Make sure you pay your minium pension

The importance of meeting the pension payment standards

As we come to the end of the 2024 financial year, it is important to ensure members take at least their minimum pension payments before 30 June.  Remember this financial year, the minimum drawdowns are back to the normal account-based pension drawdown rates as shown in the table below.

Age	Annual payment as % of account balance 2024-25 income year
55—64	4%
65—74	5%
75—79	6%
80—84	7%
85—89	9%
90—94	11%
95+	14%

When a complying superannuation fund pays an income stream, it may be entitled to exempt the income earned from the fund’s assets used to support the pension until such time as the pension ceases.

For example, the Miller Superannuation Fund is 100% in pension mode and has been so since the beginning of the 2021/22 financial year, paying retirement pensions to Mr and Mrs Miller.  One of the assets of the fund is a residential property sold during the current financial year (which the fund has owned for several years) with the following details:

As the fund is 100% in pension mode for the financial year, the entire capital gain of $490,000 is disregarded for taxation purposes.  This is called Exempt Current Pension Income (ECPI).

Another example is the Russell Superannuation Fund, which is fully in pension mode, paying pensions to Mr and Mrs Morris, who have retired.  It has a large share portfolio with franking credits of $18,000.  Again, as the fund is 100% in pension mode for the 2024/25 financial year, the franking credits are not used to offset any tax payable and are received as a refund.

What happens if the pension standards are not met?

If the Trustee fails to meet the minimum pension requirements in a financial year, however, the super income stream will cease at the start of that income year for income tax and superannuation purposes.  Whilst one might think underpaying the pension minimum is unlikely, many people pay their pensions quarterly, or even half-yearly.  This could impact minimum drawdown requirements.

If such a scenario comes to pass, the fund will not be entitled to treat income or capital gains as ECPI for the year.  Any payments received will not be considered income stream payments, but rather lump sums.  If the members wish to receive income streams in subsequent years, they will be treated as pension payments relating to new pensions – not the continuation of an existing pension or pensions.

If we revisit the above examples, the Miller Superannuation Fund will incur Capital Gains Tax (CGT) on the sale of the residential property of $49,000 ($490,000 x 15% discounted by one third) if it is not considered to be in pension mode.  The Russell Superannuation fund, if the minimum pension payment is not met, may have to use the franking credits to offset any taxable income of the fund in the financial year.

Also, the pension will no longer be treated as a separate superannuation interest, meaning several different pensions, established to make use of different tax-free/taxable percentages, may be mixed in accumulation phase, undermining important member goals and objectives, such as tax efficient estate planning.

This last point is particularly important, given the impact the underpayment of pensions may have on such strategies.  Let us have a look at a case study to illustrate the issues.

Case Study – Stella and Tom

Stella and Tom are trustees and members of their SMSF, the Grace Superannuation Fund.  Stella and Tom are retired, in their late 60’s, with two independent adult daughters.  Stella has two pensions as of 1 July 2024 with the components as follows:

Pension 1	Tax free	$500,000 (100%)
Pension 2	Tax free	$50,000 (8%)
	Taxable	$600,000 (92%)
	Sub-total	$650,000 (100%)
Total for Stella	Tax free	$550,000 (48%)
	Taxable	$600,000 (52%)
	Total	$1,150,000 (100%)

Pension 3	Tax free	$700,000 (100%)
Pension 4	Tax free	$30,000 (5%)
	Taxable	$550,000 (95%)
	Sub-total	$580,000 (100%)
Total for Tom	Tax free	$730,000 (57%)
	Taxable	$550,000 (43%)
	Total	$1,280,000 (100%)

Their estate planning strategy, designed in conjunction with their Adviser, is to have the pensions with the higher taxable component reversionary to the surviving spouse, with the tax-free pensions encompassed by a Binding Death Benefit Nomination (BDBN) which directs the trustee to pay the Benefit to their respective estates.  The member’s Wills state these proceeds are then to be paid to the two independent adult daughters equally.  The rationale behind this strategy is the surviving spouse is a tax dependent and can receive a reversionary income stream tax free, whilst the super death Benefit paid to the estate will consist of a tax-free component, meaning the death Benefit lump sum tax impost will be nil.

Stella and Tom receive their pensions periodically, as they find this is the most convenient method of payment for them.  To make things easier, Stella takes a combined payment rather than four separate payments.  They have the fund accounts and tax return done on an annual basis, as they think their fund is straight-forward.  Stella, being an ex-Accountant, likes to record the fund information on an Excel spreadsheet, along with collating all other paperwork, to get the accounts done each year.

However, due to some personal family matters, Stella forgets to make payments in the final few months of the 2024/25 financial year.  In fact, Stella has underpaid the pensions by around 25%.  The personal matter was the death of Tom’s mother earlier in the year, which meant they were tied up finalising her estate (Tom was his mother’s Executor).  Tom also received an inheritance, some of which was used to fund their living expenses.  This added to Stella forgetting to pay the pension minimums, as the income was not required like a normal year.

The ramifications mean the fund has not met the pension minimums for the 2024/25 financial year.  Therefore, according to the ATO’s Taxation Ruling TR 2013/5, which deals with the starting and stopping of income streams, the pensions are deemed to have ceased on 1 July 2024, the fund is in accumulation mode from that date and all payments made in the financial year are considered lump sums.

But more importantly for Stella and Tom, their estate planning strategy has been compromised.

Each pension is a separate superannuation interest, with distinct benefit components and even preservation status.  An SMSF member can have as many pensions as they wish but can only ever have one accumulation account.  By forgetting to meet the pension minimums in the 2024/25 financial year, the fund will now consist of a single accumulation account each for Stella and Tom.  Their tax-free and (largely) taxable income streams are now mixed.  Stella and Tom’s accounts can be used to commence new pensions, but the strategy of streaming the tax-free pensions to their daughters and the surviving spouse taking the taxable pension as a reversionary income stream is no longer available.

Any superannuation death benefit streamed to the adult daughters will now consist of a tax free AND taxable component, which will then be subject to lump sum tax.  Given the large taxable component each member has, this tax impost could be substantial.

The ATO can exercise powers of general administration (GPA) to allow an SMSF to continue to claim ECPI, even though the minimum pension standards have not been met.

Can the ATO allow discretion?

However, the Commissioner will disregard breaches of the pension payment standards in extremely limited circumstances.  All the following conditions must be satisfied for the fund to continue to claim ECPI:

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, or
   1. 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 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 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 (ECPI) 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.

What is considered 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 (i.e. the year in which the underpayment was made).  The Commissioner considers “as soon as practicable” to be within 28 days of the trustee becoming aware of the underpayment, or if the underpayment is due to factors 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.

The ATO will also allow SMSF trustees to self-assess and apply the GPA concessions if all 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, it does not exceed one-twelfth of the minimum annual pension payment).
• All the other GPA conditions have been met.

Can discretion be shown more than once?

In addition to meeting all the above criteria, the Commissioner will only allow the GPA concession if the trustee has not previously been granted discretion 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 requirements for the Commissioner to exercise GPA discretion.

Given the trustees of the Grace Superannuation Fund underpaid the pensions by more than one-twelfth and the underpayment was within the trustee’s control, they will not be able to self-assess and will need to apply to the Commissioner for GPA discretion.  In our experience, the situation as it applies to Stella and Tom will not be met with benevolence by the ATO.

How could this situation be avoided

Trustees and their intermediaries need to review the minimum pension requirements for the financial year and if there is any doubt, contact the fund’s administrator or Accountant.

Pension payments must be made in cash and must be received in the member’s account on or prior to 30 June 2025.

What does Neo Super provide?

We are an innovative end-to-end SMSF service provider specialising in:

• SMSF administration and compliance
• Documentation services, including fund establishment, borrowing arrangements and pension documentation
• White label documentation and services for Intermediaries such as accountants and financial planners
• SMSF technical support, education, and training.

Further Information

For other service requirements, please contact our office at neo@neo-super.com.au or 1300 083 428.