Since the release of TR 2013/5 that provides guidance on when a pension commences and ceases, we have continued to see the Australian Taxation Office provided guidance around the payment of superannuation income streams. This focus has highlighted the importance of trustees and members staying ‘between the flags’ when it comes to the minimum and maximum pension obligations each year.
Whilst the Commissioner within TR 2013/5 has provided guidance within on what happens when a member fails to take the minimum pension (see example 6), limited guidance has been provided on examples where a member breaches their maximum pension amount that applies to a Transition to Retirement Income Stream (TRIS).
In the ATO’s recent compliance update webinar, we have seen the Regulator provide guidance on how to deal with overpayments of Transition to Retirement Income Streams.
To understand this, let’s take a look at the following example:
Exceeded TRIS maximum example
James (57) has previously commenced a Transition to Retirement Income Stream from the ABC SMSF. His account balance at 1 July 2014 for his TRIS is $500,000, made up entirely of taxable component. All of the benefits have remained preserved as James has only satisfied a condition of release of attaining preservation age (i.e. a cashing restriction still applies to his benefit).
For the 2014/15 income year, it was noted that James could take within the following pension limits:
- Minimum (4%) = $20,000
- Maximum (10%) = $50,000
When completing the annual compliance requirements for the SMSF, it was determined that James had withdrawn $60,000, having exceeded the maximum TRIS pension amount by $10,000. As a result of breaching the payment rules of the income stream and the SIS Regulations, it is determined that James never had an income stream at any stage during the financial year. As a result, all benefit payments that have been withdrawn are to be treated as lump sums.
However, as the benefits are preserved, any lump sums withdrawn by James are effectively early release amounts. As a result, these benefit payments must be included as assessable income within James’ individual income tax return as ‘other income’. As the amounts are not pensions, the 15% tax offset will not apply to these amounts, nor will the low rate threshold that is attributable to lump sums between preservation and age 60.
James will need to start a new TRIS from 1 July 2015 to continue to receive an income stream for the following income year.
As you can see from the above, it can serve as an important lesson to ‘stay between the flags’, that will ensure the continuation of the member’s pension and a fund’s tax exemption.