May 2020

Overview

The primary tax concession for an SMSF that pays a retirement phase pension is the partial or potentially full exemption from fund income tax (15%) on eligible assessable income. However, this is put at risk where the minimum pension standards are not satisfied, as failing to pay the relevant minimum pension is a pre-requisite to the fund making the relevant claim for ‘Exempt Current Pension Income’ (ECPI).

Whilst the Government recently announced a temporary 50% reduction to the required minimum pension for certain pensions, for the financial years 30 June 2020 and 30 June 2021, the pre-requisite minimum pension requirement still applies.

Payment of a retirement phase pension to an SMSF member provides tax concessions, provided that the pension standards are met during a financial year.

Trustees must ensure at least the minimum required pension payment is made to the member on an annual basis (as either a one-off yearly payment or a series of payments over the financial year) for the retirement phase income stream to be eligible for the following tax concessions:

• Earnings received from assets held to support retirement phase pensions are tax-exempt (fund can claim ECPI).
• Pension payments are taxed as a superannuation income stream benefit payment (i.e. as a pension payment rather than a superannuation lump sum).

If you wish to keep your pension on foot, do not let it fail the requirements!

 Let’s look at a case study below  that shows what can go wrong when the minimum pension payment is not made to the member and the potentially disastrous implications it may cause.