Failure to pay minimum pensions just got a lot more costly

You may need to ensure your accountant, financial planner and your fellow trustees is up to date with the latest rule changes affecting the start and ending of an SMSF pension which mostly affect those that fail to take the minimum pension amounts in a financial year.

SMSF trustees, accountants and financial advisers should take note of significant changes to pension commencement rules that came into effect on 1 July 2025. These changes impact how pensions are treated for tax purposes if a minimum pension is missed and could have serious implications for retirement planning strategies.

What’s Changed?

The Australian Taxation Office (ATO) has revised Tax Ruling 2013/5 (TR 2013/5), which governs when a pension starts and ceases.

Previously, the rules provided some flexibility with minimal adverse consequences. However, the ATO has now taken a stricter stance, which may have major implications not only for the current and the previous year’s, tax position but also on strategies designed to quarantine pensions with high tax free components from ones with mixed components.

Key Implications of the Changes

1. Pension Failures Confirmed to Take Effect at the Start of the Financial Year

Under the new rules, if a pension fails to pay the minimum pension, it is treated as ceasing at the beginning of the financial year rather than the end. This means:

• The pension account converts to an accumulation account immediately at 1 July of the relevant tax year.
• If an existing accumulation balance exists, the two amounts will merge for tax purposes, potentially disrupting carefully planned tax strategies. These strategies often revolve around blended families.

2. Transfer Balance Cap Complications

• If a pension fails at the start of the year, the transfer balance cap debit must be applied at the 30 June in the year the pension ceased. Ref: ITAA97 Section 294-80(1) item 6.
  NOTE: In the earlier version of this article we wrongly advised it was a credit to the TBA and immediate when in fact it is a debit and occurs 30 June at end of financial year the pension ceased. Thank you to Mark Ellen of Accurium for picking up on our error.
• The pension can only restart once the member rectifies any errors (e.g., failing to meet minimum pension draw down requirements), which may take 13 to 22 months from the date the pension has to be commuted under the enforced rules. Why? Because for many people the first they realise that they have not paid the full minimum pension payment is when their accountant or administrator drafts the financial which is often 9 months after the end of the financial year. e.g., 20 June 2025 financials not completed until March 2026 and that’s when mistake found. But then the Pension is deemed to have been commuted on 01 July 2024!
• During this gap, market growth could lock a portion of the funds out of pension phase due to the Transfer Balance Cap issues, limiting tax efficiency and spoiling estate planning strategies.

3. Investment Market Risks

If markets rise while a pension is inactive, the increased account balance may exceed the available transfer balance cap. This means:

• Some funds could remain stuck in accumulation phase, missing out on tax-free pension earnings.
• Members may not be able to restore their pension to its original value, reducing retirement income benefits.

What Should SMSF Trustees, Accountants and Advisers Do?

Given these changes, it’s crucial to:
✔ Review pension compliance to avoid accidental failures. Request a Minimum Pensions Report from your Accountant/Adviser.

✔ Do not just rely on the last 30 June Financials as you need to ensure you include any new pensions that began in the current financial year

✔ Monitor minimum drawdowns before 30 June each year to prevent unintended cessations. Have someone cross check the payments for you.

✔ Beware that Market Linked and Term Allocated Income Streams have different minimum drawdowns

✔ Plan for tax implications if pensions lapse and merge with accumulation accounts.
✔ Consider timing and market risks when restarting pensions.

Final Thoughts

The ATO’s stricter interpretation of pension rules means SMSF trustees, accountants and advisers must be more vigilant than ever to avoid costly tax, estate planning and transfer balance cap issues. Proactive planning can help mitigate risks and ensure retirees maximise their superannuation benefits.

Stay informed, seek advice and adjust strategies accordingly!

Warning before you jump into implementation of any strategy without checking your personal circumstances.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one-on-one consultation, just click the Schedule Now button up on the left to find the appointment options.

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Liam Shorte B.Bus FSSA™ AFP

Financial Planner & Fellow SMSF Specialist Advisor™

      

Tel: 02 9899 3693, Mobile: 0413 936 299

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