• 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 super 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.

    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 and 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.

    This means the fund will not be entitled to treat income or capital gains as exempt current pension income (ECPI )for the year.

    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.

    See also:

    Are there any circumstances where the Commissioner will allow an SMSF to continue to claim ECPI, 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 the fund to continue to claim ECPI 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. 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.
    • 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.

    Does the exception apply to transition to retirement income streams?

    The exception applies to all account-based income streams. A transition to retirement income stream (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 streams 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.

    See also:

    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.

    See also:

    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.

    Example: The trustee does not satisfy the minimum pension payment for one member but does for another member in an income year.

    The fund has two members both in receipt of a pension. Member A is in receipt of Pension 1 and received income greater than the minimum required. Member B is in receipt of Pension 2 and received less than the minimum required.

    The trustee must ensure that each pension meets the minimum pension payment requirements.

    Subject to satisfying all of the conditions, the trustee may be able to apply the exception to treat the fund as having continuously paid Pension 2 despite the underpayment.

    If the conditions are not satisfied, the fund will not be able to claim ECPI with respect to the income derived from the assets supporting Pension 2.

    Example: One member receives two pensions and the trustee does not satisfy the minimum pension payment for one pension but does for the other

    Member A is currently in receipt of two pensions from the fund. The member has withdrawn an amount well in excess of the minimum required from Pension 1 but failed to meet the minimum pension required from Pension 2.

    The trustee must ensure that each pension meets the minimum pension payment requirements. It is irrelevant that the combined income received by Member A from the two pensions equates to an amount greater than the combined minimum pension payments required.

    Subject to satisfying all of the conditions, the trustee may be able to apply the concession to treat the fund as having continuously paid Pension 2 despite the underpayment and continue to claim ECPI.

    End of example

    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.

    Example: The trustee does not meet the minimum pension requirements for the year ending 30 June due to a transposition error which resulted in a small underpayment

    In considering whether the exception would apply, the trustee would need to assess if all of the following apply:

    • payments were made during the year and the failure to meet the minimum pension payment requirements by 30 June was due to an honest administrative error
    • the amount of the underpayment was small
    • a catch-up payment was made as soon as practicable, in the following income year.

    Based on satisfying all of the above conditions, we will allow the trustee to apply the exception. Therefore, notwithstanding the fund's failure to meet its obligations under the super law:

    • the super income stream does not cease and a new pension is not started in the following year

    the trustee continues to claim an income tax exemption for earnings on assets supporting that pension.

    Example: The trustee fails to meet the minimum pension requirements for the year ending 30 June due to being on jury duty and the case running for longer than advised in the jury summons.

    In considering whether the trustee can self-assess and apply the exception, the following conditions must be satisfied:

    • payments were made during the year and the failure to meet the minimum pension payment requirements by 30 June was due to a circumstance that was outside the control of the trustee
    • the amount of the underpayment was small
    • a catch-up payment was made as soon as practicable, in the following income year
    • the trustee had not previously been granted the exception for failing to meet the minimum requirements.

    Based on satisfying all of the above conditions, we will allow the trustee to self-assess their entitlement to the exception to treat the SMSF as having continuously paid a super income stream.

    Example: The trustee incorrectly calculates the minimum pension requirement

    The trustee makes an honest administrative error when calculating the minimum pension payment in the relevant income year. The trustee used the incorrect minimum pension payment concession (50% instead of 25%) to calculate the July 2011 pension payment as this was the percentage they had used in the previous year and there was a delay in updating their computer system.

    The trustee needs to assess if all the following apply:

    • payments were made during the year and the failure to meet the minimum pension payment requirements by 30 June 2012 was due to an honest administrative error
    • the amount of the underpayment was small
    • a catch-up payment was made as soon as practicable, in the following income year (for example, 2013).

    Based on satisfying all of the above conditions, we will allow the trustee to self-assess their entitlement to the exception to treat the SMSF as having continuously paid a super income stream.

    Example: Trustee had to travel overseas on short notice to attend to a crisis related to their business and does not make the June monthly pension payment until the following income year.

    In considering whether we would exercise the exception ,the following must be taken into account:

    • if the trustee made an honest mistake
    • if the underpayment is small and does not exceed one-twelfth of the minimum annual pension payment requirement
    • if the trustee has always met minimum pension payment requirements in the past
    • if the trustee made a catch-up payment as soon as practicable.

    Based on satisfying all of the above conditions, we will allow the trustee to apply the exception to treat the SMSF as having continuously paid a super income stream.

    End of example

    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 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 and continued to claim ECPI, 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).

    Example: A trustee is overseas and does not make the annual pension payment until the following income year

    We would take into account that this is not a small underpayment as it exceeds one-twelfth of the minimum annual pension payment.

    This would not ordinarily be a case where the Commissioner would treat the pension as continuing and a trustee would need to demonstrate that matters outside of their control affected their ability to meet the minimum pension requirements. Only then can we consider whether the other conditions relevant to the exception can apply. Each case would be considered on its own merits.

    Example: Minimum pension payment requirements were not met due to factors outside of the trustee's control

    Both members of a two member SMSF are injured in a car accident just before the final pension payment for the relevant year. The trustees were both incapacitated and spent extended periods of time in hospital recovering from their injuries. Due to this they were unable to make the payment prior to 30 June. The payment is made in August of the following income year.

    In this case, we would need to consider all the following in determining whether or not to allow the exception to allow the pension to continue:

    • if the trustee would have been entitled to the ECPI exemption but for the failure to pay the minimum payment amount;
    • if the catch-up amount was made as soon as practicable,

    if the circumstances that prevented the trustee from completing the pension payment were out of the trustee's control.

    Example: The trustee makes a payment by cheque that is dishonoured

    The trustee of a SMSF wrote a cheque for the pension payment and it was dishonoured when presented.

    This is not acceptable for an SMSF as the course of action that prevented the payment was not beyond the trustee's control. In an SMSF, the trustees are responsible for the running of the fund and they would be expected to ensure there were sufficient funds in the bank account to ensure the cheque payment would be honoured.

    The minimum pension requirement would not be satisfied in the relevant year. The super income stream will be taken to have ceased at the start of that income year for income tax purposes.

    Example: The trustee has insufficient liquid funds on 30 June

    The trustee of a SMSF wrote a cheque for the minimum annual pension payment on 30 June and issued the cheque to the member on 30 June. As at 30 June, the SMSF does not have sufficient available funds to make the pension payment to the member but will have the necessary funds when a term deposit, held by the SMSF, matures on 31 July. The member presents the cheque on 1 August. The cheque is subsequently honoured.

    The lack of available funds as at 30 June indicates that the trustee does not have an intention to immediately transfer funds from the SMSF to the member at the time that the cheque is issued. In this case, the pension payment is not made on 30 June but rather 1 August of the following income year.

    The minimum pension requirement would not be satisfied in the relevant year and the trustee would need to demonstrate that matters outside of their control affected their ability to meet the minimum pension requirements. Only then can we consider whether the other conditions relevant to the exception can apply.

    Example: Electronic funds transfer on 30 June which falls on a weekend

    The trustee of an SMSF arranges for an electronic transfer for the minimum annual pension payment on 30 June, which was on a weekend.

    The payment of a benefit using an electronic funds transfer is made when an amount is received by the member.

    Where an electronic funds transfer is processed overnight or later, the Commissioner’s view is that the pension payment is made on or after 1 July in the following income year. The minimum pension requirement would not be satisfied in the relevant year and the trustee would need to demonstrate that matters outside of their control affected their ability to meet the minimum pension requirements. Only then can we consider whether the other conditions relevant to the exception can apply.

    Where there is a simultaneous debit and credit of the SMSF’s and member's accounts linked at the same institution and the funds are available immediately for use by the member, the pension payment is made on 30 June. Evidence such as a computer print-out recording the receipt of the amount into the member’s account may be used to establish the timing of the payment.

    Example: Financial institution error

    If the trustee of the SMSF can demonstrate all reasonable steps had been taken to ensure the pension payment would be processed prior to 30 June and it was something outside the trustee's control that prevented the payment from being made, we may consider applying the exception to allow the fund to continue to claim ECPI.

    End of example

    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 exception for underpayments applied from 1 July 2007.

    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.

    In 2008–09, 2009–10 and 2010–11, the superannuation regulations were amended to reduce the minimum annual pension payment by 50%.

    In 2011–12, this relief has been extended, with the minimum payment for account-based pensions reduced by 25%.

      Last modified: 04 May 2016QC 39769