trustees must meet minimum pension payment requirements. Income equivalent to a percentage of the account balance must be paid out each year, with the percentage changing with age.

The percentage factors are:

  • Under age 65, the minimum pension payment is 4 per cent a year;
  • Between 65 and 74, the minimum is 5 per cent a year;
  • Between 75 and 79, the minimum is 6 per cent;
  • Between 80 and 84, the minimum of 7 per cent;
  • Between 85 and 89, the minimum of 9 per cent;
  • Between 90 and 94, the minimum of 11 percent; and
  • For people aged 95 and over, the minimum is 14 per cent.

The SMSF Association’s technical director Peter Hogan says the ATO is concerned that trustees may not have caught up with all the changes to the system that occurred in July 2017.

Hogan says a lump sum used to count towards the minimum pension payment but no longer does.

Speaking at a recent Morningstar Investor Conference, Hogan says: “A pension can only be paid in cash. Cash payments plus commutations used to count towards the minimum but that does not apply anymore.”

If the minimum payment has not been made, the ATO can rule that the pension has ceased. It would then be ruled to have been in accumulation for that period and even before, with tax payments due.

Hogan says there are number of things SMSF trustees must get right when they start a pension.

“To start a pension, all the terms and conditions must be put in writing. For example, this is the time to nominate a reversionary pension recipient. It is difficult to add someone once the pension has started.”

The market value of the account must be reported to the ATO. Hogan says: “You have to be careful about how you do this. For an asset like property, you may need an independent valuation.”

Hogan says this is an appropriate time to review the fund’s investment strategy. “Because you have to make pension payments, it may be suitable to change the investment strategy to hold more cash. You would not want to be in a position where you have to sell assets to pay make pension payments.

“I recommend having 24 months of pension payments in cash, and top that up after each payment.

“Many trustees think they have to report to the ATO each time they make a pension payment, but you don’t.”

Hogan says one common misunderstanding is that the size of the pension balance must always be under the $1.6 million limit. “Pensions can grow. You are not penalised for good investment performance,” he says.

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