Exceeding 10% transition to retirement pension payments?

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exceeding maximum pension payment cap on transition to retirement pension, 10%, transition to retirement income stream, TRIS, TRIP, ATOThe ATO has clarified what happens if the 10% maximum pension payment cap for a transition to retirement pension (TRIS / TRAP) is exceeded.

To begin with, what happens if an SMSF underpays a pension? Account based pensions and transition to retirement account based pensions have minimum payment amounts. Since 2013/14 this has been 4% for people under age 65.

TR 2013/5 income tax: when a superannuation income stream commences and ceases says that if the minimum pension payment is not met the pension is deemed to have ceased at the beginning of the financial year and any payments are treated as lump sums. This can have tax consequences for the super fund and the member.

However the ATO will allow some flexibility in these rules, according to this FAQ, where an honest mistake results in a ‘small underpayment’ or for “matters outside the control of the trustee.”

For more details see: SMSF missing the minimum pension payment amount?

But transition to retirement income streams, sometimes abbreviated to TRIPs or TRISs (transition to retirement income streams), have a maximum pension payment per year of 10%.

The same ATO FAQ says: “The exception does not apply to a TRIS which has paid a pension amount in excess of the maximum limit of 10% of the account balance.”

TR 2013/5 does not specifically mention the maximum pension payment amounts, but does say “a superannuation income stream ceases for income tax purposes if any of the requirements of the SISR 1994 relating to the payment of the superannuation income stream are not met in a financial year.”

The ATO has now reinforced that the same flexibility does not apply to overpayment of transition to retirement pensions as it does to underpayments, in a Q&A:

If payments are outside the allowable limits, the TRIS is automatically taken to have ceased for income tax purposes from the start of the financial year in question. This means your fund cannot claim a tax exemption on the income from the account supporting all the payments. It also means that all the payments made during the financial year will be treated as a lump sum and taxed at the individual’s marginal tax rate unless the payments are unrestricted non-preserved benefits.

Perhaps the ATO will codify this view in a ruling and also consider applying similar flexibility to the overpayment of TRISs as it does to underpayments?

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