SMSFs: Minimum pension payment requirements – frequently asked questions

Once an account-based pension commences, there is an ongoing requirement for you, as trustee of a complying superannuation fund, to ensure the pension standards in the super laws are satisfied. This includes meeting the minimum pension payment requirements.

This document provides answers to a number of frequently asked questions (FAQs).

This information also applies to complying super funds which started a super income stream in the form of an allocated pension on or before 19 September 2007.

Find out more about temporarily reducing superannuation minimum payment amounts.

What if a trustee fails to meet the minimum pension payment requirements under the Superannuation Industry Supervision (SIS) Regulations?

If a fund fails to meet the minimum pension payment requirements in an income year, the super income stream will be taken to have ceased at the start of that income year for income tax purposes.

From the start of the income year the account is no longer supporting a super income stream. Any payments made during the year will be super lump sums for both income tax and SIS Regulations purposes.

This is the case even if the member remains entitled to receive a payment from the fund for the pension under the governing rules or under general trust law concepts.

If the income stream is in the retirement phase, the fund will not be entitled to treat income or capital gains as exempt current pension income (ECPI) for the year.

Note: From 1 July 2017, earnings from assets supporting a transition to retirement income stream (TRIS) will not be eligible for ECPI if the income stream is not in the retirement phase and will be taxed at 15%. This will apply to all TRIS regardless of the date the TRIS commenced.

What if the trustees have failed to meet the minimum pension payments in one year but in a subsequent year are prepared to meet the minimum pension requirements as required under the SIS Regulations?

If the relevant rules are again complied with in a following income year, this results in the commencement of a new pension. The trustee will need to revalue assets at market value and recalculate the minimum pension payment required at the start of the new pension.

For more information on the relevant tax law, read TR 2013/5 Income tax: when a superannuation income stream commences and ceases

Are there any circumstances where the Commissioner of Taxation will allow an income stream to continue, even though the minimum pension standards in the SIS Regulations have not been met?

If the total payments in an income year to a member are less than the minimum payment amount for a super income stream, the Commissioner may allow an income stream to continue where all of the following conditions are satisfied:

1. The trustee failed to pay the minimum pension amount in that income year because of either  
   1. an honest mistake made by the trustee resulting in a small underpayment of the minimum payment amount for a super income stream
   2. matters outside the control of the trustee.
    
2. If the income stream was in the retirement phase, the entitlement to the ECPI exemption would have continued but for the trustee failing to pay the minimum payment amount.
3. Upon the trustee becoming aware that the minimum payment amount was not met for an income year, the trustee makes a catch-up payment as soon as practicable in the following (current) income year; or treats a payment (intended prior year payment) made in the current income year, as being made in that prior income year.
4. Had the trustee made the catch-up payment in the prior income year, the minimum pension standards would have been met.
5. The trustee treats the catch-up payment, for all other purposes, as if it were made in the prior income year.

If all of the above mentioned conditions are satisfied:

• The super income stream is taken to have continued and a new pension is not commenced in the following year. The proportioning rule does not need to be applied again to determine the tax free and taxable components.
• If the income stream was in the retirement phase, the trustee of the fund can continue to claim an income tax exemption for earnings on assets supporting that pension, notwithstanding the fund's failure to meet its obligations under the super law.
• Any payments made to the member during that income year are treated as super income stream benefit payments (that is, pension payments) and not super lump sums.

If the circumstances of the underpayment do not meet all of the conditions set out above, the super income stream will be taken to have ceased at the start of the income year for income tax purposes.

From 1 July 2017, ECPI has been extended to deferred lifetime annuities. Although a deferred lifetime annuity may be purchased today, the income stream won’t commence until several years later, when the purchaser reaches a condition of release. There are certain conditions of release for when a deferred lifetime annuity is considered to be in retirement phase and a fund can claim ECPI. See LCG 2016/9 Superannuation reform: transfer balance cap for more information.

Does the exception apply to transition to retirement income streams?

Note: The exception currently applies to all account-based income streams, including a transition to retirement income stream (TRIS). However from 1 July 2017 earnings from assets supporting a TRIS that is not in the retirement phase will not be eligible for ECPI and will be taxed at 15%. This will apply to all TRIS regardless of the date the TRIS commenced. Therefore, the ECPI component of the exception would not be relevant for a non-retirement phase TRIS. There are other consequences for failing to meet the standards though, and these would be considered.

A TRIS is an account-based income stream if it has all of the following general characteristics:

• it requires a minimum annual payment to be made
• the account balance cannot be added to by a contribution or roll-over
• if the member dies, it cannot be paid to a non-dependant beneficiary.

Where the TRIS meets all the standards of an account-based income stream and the trustee has failed to pay the annual minimum pension amount, the exception may be considered.

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.

For more information, read SMSF – transition to retirement income streams.

Does the exception apply to an allocated pension commenced prior to 19 September 2007?

The exception applies to an allocated pension, commenced prior to 19 September 2007, which continues to be paid under the previous pension payment standards.

Where a choice is made to start paying the allocated pension under the new minimum pension standards (commonly referred to as the account-based pension standards) the exception may also be considered. The choice to operate under the new minimum pension standards, any time after 1 July 2007, must be permitted by the rules of the fund and does not require the start of a new pension.

For more information, read pension standards for self-managed super funds.

How does the exception apply to an SMSF paying multiple pensions?

Where an SMSF is paying more than one pension to one or more members, the minimum pension payment requirements must be satisfied for each pension.

Where the trustee fails to meet the minimum pension payments for one or more pensions, the conditions for the exception must be considered with respect to each pension.

What does the Commissioner consider to be a 'small' underpayment?

The Commissioner considers a small underpayment to be one that does not exceed one-twelfth of the minimum pension payment in the relevant income year. For super income streams that commence part way through the year this amount is taken to be one-twelfth of the minimum annual pension payment amount and not the pro-rated amount.

Where the underpayment exceeds one-twelfth of the minimum pension payment the trustee will need to provide details of the circumstances that affected their ability to make the minimum pension payment. Each case will be considered separately on its own merits.

What does the Commissioner consider to be 'as soon as practicable'?

Generally, if the underpayment is due to an honest trustee error, the Commissioner considers 'as soon as practicable' to be within 28 days of the trustee becoming aware of the underpayment.

If the underpayment is due to matters outside the trustee's control, 'as soon as practicable' is considered to be within 28 days of the trustee being in a position to be aware of the underpayment.

Under what circumstance would we allow a trustee to apply the exception?

We will allow the trustee to apply the exception if all of the following apply:

• failure to meet the minimum pension requirements was an honest mistake or was outside the control of the trustees
• the underpayment is only small (that is, does not exceed one-twelfth of the minimum annual pension payment)
• all of the other conditions have been met
• the trustee has not previously applied the exception for failing to meet the minimum pension payment requirements.

In all other cases the trustee will need to write in and outline why they did not meet the minimum pension payment requirements. We will consider the fund's eligibility to the exception and, if applicable, whether the trustee can continue to claim ECPI.

What if the trustee fails to make the minimum annual pension payment for multiple years?

Where a fund has previously applied the exception, the trustee cannot meet the conditions to apply the exception again. The trustee would need to write in and we would need to consider the circumstances of the individual case to determine whether the exception can be applied.

When should a trustee write in and request the Commissioner consider the application of the exception?

A trustee will need to write in and outline why they did not meet the minimum pension payment requirements for us to consider their entitlement to the exception, where either – they have:

• not met all of the conditions as set out above to self-assess and apply the exception
• previously, either through self-assessment or at the Commissioner's discretion, applied the exception for not meeting the minimum pension payment requirements.

When requesting the Commissioner consider an application of the exception, a trustee will need to provide details of the circumstances that affected their ability to make the minimum pension payment. Each case will be considered on its merits.

To ensure a fair and reasonable outcome is achieved in each case, the decision will be made in accordance with the statements and principles set out in the Taxpayers' charter, compliance model, and the good decision-making model (which requires that the decision be legal, ethical, overt, sensible, timely and in accordance with the principles of natural justice).

Can the trustee record the underpayment of the pension as an 'accrual' in the accounting records of the fund?

No, for a trustee to meet the minimum pension payment standards they must meet the payment requirements both in form and effect. It is not enough for the rules of the pension to state a payment will be made in each year if the payment for a particular year is not actually made.

If a trustee fails to make the minimum pension payment in an income year, the pension will have been taken to have ceased at the start of that income year for income tax purposes, unless we apply the exception.

This applies even if the member remains entitled to receive a payment from the super fund for the purported income stream under the governing rules or under general trust law concepts and the trustee records the underpayment as an 'accrual' to recognise that liability.

The purpose of the exception is to allow a catch-up payment to be made (i.e. paid) in a following income year in satisfaction of the SIS Regulations in the year there was an underpayment. This requires the trustee to treat the catch-up payment, for all purposes, as if it were made in a prior income year. The ATO accepts that this will require the fund to account for the pension payment as an 'accrual' in the year of the underpayment to correctly reflect that it is not within the pension payments in the year the catch-up payment is made.

When does the exception for underpayments apply?

The exercise of the exception to allow a superannuation income stream to continue, despite the fund having failed to meet the minimum pension payment requirements, applies to underpayments on or after 1 July 2007.