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).

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.

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.

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

• an honest mistake made by the trustee resulting in a small underpayment of the minimum payment amount for a super income stream
• 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.

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%.

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 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.

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.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.