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Minimum pension amounts must be paid on or before 30 June
It is vitally important that individuals receiving retirement phase pensions should ensure that they pay the minimum pension amount in respect of the 2018/19 financial year. The minimum pension amount must be paid on or before 30 June 2019.
What are retirement phase pensions?
These are pensions which are in retirement phase and consequently entitled to exemption from the tax on investment earnings. Retirement pensions (ie account-based pension payable to an individual who has retired or attained age 60) and beneficiary pensions (ie account based pensions payable to an individual from the death benefit of another individual, or because the pension has transferred by reason of the death of another individual).
What about transition to retirement pensions?
Before a transition to retirement pension becomes a retirement phase pension – there is no loss of the earnings tax exemption if the minimum payment amount is not paid.
Once a transition to retirement pension becomes a retirement phase pension (typically because the member receiving the pension has attained age 65 or becomes retired for super purposes, or because the member receiving the pension has died and the pension has transferred to another person) then there will be a loss of the earnings tax exemption if the minimum payment amount is not paid.
What is the minimum pension amount?
This is a specified percentage of your pension account balance as at 1 July 2018.
The specified percentage depends on your age as at 1 July 2018 as follows
- 4% if aged under 65
- 5% if aged 65 to 74
- 6% if aged 75 to 79
- 7% if aged 80 to 84
- 9% if aged 85 to 89
- 11% if aged 90 to 94
- 14% if aged 95 or more.
How is the minimum pension amount calculated?
If your pension balance at 1 July 2018 was $650,000 and your attained age was 80 then the minimum pension amount is simply 7% of $650,000 or $45,500.
The amount is rounded to the nearest $10 with an amount ending in $5 being rounded up.
What if the pension commenced part way during the financial year?
In this case the minimum amount is pro-rated for the number of days the pension was payable during the financial year.
Must the minimum pension amount be paid in cash on or before 30 June 2019?
The minimum pension amount must be paid in cash. The minimum pension amount cannot be paid by way of transfer of assets.
Can the super fund "owe" the unpaid portion of the minimum pension amount?
A fund can only "owe" the unpaid portion of the minimum pension amount at the cost of losing the earnings tax exemption in respect of the particular pension.
Can you carry forward an excess of the minimum pension amount from an earlier financial year to the current financial year?
In short, no. A payment in excess of the minimum pension amount for a previous financial year cannot carried forward to offset an underpayment of the minimum pension amount for the current financial year.
What happens if two or more retirement pensions are being paid during 2018/19?
The minimum pension amount applies separately to each pension. Strictly, an overpayment on one pension cannot be used to support an underpayment of another pension.
However, as the method of determining whether there has been underpayments in respect of two or more pensions is done on a global basis, an underpayment is not detected if the aggregate of pension payments are sufficient to satisfy the minimum pension payment of all the pensions.
If there has been a pension underpayment for 2018/19 what can be done?
Obviously, the best practice is not to be in this position.
However, if the underpayment is due to an honest mistake by the trustee or due to matters outside of the control of the trustee, then the ATO will generally exercise its administrative discretion to disregard the pension underpayment and the pension underpayment will not adversely affect the entitlement to the earnings tax exemption if the following apply:
- the only reason for the earnings tax exemption not applying is due to the pension underpayment
- the trustee has not previously had the benefit of the ATO’s administration discretion to disregard a pension underpayment
- the trustee, on becoming aware of the pension underpayment, either
- immediately makes a catch up payment in the following financial year or
- identifies a payment made in the following financial year as if it were made in the previous financial year
and in either case the payment (the catch up payment or the identified payment) is not more than the minimum necessary to eliminate the pension underpayment
- the catch up payment or the identified payment cannot be counted as satisfying the minimum pension amount for the following financial year.
For this purpose, a small underpayment is less than 1/12th of the minimum pension amount.
If there is a pension underpayment and the above do not apply then, generally, the ATO is unlikely to be inclined to disregard the underpayment.
What happens if there is an underpayment and it cannot be disregarded?
In this case the fund will not be entitled to claim the earnings tax exemption in respect of the pension for the entire financial year in which the underpayment occurred
Contributions must be received on or before Sunday, 30 June 2019
If a contribution is to be treated as being received in respect of the 2018/19 financial year, then the trustee must receive the contribution on or before the last day of the financial year – which is Sunday, 30 June 2019.
A contribution will be received by a trustee -
- in the case of a cash payment - on receipt of the cash payment
- in the case of a payment by cheque - so long as the cheque is dated on or before 30 June 2019, in the possession of the trustee on or before 30 June 2019 and presented for payment within a reasonable period of time of receipt by the trustee
Example - a contribution is made by cheque; the cheque is dated 29 June 2019, the cheque is handed to the trustee on 30 June 2019 and the trustee presents the cheque for payment on or before 5 July 2019 – the contribution will be treated as being received in the 2018/19 financial year
- if the cheque is dishonoured on presentation - then no contribution has been made
- if the cheque is presented more than one week after receipt by the trustee - the trustee is living dangerously and the ATO may not accept that the contribution has been effected in the 2018/19 financial year
- in the case of electronic funds transfer - the contribution will be treated as being received when a credit entry is made to the bank account of the fund. If the transfer is done in real time, then a transfer on 30 June 2019 may be effective to be a contribution in respect of the 2018/19 financial year. If the transfer is not done in real time but effected at some later time as a batch transaction, then the credit may only appear in the trustee’s bank account on or after 1 July 2019 (even though it appears to be disappeared from the contributor's bank account before 1 July 2019), in which case the contribution will be taken to have been made in respect of the 2019/20 financial year
- in the case of in specie contributions of tangible property - the contribution will be made when delivery is effected ie the trustee has possession of the tangible property
- in the case of in specie contributions of intangible property - the contribution will be made when the trustee has possession of whatever title documents/transfer documents are required to effect the transfer and the trustee is in a position to immediately register the transfer without any further assistance of the contributor
- in the case real estate – when the trustee has received the completed and signed (by the transferor) transfer form and the trustee is in the legal position (subject only to the payment of any relevant registration fees) to immediately register the transfer.