Ticking off the pension box

Summary: Make sure you draw your minimum pension payment by Saturday.

Key take-out: Those the fail to do so will be hit with a tax mallet.

June 30 is a critical financial milestone on many levels, not least for retirees drawing down a superannuation pension stream from a self-managed super fund.

That's because the financial year, not the calendar year, is the reckoning point from a Tax Office perspective for the amount of pension income that needs to be drawn down.

Miss the deadline (and that means the end of this week), and the ATO will take a dim view in terms of determining your tax-free income entitlements.

Meeting the minimum pension payment requirement

The minimum pension payable is calculated by multiplying the value of a member's super pension account balance at the start of each year, or the balance of the member's account when the pension commences, by the percentage shown in the following table:

Put simply, the tax effect of an SMSF not meeting the minimum pension requirement from a fund is disastrous. This is because the fund is then not regarded by the ATO as being in pension phase, and will therefore lose the tax exemption on any income it earns.

The guidance notes issued by the Commissioner of Taxation detail when he will use his general power of administration (GPA) when assessing whether a super fund fails to meet the minimum pension requirements.

In general terms trustees can self-assess when there has been a small pension shortfall, or where the failure to take the minimum was outside the control of the trustees, and the matter is rectified as soon as practicable after the shortfall has been identified.

However, for SMSF trustees to self-assess the following four conditions must be met:

• The failure to meet the minimum pension requirements was an honest mistake or was outside the control of the trustees; and
• the underpayment is only small (that is, does not exceed one-twelfth of the minimum annual pension payment); and
• all of the other GPA conditions have been met; and
• the trustee has not previously been granted the Commissioner's concession for failing to meet the minimum requirements.

You could be forgiven for thinking that these guidance notes make it clear that where an account-based pension is paid as a lump sum at the end of a financial year, and a member dies during that financial year, the trustees will not be able to self-assess and therefore the pension income stream requirements will not have been met. In actual fact, this is not the case.

The ATO has confirmed that if a member dies before they have received an annual pension payment, which often occurs at the end of each financial year, the minimum pension payment standard is not applied.

Also, in an example on its website, explaining when a super fund does not meet the minimum pension payment standard, the ATO states that in the event of the death of a member it will not require a minimum pension payment to be made in the year the member dies.

But this aside, remember that if you fail to meet the minimum pension payment requirements this financial year, your super income stream will be taken to have ceased at the start of the income year for income tax purposes.

As such, any payments made during the year will be regarded as super lump sums for both income tax and Superannuation Industry Supervision Regulations purposes.