Under Paid Pensions – ATO Concession

1/8/2013 8:00AM

Under Paid Pensions – ATO Concession

If a SMSF pays a pension, or if it intends on commencing a pension in the near future, the following information is essential reading.

The ATO has announced an important administrative concession dealing with the consequences of the shortfall in payment of an account based pension minimum pension in a financial year.

This concession is significant in that previously the ATO had taken the view that if there was an underpayment of the minimum pension, regardless of the amount of the underpayment, the pension is treated as having terminated at the start of the financial year, with the following consequences:

  • Payments made will be treated as superannuation lump sums for both income tax and SIS regulation purposes;
  • Earnings on assets supporting the pension will not be tax exempt;
  • The pension interest is merged with any accumulation interest of the relevant member; and
  • The proportioning rule will have to be reapplied when a new pension is commenced.

The concession now provided by the ATO means that where there is a “small” pension underpayment, or an underpayment outside the control of trustees, the pension will not be treated as having terminated.

The concession applies to Account Based Pensions (ABP) only – it does not apply to Allocated Pensions (AP) or Market Linked Income Streams (MLIS).

  • For SMSFs still paying a pension under the old Allocated Pension rules (i.e. min/max applies) this may be an excellent reason to consider converting from an AP to an ABP.

The conditions for self assessment and application of the concession include:

  • The underpayment is, either “small” and due to “an honest mistake” of the trustee, or, has occurred due to matters outside the control of the trustee;
  • The only reason the pension is treated as terminated is because of the underpayment;
  • The trustee makes the “catch up payment” as soon as practicable after becoming aware of the underpayment;
  • If the “catch up payment” had been paid in the earlier year, the minimum pension would have been satisfied;
  • The trustee must treat the “catch up payment”, for all other purposes, as though it had been paid in the previous year; and
  • The trustee has not previously been granted the Commissioner’s concession for failing to meet the minimum pension requirements.

If the circumstances of the underpayment do not meet all of the above conditions the exercise of the Commissioner’s general powers of administration would not be relevant for the purposes of self assessment.

The concession can only be used once. If the self assessed concession has been previously used, then the ATO may view that subsequent underpayments are not due to an honest error, but due to carelessness or indifference.

If the underpayment is outside the conditions for self assessment, then the trustee can still write to the ATO outlining the reasons for the failure to meet the minimum pension requirements and to request consideration of the exercise of the Commissioner’s powers of general administration, but there is no certainty that the ATO will apply the concession. Each case would be considered on its own merits.

If all the concession conditions are met, then:

  • The pension is taken to have continued and a new pension is not commenced in the following year;
  • The proportioning rule does not need to be reapplied to determine the tax free and taxable components;
  • The trustee can continue to claim an income tax exemption on earnings of the assets supporting the pension; and
  • Any payments made during the relevant year of income are treated as pension payments, not lump sum payments.

Following is an explanation of terms used above, and some examples of these terms:

  • Small” means at most 1/12th of the minimum pension payment for the relevant year.
  • An honest mistake”e.g. a transposition error when making a payment, or incorrect calculation of the minimum pension by using the 50% concession rate instead of 25%.
  • “Matters outside control of the trustee” – e.g. the trustees are incapacitated due to a car accident just before the final pension payment for the year is due, or the trustees had to travel overseas on short notice due to a family or business crisis and did not make the June pension payment until the following financial year.
  • “Catch up payment” – e.g. the catch up payment for the 2011/2012 year may be achieved by the designating the July 2012 pension payment as the underpaid amount, however, the minimum pension for the 2012/2013 year must still be made.
  • “As soon as practicable” – If due to an honest trustee error: The payment needs to be made within 28 days of the trustee being aware of the underpayment. If the underpayment is outside the control of the trustee: The payment needs to be made within 28 days of the trustee being in a position to be aware of the underpayment.

What trustees should do going forward

For funds administered by Super Plus using our ongoing regular processing service with a Macquarie or DDH Graham account (ie not annual work), a pension “health check” is conducted at the end of May each year so that remedial action can be undertaken before 30 June.

If your SMSF is not processed on a regular basis, i.e. you are using an accountant or administrator that does adhoc or annual processing, then it is essential that the trustee assess during the relevant year whether SMSF have met the minimum pension payment requirement for relevant the year, before 30 June.

1/8/2013 8:00AM

Enduring Power of Attorney – for SMSFs

People don’t like to think about becoming mentally incapacitated by illnesses such as alziemhers or dementia, or becoming physically or mentally incapacitated as the result of an illness or accident. But if it does occur it is vital there is a vehicle in place allowing someone else to legally make decisions.

What follows is a general overview to highlight some issues. It is not exhaustive and should not be considered legal advice nor any substitute for legal advice. Some of the contents may not apply to the specific circumstances of the reader and so should not be relied upon without seeking professional legal advice.

An Enduring Power of Attorney (EPoA) allows one person to give another person the authority to make decisions on their behalf if they find themselves unable or incapable of conducting their affairs at any time in the future.

It is vital that “every” trustee/member of a SMSF has an Enduring Power of Attorney (EPoA) so that the nominated attorney can continue to operate the fund when a trustee is no longer able or capable. Failure to do so can cause significant and costly problems for the fund!

Consider the implications for the SMSF if someone is incapable of making decisions:

  • How does the SMSF run?
  • How can documents be executed?
  • How does a corporate trustee operate?
  • How is a new trustee appointed?
  • How are assets sold or bought?
  • How are pensions or lump sum withdrawals made?

If there isn’t an EPoA what can happen?

  • Documents requiring two signatures, can’t be executed
  • Possible Audit contravention
  • The ATO may render the fund non-complying
  • Cannot roll-out an incapacitated member as SIS regulations require member consent (can’t be given if incapacitated)
  • Apply to QCAT, VCAT, NCAT, SAT(for WA) – Civil and Administrative Tribunal
  • Apply for guardianship
  • But who will they appoint? Surviving spouse, son/daughter, Public Trustee?
  • What happens to the SMSF while waiting?
  • Do you think the Public Trustee wants to be running a SMSF?

If there is an EPoA:

  • It allows the member to give a person of their choice the authority to make decisions on their behalf in connection with your SMSF.
  • It allows the SMSF to continue operating unimpeded if you are incapacitated.
  • It allows the SMSF to maintain its complying status, as fund operations can be conducted by the person with the EPoA authority, without fear of contravention of the relevant legislation.

General features of an EPoA:

  • The EPoA covers crucial financial and legal matters when someone is not in a position to make those decisions themselves.
  • The person appointed as an attorney should be someone that can be trusted. It can be a spouse, partner or adult child, professional such an accountant or lawyer, a relative or a friend. More than one person can be appointed – different people for different things, or to exercise their powers jointly.
  • Whomever is appointed as an attorney must be at least 18 years old, be of sound mind (i.e. have the capacity to make decisions), and agree to be your attorney.
  • The person making the appointment must be over 18 years and have the mental capacity to make decisions. Generally they have the ability to nominate whether they want the power of attorney to come into effect immediately, or only when, or if, they become incapable of making decisions.
  • If you are granting the attorney power to sell property this will need to be registered with the relevant state or territory land titles office.
  • There are formal requirements both as to form and witnesses, but these vary between state and territories, so you need to check for the area specific to you, your client or consult a solicitor.
  • The EPoA ceases upon the appointer’s death. Once a person dies, the provisions of the will take over as the authority for decisions regarding the estate.

Attorney responsibilities!

The decision to act as an attorney and the legal duties are significant. The attorney must:

  • Consider the  interests of the donor when making decisions as the attorney;
  • Take care of property/assets;
  • Avoid conflicts of interest;
  • Comply with relevant legislation, and
  • If necessary, prove that they have been appointed your attorney.

Points for consideration in appointing an EPoA

  • Locate the documents

Make sure you know where the originals of all your documents are. This includes previous deeds and company constitutions that have been upgraded.

  • Indentify the Power

Review the documents and understand the requirements for appointing and removing trustees/directors.

  • Decide on the Attorney(s)

It is important to consider who is appointed as a member’s individual attorney, because they will have a significant degree of control on the incapacity of the member.

Consider the appropriateness of the attorney. Are they sensible, are they likely to act in your interests, are they convenient (not living overseas)?

  • Effectiveness of appointment

Make sure you do a “what if test” assuming the worst has happened, then see how the documents would work, testing the rules. Does your appointed attorney and the rules of the trust deed achieve your desired outcome?

  • Review

Periodically review the appointed attorney. Are they still appropriate? Have circumstances changed that would require a change? Has the trust deed or company constitution been changed? and if so the “what if” test should be conducted again to make sure your desired outcome is still achieved?

Summary – EPoAs for SMSFs

  • Members of an SMSF can give an EPoA to someone to act as a trustee or director of the corporate trustee of an SMSF.
  • Check your SMSF trust deed, what are the rules. Does it allow you to give an EPoA?
  • The resignation of the member from being a trustee or director of the corporate trustee must be in accordance with the trust deed, the SIS Act and Regulations, and other relevant legislation.
  • An EPoA allows an SMSF to retain its complying status and satisfy the definition of an SMSF if the members no longer want to perform their duties as a trustee or director of a corporate trustee of the SMSF.
  • Each state and territory has its own legislation, so regard must be given to the specific provisions to ensure the EPoA is valid.
  • Do a “what if” scenario on your circumstances, refer to the deed(s) and constitution – What is the outcome?
  • Seek legal and other professional advice and guidance.

For registered users a detailed Enduring Power of Attorney fact sheet is available in our Resource Centre, Fact Sheets.

1/8/2013 8:00AM

Special Offer on QROPS registration for UK pension transfers

Only $50 for the months of October to December, to QROPS register your SMSF.   This will allow your fund to receive UK pension transfers. It is only available to SMSFs that Super Plus provides ongoing administration services for.

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