If an income stream does not meet the SIS pension and annuity standards it is taken to have ceased at the beginning of that financial year for taxation purposes. This will trigger a transfer balance account debit for the member which occurs at a later time in that financial year.
Taxation consequences of not meeting minimum standards
To receive available tax concessions, a retirement phase income stream must meet the requirements of the SIS regulations, known as the ‘minimum standards. For example, the minimum standards require an account-based pension to make payments at least annually and pay a minimum amount of income payments during a financial year (among other requirements).
If an income stream fails to meet any of the minimum standards in a financial year it will be taken to have ceased at the start of that income year for tax purposes. This means any payments made from the superannuation interest in that year are taxed as lump sums rather than income stream payments and any income or capital gains are subject to tax as the assets are no longer considered to be supporting a superannuation income stream.
Note – there may be limited circumstances where the ATO will allow the superannuation interest to be treated as a superannuation income stream even though the minimum pension standards have not been met. Please see ATO document – SMSFs: Minimum pension payment requirements – frequently asked questions, for more information Click Here.
Transfer balance account consequences of not meeting minimum standards
Since 1 July 2017, failing to meet the minimum standards will also result in the income stream ceasing to be in the retirement phase and will trigger a debit in the member’s transfer balance account.
However, the timing of any debit will generally occur at a different time to when the superannuation income stream ceased for taxation purposes. That is, for the purpose of determining whether a member has a transfer balance account and the timing of any credits and debits, you are required to assume a superannuation income stream satisfied the minimum standards up until the time it’s possible to determine, based on the relevant facts and circumstances available at that time, that it had failed those standards.
For example, where a fund failed to pay a member any pension payments during a year, the income stream will cease to be in the retirement phase for transfer balance cap purposes from the end of 30 June as it’s only possible to determine the income stream failed the minimum standards from that time. Alternatively, where a fund failed to pay a pro-rata pension payment prior to a member fully commuting their pension, the income stream would cease to be in the retirement phase from the time of the full commutation.
In this case, the value of the debit for transfer balance cap purposes will be the value of the superannuation income stream interest immediately before the time it was possible to determine it had ceased to be in the retirement phase.
Additionally, any transfer balance account events that occurred prior to the income stream failing to meet the minimum standards, such as a credit for the commencement of the income stream in that year, will continue to be valid as they occurred prior to the time the income stream ceased to be in the retirement phase.
Case Study 1
Lewis commences a $1.3M account-based pension on 1 July 2017. His transfer balance account is credited $1.3M on 1 July 2017.
On 30 June 2018 Lewis’ account based pension had an account balance of $1.352M.
In July 2018 it is discovered that the fund had failed to pay the minimum amount required to satisfy the minimum standards by 30 June 2018 by a significant margin.
As a result, Lewis is taken not to have commenced a superannuation income stream on 1 July 2017 for tax purposes.
However, for transfer balance account purposes, the original $1.3M transfer balance account credit on 1 July 2017 will stand and $1.352M will be debited from his transfer balance account on 30 June 2018.
As a result Lewis will have a transfer balance account value as at the end of 30 June 2018 of -$52,000.
Case Study 2
At 1 July 2018, Maureen has an account based pension with a balance of $300,000. Maureen is required to draw at least 4% of the balance ($12,000) as income stream payments in 2018-19.
Maureen receives a $500 income payment from her account based pension each month for six months. On 15 January 2019, she commutes her remaining balance of $306,000 to rollover to another fund. She has not met the pro-rated minimum payment requirement for the 2018-19 financial year prior to commutation.
Maureen’s income stream ceases to be in the retirement phase on 15 January 2019 and $306,000 will be debited from her transfer balance account on that date.
Normally a commutation is a transfer balance account debit, however on this occasion a separate debit does not arise for the commutation on 15 January 2019 as the income stream ceased being in the retirement phase immediately before the commutation.
SMSF transfer balance account reporting implications
Where an income stream fails to satisfy the minimum standards in a year, an SMSF will need to report a debit to the ATO for that event via a Transfer Balance Account Report (TBAR) within the required timeframe.
Where an impacted SMSF had any members with a total superannuation balance of $1 million or more on 30 June the year before the first member started a retirement phase income stream, the fund will be a quarterly reporter and must report the value of the debit within 28 days after the end of the quarter in which it could be determined the income stream had failed the minimum standards.
For example, in Case Study 1 (above), Lewis’ SMSF would need to report the value of his account based income stream on 30 June 2018 ($1.352m) as a debit by 28 July 2018.
Alternatively, where all members of an SMSF had a total superannuation balance of less than $1 million, the SMSF can report at the same time the fund’s annual SMSF return is due.
For example, in Case Study 2 (above), Maureen’s fund would need to report the value of her account based income stream as at 15 January 2019 as a debit by the time the fund is required to lodge its annual SMSF return for the 2018-19 year. However, in this case Maureen’s fund may wish to consider reporting the debit much sooner to avoid any double counting if Maureen intended to commence a new income stream in the large fund.
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