The ATO has recently issued draft SMSF determination, SMSFD2010/D1, which considers whether a benefit payable with a cheque or promissory note can be ‘cashed’ for the purposes of superannuation law at the time the cheque or note is issued.
This issue tends to appear year after year when completing a SMSF’s compliance obligations, particularly where a pension member has forgotten to take their minimum pension for the financial year. The consequences of not having taken the minimum pension means the fund is not entitled to the tax exempt status on income generated by the SMSF (or 0% tax rate).
This draft determination appears to be a ‘win’ for the SMSF trustee as the ATO view in this determination is that an unpresented cheque or promissory note does meet the cashing requirement provided that:
- the money is payable immediately
- the trustee takes all reasonable steps to ensure that the money is paid promptly
- the money is paid; and
- the requirements of the SIS Regulations are otherwise satisfied
Previously it has been the commonly held view that amounts effectively withdrawn post 30 June (even where the cheque may have been backdated to 30 June) did not meet the minimum pension requirements for that financial year.
The ATO have included some examples within SMSFD2010/D1 to assist us to understand how these views have been reached. The key issue appears to be the timing of the payment and having taken reasonable steps to pay the “money” to the member.
Where a cheque was dated 30 June and is banked promptly (say 5 July) and honoured, then this appears to be OK. Where there are issues outside of the control of the trustee or member from receiving the benefits, and reasonable steps had been taken to ensure that the benefits are transferred as soon as possible, this also appears OK. Where a benefit is not paid because of insufficient funds or is simply not presented until much later (even though the cheque was dated 30 June), this will not be seen as benefits ‘cashed’ for the financial year.
The ATO has made is abundantly clear within this draft determination that:
- they will be applying ‘commercial practice’ to cheques raised at 30 June and subsequently banked to be included as cashed benefits. Typical commercial practice for cheques to be cashed is a few business days; and
- unless there is an arm’s-length separation between trustees and members, there is little or no scope to include any delayed payments within the financial year as cashed amounts.
Practically, for any SMSF trustees in this position, you need to consider your circumstances to form the appropriate view on which financial year the benefits will relate to. If the unpresented cheque can be included, it should be shown as a unpresented cheque within the SMSF’s bank reconciliation (and financial statements) for the financial year, not a creditor (or account payable – as some accountants may show).
Submissions are due by 27 August, 2010. Further information relating to this draft SMSF determination can by found by clicking on the link, http://www.ato.gov.au/superfunds/content.asp?doc=/content/00250995.htm.