As soon as you start a pension with your super, you need to make minimum pension payments each year to keep your pensions tax-free status.
Minimum Pension Payments
The minimum pension payment percentages have changed over time and could change again. However, since 2013 the percentages have remained as is. Here are the percentages for the 2020 tax year (1 July to 30 June):.
4% if you are under 65
5% if you are under 75
6% if you are under 80
7% if you are under 85
9% if you are under 90
11% if you are under 95
14% if you are 95 or older
You apply the percentage to the opening balance of a pension account balance.
Purpose
The purpose of minimum pension payments links back to the sole purpose test. Super is meant for retirement. Not to transfer wealth to future generations. So the legislator wants you to spend your super.
Age
You take your age as of 1 July assuming a standard financial year from 1 July to 30 June. How old were you on 1 July?
Let’s say you turned 65 on 30 June while your spouse turned 65 two days later on 2 July. As a result, you were 65 on 1 July and as a result need to withdraw 5%. Your spouse on the other hand was still 64 and hence gets away with just 4% of minimum pension payments.
Member account balance
You apply the percentage to your account based pension (ABP) balances as at 1 July. Not your total superannuation balance (TSB) which includes accumulation. And not the transfer balance account (TBA) since the TBA doesn’t include past investment earnings or losses since the start of the pension.
Let’s say on 1 July you had a TBA of $1.6m while your TSB was $4m with $1.7m in retirement phase and the rest in accumulation. In this example, your minimum pension payments are 5% of $1.7m.
Date
If the pension commenced before the 1 July, you use the member balance as of 1 July.
If the pension commences during the year, you use your pension balance as of that date – the commencement date. So you need to determine the balance including investment earnings and losses as of that day. In Class and BGL you just run a period update.
But most pensions start on 1 July. Saves you an extra period update.
Pro Rata
If the pension commences after 1 July, the minimum payment amount is calculated proportionately to the number of days remaining in the financial year, starting from the commencement day. Another reason why a pension start on 1 July is less work.
Rounding
The minimum amount is rounded down to the nearest 10 whole dollars.
Let’s say your balance was $1,712,345 and 5% of that is $85,617.25. So your minimum pension payment is $85,610.
1 June
You don’t need to worry about minimum pension payments in a year if the pension commences in June of that year.
So if you start a pension on 1 June – no minimum pension payments for that financial year. You can still pay a pension, but you don’t have to.
Below Minimum
If you didn’t pay a high enough pension, you lose your ECPI status for that account. The super income stream for that account is taken to have ceased at the start of that income year for income tax purposes.
You commute the account based pension back to accumulation as of 1 July and recognise 15% tax on any income for that year. And then report the commutation in the next TBAR.
You might be able to apply the Commissioner’s discretion if this is an honest mistake or due to matters outside of your client’s control. In that case the account can keep its ECPI status and no need to commute.
An honest mistake only counts as such if the shortfall is less than 1/12 of the minimum payment and you make the catch-up payment as soon as you become aware of the shortfall.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.