Once you start an income stream benefit, there is a minimum pension amount that must be met each financial year. This is determined by the age of the member in addition to when the pension commenced in the year. Talk to your accountant or adviser about calculating this amount for your members’ pension accounts.
So, what happens when a member doesn’t pay the minimum amount in the year? If the fund fails to pay the member’s minimum pension amount in the financial year, the income stream benefit is taken to have ceased at the beginning of the year for tax purposes. This means that any payments made during the year are deemed to be lump sum payments for the purposes of tax and SIS legislation. The fund loses its tax concession and is not entitled to treat income and capital gains as Exempt Current Pension Income.
When the pension standards are met in a subsequent year, it is considered to be a new pension. All the assets must be revalued to the current market value and the minimum pension must be calculated again. This also then affects the proportioning of the taxable and tax-free components.
There may be circumstances where the Commissioner’s discretion may be applied to certain shortfalls in pension payments in order to continue to claim the Exempt Current Pension Income in the year. If certain conditions are met, then the pension is deemed to have continued and is considered an income stream benefit payments (rather than lump sums) and the fund can claim the tax concessions. The following are the conditions that must be met in order to apply the Commissioner’s discretion:
1. The trustee failed to pay the minimum pension amount in that income year because of
- an honest mistake made by the trustee resulting in a small underpayment of the minimum payment amount for a super income stream
- matters outside the control of the trustee.
2. The entitlement to the ECPI exemption would have continued but for the trustee failing to pay the minimum payment amount.
3. Upon the trustee becoming aware that the minimum payment amount was not met for an income year, the trustee makes a catch-up payment as soon as practicable in the following (current) income year; or treats a payment (intended prior year payment) made in the current income year, as being made in that prior income year.
4. Had the trustee made the catch-up payment in the prior income year, the minimum pension standards would have been met.
5. The trustee treats the catch-up payment, for all other purposes, as if it were made in the
prior income year.
Please note that the exception does not apply to pensions where the Transition to Retirement Income Stream benefit has exceeded the maximum benefit.