Pensions / SMSF / SMSF Compliance

Tax exemption and exceeding the pension limit


In a follow-up to my last blog post about “falling short with pension payments”, I’ve had a range of questions being asked about the ATO’s view when a trustee may not meet the pension standards and when the Commissioner may use his powers of general administration (GPA) to allow for a pension to continue, along with the fund’s tax exemption (ECPI tax deduction).

One avid reader (thanks Abhitha!) asked the following question which I thought I’d share my views:

There is a lot of discussion on under drawing of pensions. However, what happens where a Transition to Retirement Income Stream (TRIS) maximum pension is exceeded?  I understand that the Fund loses it’s ability to claim the pension exemption percentage but what happens to the actual amounts withdrawn from the super fund?  Would they have to be returned or are there issues of early release by the fund member, which the withdrawals are then reportable in the personal income tax return of the member?  It would appear to be a harsh outcome for a member that potentially exceeded the maximum TRIS by withdrawing an additional amount a week prior to year-end, in particular where it is a genuine mistake. Would you be able to provide some practical guidance on this matter?

The guidance provided by the ATO in respect to the applying the Commissioner’s powers of general administration (GPA) was restricted to underpayments of a minimum pension.  There wasn’t any mention that it would apply to other circumstances.  Relying only on the interpretation taken from draft tax ruling TR 2011/D3, it is abundantly clear that failure to comply with the pension rules and payment standards will mean that the trustee is not taken to have paid an income stream at any time during the year.

This issue has previously been flagged within the NTLG, December 2010 minutes regarding excess pension payments a fund’s tax exemption.  Interestingly, the ATO’s initial response to the question sounds very familiar to that issued within the recently released guidance regarding minimum pensions and where the powers of general administration may be exercised, including self-assessing.  The NTLG minutes note that:

“There may be some administrative scope for the Commissioner to consider that the pension definition has been met where the relevant breach arises from circumstances that are completely outside of the trustee’s control. However, this could only be considered on a case by case basis in the light of the specific facts and circumstances of each particular case.”

So, could a fund’s tax exemption continue for a pension where a member exceeded their maximum pension? Maybe, but the trustee would need to show that such an overpayment was outside of their control.

I would love to hear your thoughts…

Find out more about the Commissioner’s view on minimum pensions shortfalls in tomorrow’s webinar the “Changing Face of SMSFs”

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