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ATO points to biggest issues with pensions, property

The ATO has outlined some critical issues it’s seeing with pensions for SMSFs that hold property, and has urged professionals to assess their clients’ circumstances for key risks.

News Katarina Taurian 30 July 2015
— 1 minute read

The tax office has reiterated several times that it will target SMSFs in pension phase as part of its SMSF compliance program.

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Earlier this week the ATO’s director in superannuation, Mary Simmons, expressed concern about SMSFs in or transitioning to pension phase that hold illiquid assets such as real property.

“The big issue that we’re seeing now though, in meeting the minimum pension requirements, is around liquidity issues,” Ms Simmons told delegates at the SMSF Association’s state technical conference in Sydney.

“We’re concerned by funds that have moved into pension phase but haven’t necessarily adjusted their investment strategy to take into account that ongoing pension payment,” she said.

“The biggest issue we’re finding is where real property is the major asset of the fund.”

Ms Simmons said in the “simplest of cases” the ATO is finding that the net rental income return on a fund’s real property investment is insufficient to cover pension payments.

“It might start off OK in the early years, but as your pension drawdown increases and you’re not adjusting your investment strategy, that’s where the problems become more and more serious,” she said.

Professionals should also keep in mind that, in times of economic downturn, such as the Global Financial Crisis, generating sufficient rental income can be particularly problematic, Ms Simmons said.

Apart from property, Ms Simmons also pointed to a common and “surprising” issue that persists with SMSF pensions.

“It’s very simple, but you would be surprised at how many people get it wrong – the simple application of the wrong pension drawdown percentage,” Ms Simmons said.

“That could be because people have turned a different age, perhaps they are on the cusp or they just apply the same rate as the year before.”

ATO points to biggest issues with pensions, property
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