Your clients need to make minimum pension payments each year. If they don’t, their pension accounts lose their tax exempt status.
Minimum Pension Payments
The minimum pension payments for the 2018 and 2019 financial years (1 July to 30 June) are:
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 their pension account balance.
This seems to be the most recurring issue around pensions. You tell your clients how much to withdraw. And when you do the accounts, you realise they didn’t.
So you have to commute the pension back to accumulation, which takes time. And then you have the thankless task to tell your clients that they have to pay more tax or get less back than they thought because of this mishap.
However, bank fees and regular updates of the accounts make it possible to detect any shortfall before 30 June and to hence still ask your clients to fix the issue in time.
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. You got testamentary trusts for that.
You take your client’s age as of 1 July assuming a standard financial year from 1 July to 30 June. How old were they on 1 July?
Let’s say Bob turned 75 on 2 July 2018 and Sally turned 65 on 30 June 2018. So Bob only needs to withdraw 5% in 2018/19 since he was still 74 on 1 July. Sally needs to withdraw 5% since she was 65 on 1 July 2018.
Member account balance
You apply the percentage to the member’s ABP balances in pension phase as at 1 July. Not TSB which includes accounts in accumulation phase. And not TBA which doesn’t include investment earnings or losses since the start of the pension.
On 1 July 2018 Bob had a total superannuation balance of $4m with $1.7m in retirement phase and the rest in accumulation. His TBA is $1.6m. So the 5% applies to the $1.7m.
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 the pension balance as of that date – the commencement date.
So you need to determine the member balance including investment earnings and losses are for that member as of that day. In Class you just run a period update for the day before. In BGL you do the same – it might just be called something different. So most pensions start on 1 July. Saves you an extra period update.
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.
The minimum amount is rounded down to the nearest 10 whole dollars.
Let’s say Bob’s balance wasn’t exactly $1.7m but $1,712,345 – 5% is $85,617.25. So you advise Bob to at least withdraw $85,610.
You don’t need to worry about minimum pension payments in a year if the pension commences in June of that year.
So if Bob starts a pension on 1 June 2019 – no minimum pension payments for the 2019 financial year. Bob can still pay a pension, but he doesn’t have to.
If your client didn’t pay a high enough pension, they lose 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 your client makes the catch-up payment as soon as they become aware of the shortfall.
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.
Last Updated on 10 May 2019