SMSF members who are receiving retirement pensions or transition to retirement pensions (TTR’s) need to ensure that they make their minimum pension payments from their SMSF before the 30 June 2017.
With less than two weeks to the end of the financial year, this could easily be a potential oversight by many SMSF pension recipients.
What are the tax benefits of being in pension stage
The earnings on pension accounts are not subject to income tax nor capital gains tax, they are tax exempt. Needless to say this is potentially a sizeable tax benefit. The average balance of a member in a SMSF in pension stage is $500,000. Say that pension account earns a modest 5% per annum, there will be no tax on the earnings of $25,000.
However, to qualify for this tax benefit the member must be in pension stage and receiving the minimum pension payment. Many pension recipients leave it to the end of the financial year, so that the capital is left in the pension account as long as possible. They leave the money in the pension account as long as possible so that the investment return of the account is maximised and not subject to income tax.
What are the implications if the minimum pensions is not paid
If a fund fails to meet the minimum pension payment requirements in an income year the super income stream will be taken to have ceased at the start of that income year for income tax purposes.
From the start of the income year the account is no longer supporting a super income stream and any payments made during the year will be super lump sums for income tax purposes.
This is the case even if the member remains entitled to receive a payment from the fund for the pension under the governing rules.
This means the fund will not be entitled to treat income or capital gains as exempt current pension income for the year. Income tax may be assessed at 15% of the earnings of the asset and 10% tax may be levied on any capital gains.
Should you have any queries in relation to retirement pension or transition to retirement pensions please feel free to contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.