Pension shortfall (including 1/12 shortfall)

The Australian Taxation Office (ATO) may allow a SMSF to continue a superannuation income stream and continue to claim Exempt Current Pension Income (ECPI), even though the minimum annual pension payment amount requirements under SIS Regulations are not met.

The ATO takes the view that if an SMSF fails to meet the minimum annual pension payment requirements in a year, the superannuation income stream will have been taken to have ceased at the beginning of the financial year for income tax purposes. This means that the fund will not be entitled to treat income or capital gains as ECPI for the year. See tax ruling, TR2015/5.

This means that if some pension payment was paid in a year, but the amount paid fail to meet the minimum annual amount, the pension ceases for income tax purposes at the beginning of the year and the amount paid is treat as superannuation lump sum.

If the minimum pension payments are complied with in the following year, it results in the commencement of a new pension.

Pension payment must be 'cash' payments

The ATO states that pension payments are recorded on a 'cash' basis, and cannot be accounted for on an 'accrual' basis. This means that the payment amount must leave the SMSF's bank account for that payment to be recorded as paid. It is not enough for a payment to be deemed paid or otherwise recognised as a liability by the trust deed/ governing rules or trust laws.

Small shortfall

The Commissioner of Taxation may exercise powers of general administration (GPA) to allow a SMSF to continue to claim ECPI, even though the minimum pension payments to a member are less than the minimum payment amount for a superannuation income stream, where all the following conditions are satisfied:

1. The trustee failed to pay the minimum pension amount in that income year because of either:
• an honest mistake made by the trustee resulting in a underpayment not exceeding one-twelfth of the minimum payment amount for a super income stream in the relevant year.
• matters outside the control of the trustee.
2. Upon the trustee becoming aware that the minimum payment amount was not met for an income year, the trustee makes a catch-up payment as soon as practicable in the following (current) income year; or treats a payment (intended prior year payment) made in the current income year, as being made in that prior income year.

The Commissioner considers 'as soon as practicable' to be within 28 days.

To have the Commission consider an application of the exception, a trustee will need to write in and outline their reason and demonstrate that they have met all the above.

The Australian Taxation Office will allow trustee to self assess and apply the concession if the underpayment does not exceed one-twelfth of the minimum amount, and the catch-up payment was made within 28 days after becoming aware of the underpayment. The ATO has said that this self assessment is available once only. If the concession has been applied previously, the trustee is required to make an application to the Commission for the concession.

Do you need help with your situation or if you wish to discuss the above, please contact us. Our contact details.