By Tim Miller
Miller Super Solutions
Transition to Retirement Income Streams (TRIS) are a very popular strategy amongst retirees, particularly within the Self Managed Superannuation Fund (SMSF) Sector. Unlike their more flexible counterpart, the Account Based Pension, they can create problems if you don’t monitor them carefully. By being aware of the things to look out for you can take appropriate action to avoid the problems associated with a TRIS.
Having passed the halfway mark in the financial year the SMSF sector now enters lodgement season with all funds (other than prior year non-lodgers and self-lodgers) due for lodgement between 28 February and 5 June. The practical element of this means that many trustees will not receive their financial statements until late in the financial year allowing limited time to make adjustments to pension payments in accordance with the member balances. This of course will hopefully become a problem of the past as more and more funds migrate to real time administration platforms.
In the event that the members balance was higher at 30 June 2015 than the previous year this could result in a shortfall to the pension. Failure to pay the minimum will result in the pension ceasing at the commencement of the financial year i.e. 1 July 2015 and all payments being treated as superannuation lump sums, the ATO provide allowances where a member’s minimum pension is under paid by no more than 1/12th of the minimum obligation. In this instance the matter can be rectified as soon as recognised and the pension is deemed to still exist.
The problem with a TRIS is that for the most part they consist of preserved benefits which do not allow for accessing benefits as a lump sum. Therefore, the SMSF trustee/member could be hit with a double whammy where the pension ceases resulting in the Fund losing its tax exempt status but also the benefits are treated as lump sum payments from preserved component taxed at the member’s marginal tax rate plus the possibility of administrative penalties for failure to abide by the operating standards, all in all a very costly exercise. Of course to rectify the problem prior to 30 June is ideal as long as the SMSF has the liquidity to make a payment. The ability to transfer an asset other than cash is not possible.
For trustees paying a TRIS the problem is magnified because not only do they have to monitor the minimum pension obligation they also have to be aware of the maximum. Let’s assume a client regularly draws the maximum from their TRIS on a monthly basis but their balance at 30 June 2015 was lower than the previous year. This could result in them inadvertently paying over the allowable 10% and as with the minimum limit the result is that they have failed to pay a pension in accordance with the rules. Unlike the minimum pension requirement, there is no flexibility from the ATO so if you go over the maximum by the slightest of margins you have no recourse other than to approach the ATO and state your case to see if they will provide any leniency.
Often people try and rectify this situation by repaying the excessive amount back into their SMSF. This is problematic because the payment has still come out so that must be recognised but now you have to address the issue of contributions. As a member is in the transition stage they may have maximised their contributions for the year so the resultant repayment could also lead to an excess contribution liability which is gifting the ATO a great deal of tax they didn’t expect in the first instance.
So the message is clear, regular monitoring of a TRIS is imperative to ensure both the minimum and maximum limits are adhered to, to avoid any unnecessary associated penalty.
General advice warning:
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
Miller Super Solutions is the SMSF education & training creation of Tim Miller, assisting SMSF professionals and trustees with the practices associated with establishing, running and ultimately closing down SMSF’s.