An old tax ruling (TR 2013/5) provided useful guidance on many issues for SMSF pensions. It was refreshed in June 2024 and in just a few lines, the ATO profoundly changed the accepted wisdom on what happens when the minimum payment requirements aren’t met.
For the SMSF industry, it was a little like asking a builder to fix the towel racks in your bathroom but returning home to find the tiles have been ripped up and there is a hole where your shower used to be.
Fortunately the ATO has now announced it won’t “devote compliance resources” to investigating old cases of non compliance with their current view (reported by the SMSF Association following extensive consultation with the regulator).
So what was the problem and how does this help?
The ATO’s revised view (as expressed in the updated ruling released in June 2024) was that when an account-based pension fails the minimum payment requirements, it loses its tax exemption (ECPI) for both the year in which that happens as well as all future years. Under this interpretation, it’s only possible to get the tax exemption back if the pension is formally commuted and re-started.
In contrast, industry practice has historically been that when a pension fails to meet the minimum payment requirements during a particular year, it does cease for tax purposes for that year. But contractually, the income stream remains on foot and the tax exemption commences again automatically on the following 1 July without needing to “do anything” to the pension (like stopping and re-starting it).
Unfortunately the ATO hasn’t suddenly decided to revert back to the industry approach (they’re hamstrung by changes to the legislation back in 2017).
But as mentioned earlier, they have at least announced they “won’t devote compliance resources” to dealing with account-based pensions that failed in 2023/24 and earlier. In a practical sense, this means a pension that (say) failed to meet the minimum payment amount in 2023/24 will:
In contrast, a pension that fails the minimum in 2024/25 will be permanently tainted as a “failed pension”. It will never be eligible for ECPI again. The only way to get it back will be to stop the pension and start a new one.
There are a number of problems caused by the need to stop and restart.
Often, trustees don’t even realise they’ve failed the minimum until well after the end of a financial year. That means by the time they take action (stopping and re-starting their pension), they’ve not only lost ECPI for the year in which they failed but also several months (or even more) afterwards.
This view makes it extremely difficult to justify ever approaching the ATO for special consideration of the fund’s unique circumstances which might result in the failure being forgiven. Because delaying the stop / restart event means if the ATO says no, the fund has been without its ECPI for even longer than necessary.
Stopping and re-starting also has some practical implications. For example, the whole exercise requires documentation (with a cost) and additional work in updating the pension account balance at the time the stop / re-start occurs, making sure a pro-rated minimum payment for the new financial year is taken first and more. There are plenty of opportunities for getting it wrong.
The ATO also takes the view that any “failed” pension stops being a separate interest and this is backdated to the start of the year of failure. (For example, a pension that fails the minimum payment requirement in 2024/25 will stop being a separate interest with effect from 1 July 2024). That means the tax components of the pension will mix with the tax components of the accumulation account. The new pension could be made up of entirely different tax components. Years of careful planning on this front could be invalidated by one simple mistake. Unfortunately it doesn’t seem likely the ATO will change its view on this one either.
It would definitely be preferrable if we could convince the ATO to change their view entirely but absent that, at least we don’t have to worry about the past.
We’ll delve more into the ATO’s announcement in our next quarterly technical webinar. You can secure your seat here.