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I have received a SMSF Audit for 2023 and note that minimum pension not met. Total minimum pension $52,859.53. Amount paid only $25,636.66 and balance $27,222.87 accrued by the accountant.
Explanation provided:
1. Fund is in retirement phase for a long time.
2. The member is 91 years old.
3. The Trustee was under considerable stress due to her elderly partner (aged 92) being ill and in and out of hospital.
4. All medical reports have been provided.
5. The Trustee have advised that during the period in question the Fund’s accountant was also on an extended overseas holiday and had not updated the accounts prior to year-end which would have meant the breach would have been rectified earlier.
6. The Trustee have advised that up until now a Contravention Report has not been issued against the Fund at any time since its establishment.
My understanding:
a. When the trustees fail to meet the minimum pension payment requirement in a given year and the shortfall is more than 1/12th it is stated that the pension income streams ceases to exist and that there is no tax exemptions applicable with the payments deemed to be lump sum payments.
b. No application has been made to the ATO for them to treat the account as having met the minimum pension requirements and ECPI being allowed to be claimed.
c. Auditor needs to qualify the Audit report and Issue ACR.
Thank You
Hello Shalendra
Thank you for your question.
The accountant could consider making an application for the ATO to treat the fund as having met the minimum pension requirements so as to access ECPI treatment for the pension interest. Clearly this is a case where the shortfall is more than 1/12th of the pension balance so the trustee of the fund has no ability to self-assess access to this discretion.
Putting aside the possibility of accessing the Commissioner's discretion, I agree with your conclusions above. In particular the lump sum will be tax-free to the 91 year old member, but tax will be payable within the fund on the earnings supporting the pension interest where the minimum payment was not made.
Moreover, in the absence of the Commissioner exercising a discretion to continue with the ECPI status, based on the views expressed in TR 2013/5, Income Tax: when a superannuation income stream commences and ceases the pension has stopped for ECPI purposes until a new pension is commenced.