There are several key components that if present will work in favour of a positive result when applying for ATO discretion to claim exempt current pension income (ECPI) when the minimum pension requirements have not been met, according to a technical manager.
“Firstly, importantly, did the SMSF have the liquidity to pay the shortfall in the first place. Could they have paid the shortfall by 30 June. [It’s critical to establish] there was sufficient cash there. Don’t try if you haven’t got the cash,” SuperConcepts SMSF services executive manager Mark Ellem advised.
Being able to prove a third party error or a person adverse event played a role in the resulting minimum pension shortfall will also aid in getting the desired result when applying for ECPI discretion, he said.
Further, Ellem identified a good record of consistently meeting the minimum pension as another element that will assist to secure a positive ECPI discretion application.
“[It helps if] they haven’t got this record of constantly missing the minimum payment,” he said.
“Also a consistent payment pattern [will be useful] even if it’s not frequent.”
Ellem pointed out consistent payment did not mean an SMSF has to prove it makes fortnightly or monthly pension payments. A fund could be paying pension payments once or twice a year as long as it could be established there has been a frequency of payment in the past, he said.
The final element Ellem recommended be present for a successful application for ATO discretion to allow ECPI to be claimed is a deed of settlement.
“The deed of settlement with the ATO is just formalising the arrangement about what will result from the commissioner applying discretion and that is the regulator will amend the assessment and allow the deduction for the ECPI,” he explained.
“On the taxpayer’s side [it confirms] effective they will withdraw the objection because once the commissioner’s exercised discretion there is no need for the objection. [It also confirms] that the trustee will not claim interest on the amount of refund due.
“So it’s just a formalisation of the arrangement between the taxpayer, the fund and the commissioner.”
Ellem noted the ATO is the party that prepares and issues the deed of settlement as well as suggesting the SMSF not claim the ECPI deduction until after the application for ATO discretion has been made.