Running an SMSF is not an easy thing to do. Not only does it require a decent level of commitment to look after the investments of the fund, the compliance and administration obligations imposed on trustees are significant and can in certain circumstances be quite onerous.
And trustees cannot take any of these responsibilities lightly because regardless of any mitigating circumstances, the regulator will ultimately hold them responsible for whatever happens to the fund – a result of the trustee declaration an individual must sign before the establishment of an SMSF.
This fact is widely acknowledged, but don’t be expecting the situation to change to make life easier for trustees anytime soon. In fact, in reality, a lot of recent developments would suggest exactly the opposite.
Firstly, there is the proposed Division 296 tax, the 15 per cent impost on total super balances of $3 million or over that will mean more administrative duties for superannuants caught by the measure. If nothing else it will place greater emphasis on the valuation of assets from 1 July 2025.
However, the good news is this policy may not actually be introduced, especially if Labor is not returned to government at the next election, so hope springs eternal there.
But a recent update to an existing ATO taxation ruling (TR) has definitely made the administrative aspect of an SMSF with a pension account slightly more challenging. I’m referring to the latest version of TR 2013/5 Income tax: when a superannuation income stream commences and ceases.
All sounds pretty mundane and the unanimous opinion among SMSF technical specialists was the update in question was going to be just that. And they had good justification for thinking so because the basic premise of the revision was to make the operation of income streams align with the introduction of the transfer balance cap and the draft update reflected this.
However, when the final revised version of TR 2013/5 was released, it contained details with a significant change as to how existing income streams are treated if trustees do not meet the minimum pension payment requirement for a given income year.
Unfortunately, trustees do often breach this obligation, but until now it was really an inconvenience from a tax perspective but not such a big deal in terms of the operation aspects of the fund. In most cases trustees would forget to draw down the minimum pension amount in one year and then recommence the very same payment amount in the following year.
With regard to tax, it meant the income stream would be considered invalid for the year in which the breach occurred and the SMSF was not permitted to claim exempt current pension income for that period. Further, if the minimum pension payment was once again met in the following financial year, the pension would be allowed to resume as if no compliance breach had ever happened.
But this recommencement of the existing pension under these circumstances will now no longer be permitted. Instead, the income stream in question will have to be commuted, or stopped, and a new one established in the following year should the trustees still want to draw from a pension.
Of course, this comes with plenty of new administration hassles, such as having to revalue the assets supporting the income stream and recognise transfer balance account movements related to the cessation of one pension and the commencement of another.
These implications are only the tip of the iceberg as an extensive analysis is not possible in the context of this editorial.
But there are two distinct takeaway messages from this tax ruling update. One being it is more important than ever for trustees to meet their minimum pension obligations and the other is the running of an SMSF is unlikely to get any easier in the future.
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