ATO Concession on Pension Underpayments
The ATO has just announced an important administrative concession dealing with the tax consequences of pension underpayments – that is, when the pension payments for an account pension in a financial year fall short of the minimum required amount.
This issue is very significant as the ATO has taken the view that if there is a pension underpayment - even of an immaterial amount – the pension will be treated as having terminated at the start of that financial year with the following consequences
- the payments which have been made will be taxed as superannuation lump sums;
- earnings on assets supporting the pension will not be tax exempt;
- the proportioning rule will have to be reapplied; and
- the pension interest will have been merged with any accumulation interest of the relevant member.
The concession provided by the ATO means that “small” pension underpayments, and pension underpayments outside the control of the trustee, will not be treated as having terminated the pension.
To which pensions does this concession apply?
The concession only applies to account-based and transition to retirement pensions.
The concession does not apply to allocated pensions or market linked pensions.
From what date does the concession apply?
The concession will apply from 1 July 2007.
When will this concession apply?
This concession will apply where the following factors are present:
(a) the underpayment is either “small” and due to the honest mistake of the trustee or the underpayment has occurred due to matters outside the control of the trustee;
(b) the only reason why the pension is treated as having been terminated is because of the underpayment;
(c) the trustee takes corrective action (eg making a catch up payment) as soon as practicable after being aware of the underpayment;
(d) if the catch up payment had been made in the earlier year, the minimum pension requirement would have been satisfied; and
(e) the trustee must treat the catch up payment for all other purposes as if it had been made in the previous financial year.
What is a small underpayment?
The ATO considers a “small” underpayment to be an underpayment by at most 1/12 (about 8%) of the minimum required pension payment.
What is the corrective action?
The trustee could make a catch up pension payment or designate current year pension payment as a pension payment in respect of the preceding financial year.
For example, an underpayment has occurred in the 2011/12 financial year. The trustee could make a catch up payment in the 2012/13 financial year. This catch up payment is in addition to the pension payments which must be paid for the 2012/13 financial year.
Alternatively, the trustee could designate the July 2012 pension payment as the catch up payment for the 2011/12 financial year. However, the minimum pension payments for 2012/13 would still have to be made.
What is as soon as practicable?
If the underpayment is due to an honest trustee error – as soon as practicable means within 28 days of the trustee being aware of the underpayment.
If the underpayment is due to matters outside the control of the trustee – as soon as practicable means within 28 days of the trustee being in a position to be aware of the underpayment.
Can the trustee self assess the application of the concession?
Generally, yes. However, if the underpayment is not small (ie greater than 1/12th of the required payment) or the catch up payment was made more than 28 days after the trustee became aware of the underpayment, then the trustee cannot self-assess the application of the concession. In this case the trustee could make a submission to the ATO for the application of the concession.
What if the concession has been applied previously?
The trustee cannot self assess the application of the concession – even if the previous underpayment satisfied all the conditions.
What happens if the underpayment is outside the self assessment conditions?
The pension is taken to have terminated at the start of the financial year. However the trustee can still request that the ATO apply the concession but there is no certainty that the ATO will grant the request and apply the concession.
Is the catch up payment treated as having been made in the shortfall year?
In our view, no. The catch up payment will for accounting purposes be treated as having been made in the financial year in which it is paid and not the financial year in which it should have been paid. The catch up payment will be received by the member in the financial year in which it is made.
Making the catch up payment means that the ATO will treat the pension as having satisfied the minimum pension payment requirement for the shortfall year.
Does the Trust Deed/Governing Rules need to be amended to permit the trustee to make the catch up payment?
For superannuation funds which have adopted the SUPERCentral Governing Rules – this issue is already covered in Rule 2.6 of Schedule A.
Can the concession apply to underpayments for years earlier than 2011/12?
The issue is whether an underpayment for say the 2009/10 financial year can be made good by taking corrective action in the 2012/13 financial year?
Certainly the concession can be applied in respect of pension underpayments in respect of the 2011/12 financial year by taking corrective action in the 2012/13 financial year.
It is less certain whether taking corrective action in the 2012/13 financial year for an underpayment which occurred in the 2009/10 or 2010/11 financial years will be effective. The uncertainty arises because the corrective action will have been made more than 28 days after the trustee has become aware of the issue.
Further, if the fund has already been assessed on the basis of the pension conditions not being satisfied, requesting the concession to apply will involve requesting an amended assessment for the relevant year.
This is an aspect of the concession which will have to be clarified by the ATO.
Will the catch up payment be counted for the purposes of the 10% cap applying to Transition to Retirement Pensions?
This issue is that if a catch up payment is made in the current financial year (to make good a shortfall for the preceding financial year) will the catch up payment be counted for the purposes of the 10% ceiling applying for the current year?
The concession announcement does not directly address this issue. However, it seems that the underlying logic of the concession is that if the catch up payment is to be treated as having been made in the shortfall year, then the catch up payment should not be counted for the purposes of the 10% cap of the current financial year.
What must trustees do now?
Check the pension payment amounts for 2011/12 to determine whether there has been any underpayment of the pension. If so, and the circumstances of the underpayment fall within the concession’s self assessment conditions – make the necessary catch up payment and self assess for the purposes of the 2011/12 superannuation annual return.
If the self assessment conditions are not satisfied – make the catch up payment and apply to the ATO for the application of the concession.
What should trustees do going forward?
Ensure that they do a “pension health check” for each pension in May so that any remedial action can be undertaken before 30 June.
This will ensure that there is no underpayment and no need for reliance on the concession.
Does the concession mean trustees can take a carefree attitude to pension underpayments?
No. A previous application of the concession will mean that the trustee cannot self assess the current application of the concession. Further, repeated requests for the application of the concession would strongly suggest that the underpayment is not due to an honest error (but rather carelessness or indifference).
Can more than the catch up payment be made?
The spirit of the concession suggests that the catch up payment should be of a sufficient amount to make good the underpayment and no more.
Visit the SUPERCentral product range if you would like more information on account-based and transition to retirement pensions or the SUPERCentral Governing Rules.
For further information, please contact our SUPERCentral Helpdesk on (02) 8296 6266 or email info@supercentral.com.au.
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