As 30 June approaches, much of the focus naturally shifts to contribution caps, tax planning opportunities and year-end strategies. However, for SMSF clients receiving pension payments, one important review point can sometimes be overlooked: Confirming that minimum pension requirements have actually been met.
SMSFs paying an account-based pension are required to pay a minimum amount each financial year, with the amount depending on factors such as the member’s age, account balance and when the pension commenced.
From an audit perspective, pension shortfalls are not uncommon. In many cases, they arise from relatively simple issue, for example a scheduled payment may have stopped early, an incorrect percentage may have been used, a pension may have commenced part way through the year, or the required amount may simply have been miscalculated.
The issue is that the consequences can be larger than the shortfall itself.
Why a small shortfall can become a larger problem
Where minimum pension requirements are not met, the super income stream can be taken to have ceased for income tax purposes from the start of the financial year. This can have broader implications, including the treatment of payments made during the year and the fund’s ability to claim exempt current pension income (ECPI).
While the shortfall itself may only be a few hundred dollars, the flow-on effects can create additional administration, reporting and tax complications.
A practical EOFY review for accountants
Before year end, it may be worthwhile reviewing SMSF clients currently receiving pension payments and considering a few practical questions:
- Has the minimum pension requirement been calculated correctly?
- Have all pension payments actually been processed?
- Did any pensions commence during the year?
- If there are multiple pensions within the fund, has each pension been reviewed separately?
- Is there any indication of a potential shortfall before 30 June?
The earlier the pension shortfall issue is identified, the more opportunity there may be to resolve the issue before the end of financial year.
The ATO can provide limited relief where an underpayment is small and has occurred due to an honest mistake or circumstances outside the trustee’s control. However, conditions apply, so identifying and rectifying a problem before 30 June is generally a far simpler outcome than relying on exception provisions after the event.
Need assistance reviewing pension requirements or addressing a potential shortfall? Contact the Audit your Superfund team to discuss your clients’ circumstances.