You may remember from our previous newsletter that the ATO has recently issued a controversial draft ruling regarding pensions, that if implemented will have potentially serious consequences for pension members and their beneficiaries. This draft ruling has continued to receive significant media attention yet it will be many months until any further guidance is received from the ATO.

Failure to make minimum pension payments

In the ATO’s view, a pension will cease for income tax purposes if the fund fails to pay to the pensioner the required minimum annual payment. The ATO will also consider that the pension will have ceased at the beginning of the relevant income year with the following tax consequences:

•  The fund will lose its claim for exempt pension income in respect of that member for the entire income year, and
• Any payments actually taken from the pension account in that year will be taxed as lump sum withdrawals.

Sarah is age 58 and has retired. The minimum payment required from her account based pension for the 2011 year was $160,000. Sarah only drew $80,000 from her fund. Sarah’s fund did not sell any assets during the 2011 year and received only a small amount of interest.

Sarah’s fund has failed to meet the minimum payment requirement for the 2011 year. In the ATO’s view, Sarah’s pension ceased on 1 July 2010 and the payment made to Sarah of $80,000 is a lump sum withdrawal.

Treating Sarah’s payment as a lump sum may not be detrimental provided she has sufficient low rate cap available and the loss of the fund’s tax exemption on its investment income is not significant.

Of course, the situation may be a lot worse had Sarah made a large capital gain in the 2010/11 year as the fund would have lost its tax exemption.

For those individuals drawing a transition to retirement income stream (TRIS), treating the payments taken as lump sum withdrawals may be disastrous. It would be a breach of the superannuation legislation unless the individual happens to have sufficient unrestricted benefits in their account. Generally speaking this would place the fund at risk of being made non-complying and the payments taken would be subject to tax in the individual’s hands at marginal rates, regardless of the individual’s age

For these reasons it is always wise to check before the end of June each year that you have withdrawn the correct amount. After 30 June it is too late.