The Australian Taxation Office has released a fact sheet clarifying some of the tax consequences that arise when a SMSF breaches the minimum pension payment requirement.
In summary, if a trustee of a SMSF breaches the minimum pension standards by not paying the minimum pension the pension will cease for tax purposes and the trustee will be deemed to not have paid a pension at any time during the income year.
This means that any payments made in the income year will not be treated as pension payments and instead be treated as a lump sum payment for both income tax and superannuation regulations purposes. This can also lead to additional tax for fund members.
The Commissioner’s Discretion to Allow a Breach
Provided certain conditions are satisfied, the Commissioner can exercise his discretion and allow such a breach, and still tax the payments as a pension.
Broadly, the fact sheet issued states that the Commissioner is able to exercise discretion if all of the following conditions are met:
- The trustee made a small underpayment of pension due to an honest mistake;
- The entitlement to the pension exemptions would have continued but for the failure to pay the minimum amount;
- The trustee made a catch-up payment as soon as practicable after they became aware that the minimum payment amount was not met (i.e. generally within 28 days); and
- The minimum pension standards would have been met if the trustee had made the catch-up payment in the previous income year.
We recommend that trustees of SMSFs that have any of their members drawing a pension ensure they check with their advisor that the relevant payments have been made by 30 June each year so as to avoid any adverse consequences.
Should you wish to know more, please contact Murray Howlett of our Taxation Services Division on (07) 3023 1300.