What happens if the member is not on ABP but on any old pension?
Some older pensions such as allocated pensions and market-linked pensions that commenced before July 2007 also have a minimum and maximum income determined by similar rules. Since ABP have no maximum withdrawal limits "allocated pensions" can be converted to the new ABP.
Only half amount has to be withdrawn for some years.
In the financial year ended 30th June 2009 & 2010 the government has halved the minimum amount which a pensioner must withdraw. No such announcements are made till date for the financial year ended 30th June 2011.
What happens if the member does not withdraw the minimum amount?
A very common problem for SMSF paying pensions is that the member either does not withdraw the minimum amount or withdraws less than the minimum stipulated amount. This usually happens due to lack of communication between the advisor and the trustee of the SMSF.
We strongly suggest to advisors to alert their clients of the minimum withdrawal amount for the following year at the time of preparing accounts for the SMSF. Further, send a letter to all pension members sometime in June each year, reminding that minimum pension must be withdrawn. If you an advisor and have clients on pension, feel free to forward this newsletter to your clients.
Problems in paying minimum income stream
A trustee may get into strife and pay less than minimum income stream to the member if the fund doesn't have sufficient cash to actually make the required pension payment. For example the minimum income stream payment is $40,000 and the fund has only $5,000 in cash and the remainder is in illiquid assets such as property or a managed fund which has stopped withdrawals due to GFC issues.
Minimum pension payment strategy
One strategy used in this case is to re-cycle the $5,000 eight times to ensure that the fund pays the minimum pension amount. The way the strategy works is that either the member or another member uses the same $5000 as a non-concessional (un-deducted) contribution to the fund to make the next $5,000 pension payment - please note for this strategy to work, there must be enough transactions in the bank account for the auditor to confirm that minimum income stream was paid.This strategy may not work if all the members of the fund are over 65 years old and are not allowed to make non-concessional contribution to the fund as they do not work. To counter this strategy, the trustee must admit new members to the SMSF so that they are able to re-cycle the limited cash available in the fund to make the minimum income stream payment.
What happens if no Income Stream is paid in the year?
Underpayment or non-payment of a pension are technically a breach of the minimum income payment requirements and conditions of the pension agreement.
An unwritten industry practice has developed around these errors. Some accountants show the unpaid income stream as a liability of the fund and the trustee is then instructed to pay this liability as soon as possible in the following year.
Although this practice is technically a breach of the law and some auditors conclude that the error is not a significant breach and hence would not consider reporting it to the ATO.
What are the consequences of not paying the minimum pension payment?
Recently the ATO was questioned, if this practical, industry-developed solution is acceptable. The ATO replied that in its view this practice is unacceptable. It says that the minimum payment rules must be satisfied in relation to a pension both in "form and effect".
This means that super laws do not say unpaid pension income stream payments become a liability of the fund that can be settled in the following year or later years. Clearly such an act of the trustee will be outside the pension conditions.
Consequently, the ATO's opinion is that "it is not enough for the rules of the pension to state a payment will be made in each year if the payment for a particular year is not actually made. Where a trustee does not pay the pension benefits as required, the payment will not be regarded as a superannuation income stream benefit for the purposes of the [income tax laws], and the fund will not be entitled to the exemption for income relating to their current pension liabilities."This means that a SMSF making this mistake would lose the tax exemption on earnings from the assets used to support the pension.
What to do if your SMSF did not pay the minimum amount in previous years?
If you are a trustee of a SMSF that did not pay minimum income stream to a member in any previous financial year and the fund has claimed exempt pension income and the auditor has not reported the matter to the ATO, your fund is in breach.
We suggest you take this matter with your advisor and revise your SMSF income tax return. Remember as the trustee of the fund, you are still liable for all penalties, even if you have appointed an advisor.
Also once fund assets cease to be "Pension Assets", they move to accumulation phase, this means if the member had an accumulation account in the fund, the two accounts will be merged and if new pension has to be commenced, new calculations would have to be done for "Taxable" and "Tax Free" components.
Eligible for pension - AGE 55 as on 1st July 2009 - but not yet commenced a pension
If you are a member of a SMSF eligible to commence a pension or transition to pension income stream, there is still time in this financial year to commence a pension from 1st July 2009 as long as the minimum amount is paid to the pensioner as an income stream before 30th June 2010, as long as the member expressed intention to go on pension to the trustee on 1st July 2009.
Your SMSF will comply to claim exempt pension income for the financial year ended 30th June 2010. Which means the fund will not pay any tax on income on assets supporting a pension.
