ATO partially clarifies whether a pension ceases if minimum pension requirements are not met

Due to some uncertainty over the effect of draft ruling TR 2011/D3, the ATO has clarified in a SMSF News Alert when a pension ceases and the consequences if minimum payments are not made.

The ATO position is:

• A pension ceases if the minimum payment is not made during a year. The date of the cessation is the beginning of that year, and the payments actually made are lump sum withdrawals. The trustee cannot claim exempt current pension income in respect of that pension for that year.
• If a pension ceases because the minimum payment is not made, then a new pension starts if the minimum payment is made in the following year.
• In some circumstances where the minimum payment has not been made, the ATO may exercise their general administrative powers to treat the pension as continuing.

An SMSF trustee can self-assess that a pension continues if all of the following conditions apply:

• The trustee failed to pay the minimum pension amount for that income year because of:
  • an honest mistake resulting in a small underpayment of the minimum pension amount; or
  • matters outside the trustee’s control.
• The trustee could have treated the income as exempt but for failing to pay the minimum payment amount.
• The trustee made a catch-up payment as soon as practicable in the following income year or treated a current year payment as being made in the prior income year.
• Had the trustee made the catch-up payment in the prior income year, the minimum pension standards would have been met.
• The trustee treats the catch-up payment, for all other purposes, as if it were made in the prior income year.
• The trustee has not previously used this administrative concession to treat a pension as continuing for the trustee.

If the SMSF trustee does not meet all these requirements, they can still request the ATO to exercise their discretion to treat the pension as continuing.

A ‘small’ underpayment is one that does not exceed one-twelfth of the minimum pension payment in the relevant income year, and ‘as soon as practicable’ generally means within 28 days of the trustee becoming aware or in a position to be aware of the underpayment.

The ATO’s position will provide some comfort to trustees who have not strictly complied with the rules.

TR 2011/D3 is yet to be finalised and, like the draft ruling, the ATO’s position on this will apply from 1 July 2007.
To view our previous alert on TR 2011/D3, please click here.

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