Newsletter No. 4, April 2013

Minimum Pension Payment Requirements

Please make sure you follow the rules when paying yourself a pension from your Self Managed Superannuation Fund (SMSF).  Otherwise your SMSF can end up paying tax that it doesn’t need to. Let me explain.

From 1 July 2007, once your SMSF starts paying you an account based pension, a minimum amount is required to be paid each year.  The minimum amount is determined by your age and percentage value of your superannuation account balance at 1 July of each financial year.  For example, if you are under 65 years of age at 1 July 2012, the percentage value is 3%.  For people aged 65 to 74 the percentage value is 3.75%; for people aged 75 to 79 the percentage value is 4.5%; for people aged 80 to 84 the percentage value is 5.25%; for people aged 85 to 89 the percentage value is 6.75%; for people aged 90 to 94 the percentage value is 8.25%, and finally; for people aged 95 or more the percentage value is 10.5%.  These figures will stay current until 30 June 2013.

Now, the taxation law states that any earnings generated from assets that are supporting your pension are exempt from tax, whereas earnings generated from other assets are taxed at a maximum of 15 per cent.  The tax exemption is only available if you meet all the conditions of the taxation and superannuation laws.  One of the conditions under the taxation law includes obtaining an actuary certificate if one is required.  Some conditions under the superannuation law include paying the right type of pension and making sure you pay the minimum amount each financial year.  There is no maximum pension amount you can be paid unless you are accessing your pension under the “transition to retirement” grounds.  In this case your SMSF is restricted from paying you a pension of more than 10% of your account balance each financial year.

Late last year, there was a lot of talk around a new Taxation Ruling published by the Australian Taxation Office (ATO). This ruling, when it was first released, stated that if your SMSF did not pay you the minimum pension amount in a financial year, then it will be treated as no pension being paid at all from the SMSF in that year.  This means the earnings generated from assets that support your pension will not be exempt from tax in that year.  The media ran a number of stories that were quite critical of this ruling.

The ATO later relaxed its stance and recently stated that it will treat the SMSF as having paid the minimum pension, if all of the following conditions apply to your SMSF: the underpayment of the pension was an honest mistake or outside the control of the trustee of your SMSF; the underpayment of pension does not exceed one-twelfth of the annual minimum pension amount, and; the only rule broken by your SMSF was the minimum pension amount not being paid.

The ATO has stated that if these conditions apply to your SMSF, then provided your SMSF makes a catch-up payment for the amount underpaid within 28 days of becoming aware of the mistake, it will treat the underpayment as being paid in the year that it should have been paid.  Your SMSF must actually make the underpayment in cash and not just record it as a book entry.

You can only self-assess this exception once.  The ATO will allow your SMSF to make the mistake only once.  If it happens again, you cannot self-assess the exemption, but instead you need to write to the ATO for the Commissioner to exercise his general powers of administration.  The trustee of your SMSF would need to demonstrate to the Commissioner that matters were outside their control that affected the SMSF’s ability to meet the minimum pension payment requirement.

What happens if your SMSF does not meet all of the above conditions?  Well it would mean that your SMSF did not pay you a pension but instead paid you a superannuation lump sum benefit.  This means there is no tax exemption available to your SMSF.

So please make sure you meet the minimum pension payment requirement.  Your hard earned retirement savings should be spent on your retirement and not wasted in paying tax.

Disclaimer 

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English”.  Her advice in general in nature and readers should seek their own professional advice before making any financial decisions.