Changes to tax law mean that for an SMSF to claim the current pension income deduction, the SMSF must be paying a pension that complies strictly with the SIS regulations  — including meeting minimum annual pension payments. This topic was discussed at a recent meeting of the National Tax Liaison Group (NTLG) in the context of the recent amendments to the Income Tax Assessment Act 1997 (ITAA).
The current position is that minimum annual pension payments must be made in the year in which they become payable (for the SMSF to claim a current pension income deduction).
Even so, there has been some relief for SMSFs struggling to make minimum annual pension payments. The SIS Regulations have been amended to halve the minimum payment amounts for account-based pensions in the 2008-09 and 2009-10 financial years. SMSF trustee(s) need to consult their advisor about the implications for their SMSF.
Not surprisingly, ensuring that minimum annual pension payments are being made is of particular importance given the impact the global financial crisis and economic downturn have had on the balances of many SMSFs' pension accounts.
SMSFs may claim as a deduction all ordinary and statutory income derived from assets set aside to pay a pension. To claim this deduction, the pension must comply with all the regulatory requirements for pensions under regulation 1.06 of the SIS Regulations. For present purposes, this includes the requirement that the annual minimum pension payment be made in the relevant year.
The view of the NTLG is that SMSFs should be able:
Although the ATO's initial view is that SMSFs cannot act in this way, it is currently considering the implications of failing to make minimum annual pension payments in the context of the current pension income deduction under the ITAA.
At least for the moment, SMSF trustee(s) wishing to claim the current pension income deduction must ensure that all pension amounts are paid in the year in which they are due.
The ITAA and the SIS Regulations
The NLTG noted the following:
SMSF pensions and the Global Financial Crisis
The ATO states its position regarding minimum annual pension payments and the economic downturn as follows:
If your fund fails to meet its minimum pension payment due to factors beyond your control, like being unable to liquidate assets due to current economic conditions despite taking all reasonable steps, it's generally unlikely that an offence against the operating standards in the super laws will occur.
How this approach would apply to individual circumstances is unclear. For example, will the ATO require SMSFs to liquidate shares at a major loss in order to meet pension payments?
Regardless, the ATO's position is that if minimum annual pension payments are not made, then the SMSF cannot claim the current pension income deduction. Until the ATO reconsiders its position or the legislation is amended, SMSF trustees should comply strictly with the ATO's view.
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.
More Cleardocs information on SMSFs — www.cleardocs.com
You can read earlier ClearLaw articles on a wide range of SMSF topics here.
Order SMSF related document packages
Arrange SMSF borrowing lending docs:
Download a checklist of the information you need to order a document package.
 Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).
 Section 295-385 of the ITAA
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.