On 26 June 2024, the ATO released their long awaited update of Taxation Ruling (TR) 2013/5.
When the original draft update was released on 27 September 2023 for public consultation and comment, the industry considered the ATO view to be basically unchanged from the original version released 10 years prior.
Industry practice has been along the lines of ‘rectify the pension shortfall in the following year and everything is back on track’. Of course, there would be no pension ECPI claim for that year, as well as a requirement to lodge a TBAR for the pension effectively ceasing and recommencement on 30 June (the reported values would typically be the same, so no real TBAR issue).
On a closer reading of the June 2024 release, there may be cause for concern in relation to the various implications of an income stream not meeting the minimum pension requirements in a particular financial year.
The ATO hasn’t confirmed what their updated approach is yet, however, the industry is now speculating what could be.
The main question that arises is around the pension recommencement.
The member and trustee will be confirming the recommencement of the pension, and that won’t automatically happen on 30 June / 1 July anymore. It could be much further into the next financial year when the issue is realised and rectified.
The below list is a compilation of possible issues gleaned from the Ruling itself and recent industry commentary that will highlight the seriousness of the situation.
The ideal situation is for all trustees to ensure they meet the minimum pension standards each year.
• TBA debit – original pension ends on 30 June when the member didn’t meet minimum
• TBA credit – new pension will re-commence sometime after 30 June
○ likely to be different amounts – member needs to consider action if excess TBA
• No / reduced ECPI claim in the income year when pension failed
• Following year, ECPI claim to commence only when the pension is restarted by the member
• Significant loss of tax concessions
• Unable to commute to accumulation … lump sum payment to member required
• Trustees are required to re-calculate tax components for the new pension
• And for each benefit payment from the failed pension
• Could be a mixing of accumulation/pension accounts – may upset the estate planning strategy?
• Pensions are considered a financial product – advice including stopping and starting pensions is considered financial advice
• Is a new Statement of Advice required?
• If no pension is ‘on foot’, maybe payments from the account are ‘illegal early access’ (e.g. TTR / TRIS)
• A small ‘silver lining in the cloud’
• “An honest mistake, resulting in a small underpayment”
