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A member starts a pension withoepning balance of $180K in 2018. The pension payment since then have been based on this figure till 2021. The actuary nor the auditor mention an under payment at $7035 per year for 2018- 2021. However in 2022 the actuary and the auditor mentioned that he had not paid the minimum pension. In two book written by expects in the field Monic Rule and Grant Abbott both say it is the minimum based of the amount at the start of the pension in 2018. I contend that the earning on the pension account was not regarded for penison payments. Both the actuary and the auditor say that I have to reduce the balance of the pension account to $180K. I say no. In previous year the ECPI has been between 93 - 95%. Now if I withdraw $50k from the pension account and put it in a reserve or accumulation account then the ECPI drops to 73%.
The auditor contend that he will issue a ACR if we do not put the excess $50K into an accummulation account. I again contend it is not a contravention. Am I right? I see that the effect of the shortfall in pension payment the fund is then fully taxable. Am I right?
Hi John
As a starting point the minimum pension is payable based on the balance of the pension account at the start of each year. The pension balance changes each year with income allocated to it & pension / lump sum payments allocated to it.
In terms of the audit report the auditor would qualify the audit report if there is a material breach. Re underpaid pensions the relevant SIS regulation to audit is:
Sub Reg 1.06 (9A) - "Pension payments must be made at least annually, and must be at least the amount calculated under Schedule 7".
In terms of whether it is to be reported in the ACR you need to refer to the ACR instructions and this is dependent on factors such as the $ value of the breach, the $ value of the Fund and if it is a first year Fund.
In relation to an underpaid pension the ATO gives guidance at:
The ATO states:
"If a fund fails to meet the minimum pension payment requirements in an income year, the super income stream will be taken to have ceased at the start of that income year for income tax purposes.
From the start of the income year the account is no longer supporting a super income stream. Any payments made during the year will be super lump sums for both income tax and SIS Regulations purposes.
This is the case even if the member remains entitled to receive a payment from the fund for the pension under the governing rules or under general trust law concepts.
If the income stream is in the retirement phase, the fund will not be entitled to treat income or capital gains as exempt current pension income (ECPI) for the year."
Your query refers to placing part of the pension balance to accumulation mode so that the minimum pension may have been met. This approach arguably has been a common industry approach when a minimum pension has not been paid in a year. Technically this approach is not correct as if the minimum pension has not been paid as per the ATO the income stream / pension stops at the start of the year and the Fund loses its ECPI status re that pension account. The problem with the approach of putting part of the balance into accumulation mode is that this should have been done & documented at the start of the year (& not after the error has been realised).
It is also noted that the ATO does allow an underpayment of less than 1/12th (as a once off allowance) & the trustee can apply to the ATO re an underpaid pension as being treated as if the minimum pension being met.
Thanks
SMSF AAA