.png)
In the year I am auditing I noticed a creditor of $700, the accountant advised that it represents short payment of pension
The minimum pension was $69,700 and only paid pension of $69,000 – 1% short.
In the previous year, not audited by me: - I noticed that there was a short payment in that year of $920 in creditors in the previous year on a required minimum pension of $59,290 – 1.5% short. (Nothing was said in that year by the previous auditor.)
Can I rely on the “small underpayment” 1/12 short payment rule to allow the fund to comply and keep the exempt pension income and keep the funds tax free status?
Should I be asking the accountant to relooking at his documentation commute part of the pension?
What would you do?
I understand that the alternative could be the super income stream will be taken to have ceased at the start of that income year for income tax purposes and any payments made during the year will be super lump sums for both income tax and SIS Regulations purposes. The trustees are not looking for this result.
Is it ok to be short in both years – made up in the next year?
Hi Peter
A great reference for auditors is Taxation Ruling 2013/5 “Income Tax: when a superannuation income stream commences and ceases.” It can be found at:
https://www.ato.gov.au/law/view/document?docid=TXR/TR20135/NAT/ATO/00001
It is noted that the ATO does allow a small underpayment of a pension and that then the Fund will not lose its tax exempt status. A small underpayment of a pension is when the underpayment does not exceed 1/12th of the minimum annual payment.
The ATO allows this exception if all of the following apply:
“failure to meet the minimum pension requirements was an honest mistake or was outside the control of the trustees
the underpayment is only small (that is, does not exceed one-twelfth of the minimum annual pension payment)
all of the other conditions have been met
the trustee has not previously applied the exception for failing to meet the minimum pension payment requirements.”
Under the 1/12th rule the underpayment must be paid as a catch up payment as soon as possible in the following income year (being within 28 days of being aware of the underpayment).
The Trustees can also apply to the ATO to treat an underpayment of pension as not having failed the minimum pension requirements, and a good reference re this can be found at:
Re your situation as the SMSF has used the 1/12th underpaid pension exemption previously it can not use it again. That is the pension cannot be underpaid in 2 years.
My approach would be to apply to the ATO to treat the underpayment of pension as not having failed the minimum pension requirements.
Another approach that I am aware of in the industry is a lower pension amount is started at the start of the year so that the amount paid covers the minimum pension. This is not ideal as there is TBAR & pension paperwork requirements to consider (& refer to the taxation ruling as noted above re when a superannuation income stream commences and ceases).
As per TR 2013/5 it explains the impact of not having paid the minimum pension:
"Example 6: failure to meet minimum annual payment requirement - cessation of superannuation income stream
42. Bill is a member of the JKL Superannuation Fund (a self managed superannuation fund) and has commenced a superannuation income stream (an account based pension). The minimum annual payments required under clause 1 of Schedule 7 of the SISR 1994 were made to Bill during the 2010-11 and 2011-12 years.[24] At the start of the 2012-13 year the trustee of the JKL Superannuation Fund calculates that the minimum annual payment required to be made under clause 1 of Schedule 7 of the SISR 1994 for that year is $1,000.
43. During the 2012-13 year the trustee of the JKL Superannuation Fund makes a single payment to Bill of $50. As this amount is less than the minimum annual payment required, the superannuation income stream has not met the requirements of the SISR 1994 for the 2012-13 year. The superannuation income stream ceases for income tax purposes at the beginning of this income year, and the $50 payment is a superannuation lump sum.
44. This is the case even if Bill remains entitled to receive a payment from the superannuation fund in relation to the pension under the governing rules of the superannuation fund, or under general trust law concepts, in future years. If the relevant SISR 1994 requirements are again complied with in the 2013-14 year, this results in the commencement of a new pension."
Thanks
SMSF AAA