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Minimum Annual Pension Payment Requirements: To Pay Or Not To Pay That Is The Question
Trustees of self managed superannuation funds (SMSFs) need to ensure that the pensions
the SMSF pays meet the relevant regulatory requirements including the minimum annual pension payment requirement. Otherwise, the SMSF's may not be able to claim a current pension income deduction for the pensions it is paying.Changes to tax law mean that for an SMSF to claim the current pension income deduction, the SMSF must be paying a pension that complies strictly with the SIS regulations [1] including meeting minimum annual pension payments. This topic was discussed at a recent meeting of the National Tax Liaison Group (NTLG) in the context of the recent amendments to the Income Tax Assessment Act 1997 (ITAA).
The current position, and some relief for SMSFs
The current position is that minimum annual pension payments must be made in the year in which they become payable (for the SMSF to claim a current pension income deduction).
Even so, there has been some relief for SMSFs struggling to make minimum annual pension payments. The SIS Regulations have been amended to halve the minimum payment amounts for account-based pensions in the 2008-09 and 2009-10 financial years. SMSF trustee(s) need to consult their advisor about the implications for their SMSF.
Why is this issue of particular relevance at present?
Not surprisingly, ensuring that minimum annual pension payments are being made is of particular importance given the impact the global financial crisis and economic downturn have had on the balances of many SMSFs' pension accounts.
What is the 'current pension income deduction'
SMSFs may claim as a deduction all ordinary and statutory income derived from assets set aside to pay a pension[2]. To claim this deduction, the pension must comply with all the regulatory requirements for pensions under regulation 1.06 of the SIS Regulations. For present purposes, this includes the requirement that the annual minimum pension payment be made in the relevant year.
The view of the NTLG and the ATO
The view of the NTLG is that SMSFs should be able:
to underpay the minimum payments in one year,
but with an obligation to make up those underpayments in the following year (or years) presumably without affecting the SMSFs ability to claim a current pension income deduction.
Although the ATO's initial view is that SMSFs cannot act in this way, it is currently considering the implications of failing to make minimum annual pension payments in the context of the current pension income deduction under the ITAA.
At least for the moment, SMSF trustee(s) wishing to claim the current pension income deduction must ensure that all pension amounts are paid in the year in which they are due.
The ITAA and the SIS Regulations
The NLTG noted the following:
To gain the current pension income deduction under the ITAA, the pension must comply with all requirements in r.1.06 of the SIS Regulations;
These requirements include the minimum pension amount specified in r.1.06;
It is not enough for the rules to state that a pension must be paid in a particular year: the whole of the pension payment must, in fact, be made in that year;
A pension in breach of r.1.06 for underpayment will not be remedied by paying the accrued amount in the following year; and
Accordingly, the SMSF will not be entitled to claim the current pension income deduction.
SMSF pensions and the Global Financial Crisis
The ATO states its position regarding minimum annual pension payments and the economic downturn as follows:
If your fund fails to meet its minimum pension payment due to factors beyond your control, like being unable to liquidate assets due to current economic conditions despite taking all reasonable steps, it's generally unlikely that an offence against the operating standards in the super laws will occur.
How this approach would apply to individual circumstances is unclear. For example, will the ATO require SMSFs to liquidate shares at a major loss in order to meet pension payments?
Regardless, the ATO's position is that if minimum annual pension payments are not made, then the SMSF cannot claim the current pension income deduction. Until the ATO reconsiders its position or the legislation is amended, SMSF trustees should comply strictly with the ATO's view.
[1] Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). (http://www.cleardocs.com/clearlaw/superannuation/minimum-pension-payment.html#_ftnref1_4519)
[2] Section 295-385 of the ITAA (http://www.cleardocs.com/clearlaw/superannuation/minimum-pension-payment.html#_ftnref2_4519)
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