The Australian Taxation Office (ATO) has recently provided updated guidance on their website regarding the cashing requirements as a reversionary pension from a death benefit. In particular, this update provides some ‘concession’ for beneficiaries where for some reason the minimum pension is failed during an income year.

Where the minimum pension has not been met for a financial year, the ATO confirms through TR 2013/5 (when a pension commences and ceases) that the pension will stop at the start of the financial year and any payments taken throughout the income year will be treated as lump sums. Furthermore, the fund will be denied any earnings tax exemption (ECPI) for the income year. For transfer balance cap purposes, the fund will be required to lodge a TBAR to report the cessation of the pension at the end of the income year (not the start, when the tax exemption ceases).

Cashing rules

The industry view held was that where the minimum pension requirements have failed with a reversionary pension, the only alternative would be to take the death benefit as a lump sum. This could be a diabolical outcome in some circumstances where there is little or no scope to crystallise assets to pay out the death benefit.

It now appears, however, that the regulator is providing some leniency is these circumstances. If a contravention has occurred (failing to take the minimum pension), so long as the trustees act swiftly to cash the benefit ‘as soon as practicable’ to prevent further possible contraventions, an income stream can be re-established.

According to the ATO, this can be achieved by:

immediately cashing the benefit in the form of a new retirement phase income stream as soon as they become aware of the breach (likely to be identified during the annual compliance process);
cashing the benefit in the form of a lump sum (either as a single lump sum or as an interim and final lump sum); or
rolling over the interest that supported the death benefit income stream pension to another complying super fund for immediate cashing as a new death benefit income stream.

Effectively what the ATO have advised is that in such situation, the following process can be considered where a reversionary beneficiary fails to meet the minimum pension within an income year:

See whether the pension shortfall qualifies to use the Commissioner’s GPA
Promptly purchase another income stream (further cashing event, following SISR 6.21)
Otherwise, lump sum from the super system (cashing of death benefit)

The ATO has indicated that they will be reviewing all of their web content on this issue to ensure that messaging is consistent with these views.