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ATO, Pensions

COVID-19 creates pension drawdown headache

low income pension

Trustees drawing a pension based on low income producing assets still need to draw the minimum amount and can't sidestep that requirement, the ATO has said.

SMSF trustees relying on property assets to fund a pension will still be expected to draw down the revised minimum amount, even if income from those assets had decreased, or risk losing their exempt current pension income status, according to the ATO.

ATO SMSF segment assistant commissioner Dana Fleming said that even under the revised minimum pension drawdown amounts announced in response to the impact of COVID-19 on investment markets, all pensions were still required to satisfy the minimum pension requirements.

“That’s a hard-and-fast rule. If a pension cannot meet the minimum requirements, then the effect is you can lose your current pension income exemption from the beginning of the financial year,” Fleming said explained.

She added the trustees drawing a pension could not avoid meeting the minimum amounts and would have to consider exiting the pension to meet their obligations.

“If trustees don’t have sufficient cash or liquidity put aside to meet that minimum pension payment, there are limited options available to them,” Fleming said.

“They could commute the pension and attempt to satisfy the minimum payment for the period the pension was on foot.

“This is why the government offered the reduction in minimum payments because they recognised the impact on markets, and that extends to property and shares, and that it would be more difficult to comply.”

Responding to a question on whether it was possible to ‘hibernate’ a pension to avoid commutation and the creation of a transfer balance account report (TBAR), Fleming said this was not possible, but something to consider ahead of future events like the COVID-19 downturn.

“I wish the [Income Tax Assessment] Act had a hibernation clause and that could be something that might be worth thinking about in the longer term to deal with these kinds of situations, but at present there are no provisions that allow anyone to hibernate a pension for a portion of the year,” she noted.

“The only available options are to commute and go through the documentation process and report it on the TBAR, and if recommencing a pension, to go through the process of establishing a new pension with new documentation and report the commencement of the pension on the TBAR.

“It is not a streamlined process, but that is where we are with the law’s requirements.”

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