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Paying pensions – ATO provides some relief for “mistakes”

Posted By Tony Negline On In Technical | No Comments

Last week, the Tax Office took another step towards dismantling its controversial draft Tax Ruling on pensions issued in July 2011.

The ATO published new documents on its website dealing with account-based pensions not paying the minimum income in a particular year.

The Tax Office says that if you don’t pay the minimum income payments in a year, then your fund won’t have paid a pension for that financial year. In effect, the fund’s income will go from being tax exempt to being taxed at 15%.

This may create a significant problem for some SMSF trustees, who sell assets thinking the transaction is CGT free, only to find that later this isn’t the case.  (Just remember that realised capital gains on assets held for more than 12 months are effectively taxed at 10%.)

Further, the ATO says that if the account-based pension rules are followed in the next financial year, then a new pension is deemed to have been paid.  If this occurs, then you would need to issue new documentation to support that new pension.

These comments are a re-statement of the ATO’s original position as contained in the draft Tax Ruling mentioned above.

ATO gives some ground

The ATO has now given some ground. In the new documents, it says that it will give trustees some leniency in relation to these rather harsh rules.  SMSF trustees will be able to fix this income under-payment problem themselves if all of the following exist:

  1. The under-payment of the pension’s income was an honest mistake or outside your control;
  2. The income underpaid represents no more than one twelfth (8.3%) of the statutory minimum income that must be paid each year;
  3. The only breach in relation to the pension concerns the minimum income payment;
  4. The trustee makes a catch-up payment for the amount underpaid as soon as possible (by ASAP, the ATO says it means within 28 days of you becoming aware that the income payment hasn’t been made);
  5. The trustee treats that payment for all other purposes as having been made in the prior income year; and
  6. The trustee hasn’t previously been granted a concession by the Tax Office for failing to meet the minimum payment requirements.

You will only be allowed to ‘self-assess’ (i.e. use this leniency provision without further reference to the ATO) once for a pension under-payment issue.

If you don’t satisfy all these rules, then you would need to apply directly to the ATO for it to grant you a concession to continue to pay the same pension.  The ATO will only entertain granting these concessions if you can satisfy the first five points above.  In your application for a concession, you will need to outline why the minimum pension wasn’t paid.

If you can’t self assess and you don’t satisfy the first five rules above (and therefore can’t apply to the ATO for a concession), then your fund didn’t pay a pension in that income year. This will mean that you’ve received lump sum payments.  For some people, this will create a great mess that has to be sorted out, especially if the Preservation rules have been breached.

The ATO says that its “revised views” start from 1 July 2007.  This means that, if in the last five financial years you’ve under-paid any pension, you should apply the above rules to ensure your pension continues to receive its tax exempt status.

The amount of under-payment must actually be paid out of the fund as an income payment.  In other words, an accrual in the accounting records is unacceptable.

It’s worthwhile pointing out that this new document isn’t binding on the ATO.  That is, if you apply this document and it then changes its mind on how the rules work, it can demand payment for the under-payment of any taxes, but it would probably waive penalties.

What’s now left in the ATO’s draft Tax Ruling?  In the main, there would appear to be only one item left for this ruling, namely the issue of partial and full commutations (i.e. stopping) without proper pension documentation.  Presumably this will be dealt with at some future point.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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