Not paying the minimum pension – ECPI v TBC conundrum
Post 2017 super reforms, where a fund fails to pay the minimum pension for the year, there are two major consequences. However, this provides a challenge for accountants and administrators when dealing with both these consequences to ensure that the correct reporting and tax outcomes are achieved.
What happens when the minimum pension is not paid?
Assuming that the fund cannot utilise the relevant ATO guidelines for a small shortfall or be successful in applying for discretion, the two major consequences are:
- No claim for exempt current pension income (ECPI) in relation to the failed pension for the relevant financial year; &
- The pension ceases to be a superannuation income stream in retirement phase.
Whilst these two consequences appear to be straight forward, it’s the timing of each of the above that can cause an accounting challenge to ensure the correct reporting and tax outcomes.
No claim for ECPI
Where the minimum pension is not paid, the fund cannot claim ECPI in relation to that failed pension. From a timing perspective, the relevant pension is deemed to have ceased at the start of the financial year.
A standard approach by accountants and administrators would be to affect a commutation of the failed pension back to accumulation from the start of the financial year. This would ensure that the failed pension would not be included in any claim for ECPI, under either the segregated or unsegregated method. Further, when the pension was re-commenced on 1 July of the following financial year, the tax components would be re-calculated under the proportioning rule. The tax components of the re-started pension would be different from the original pension due to:
- All net earnings for the income year (allocated to the pension) being effectively allocated to the taxable component; &
- Mixing of the original components of the failed pension with a member’s accumulation account.
Where a pension, that is in retirement phase, fails to comply with the minimum pension standard it is deemed to cease being in retirement phase. Consequently, there is a transfer balance account reporting event, which will raise a debit (reduction) to the affected member’s transfer balance account.
However, for this purpose, the pension is deemed to cease to be in retirement phase at the end of the financial year in which it failed to meet the minimum pension standard and the TBA debit, to be reported on the TBAR, is the value of the pension at the end of the financial year. This contrasts to the pension ceasing at the start of the financial year for ECPI purposes.
The accounting challenge
Where the failed pension is transferred back to accumulation at the start of the financial year, so as to ensure that it is not included in the calculation of ECPI, it will be difficult to determine the value of that pension as at the end of the financial year to be able to report such on the required TBAR. This may not be difficult where the member did not have an accumulation account prior to the pension failing to meet the minimum pension standard as it would simply be the value of the accumulation account at the end of the financial year. However, it would be difficult where the member did have an existing accumulation account, which would be common for those members who were affected by the introduction of the $1.6m transfer balance cap or where contributions were received by the fund from or on behalf of the member during the financial year.
If the approach is changed and the failed pension is not transferred back to accumulation at the start of the financial year, but kept in place to be able to determined the TBAR reportable value at the end of the financial year, then procedures must be implemented to ensure:
- The failed pension is not included in the claim for ECPI; &
- When the pension is re-commenced on 1 July of the following financial year, the tax components have been correctly re-calculated.
It should also be noted that the re-commencement of the pension on 1 July of the following financial year is also a TBAR reporting event.
Review procedures and admin systems
Those who are responsible for the preparation of financial statements, SMSF annual returns and TBARs, should review their procedures and SMSF administration systems for this scenario to ensure that correct treatment, calculation and reporting is being done. This is particularly so where the SMSF administration system has automated functionality for claiming ECPI and generating TBAR files. A particular approach may work for one of the consequences, but not the other. For example, ceasing the pension at the start of the financial year may ensure that the automated ECPI data submission and certificate generation is correctly implemented, but may result in the auto generation of a TBAR with the debit value being the value at start of the financial year, rather than the value at the end. A thorough understanding of how SMSF administration system work will help determine the best approach for SMSFs in this scenario.
SOURCE, All Rights Reserved – SuperConcepts, Mark Ellem, What happens when the minimum pension is not paid?, 10 Feb 2020, https://www.superconcepts.com.au/Insights-and-support/blog/smsf-insider/2020/02/10/what-happens-when-the-minimum-pension-is-not-paid
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