Beware of tax implications for failing to meet minimum pension requirements: consultant

Failing to meet the minimum pension requirements impacts a number of tax components, an industry consultant has warned.

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Peter Crump, senior consultant, private wealth for BDO, has said on a recent ASF Audits podcast that if a member fails to meet the minimum, the pension is treated as not having been in place during that year, which has some “nasty” consequences.

“Your expectation of having that wonderful exemption from tax on the investment income is just pulled away from underneath you,” Crump said.

“There are also other consequences in terms of tax components. When you start a pension, it's treated as a separate superannuation interest, and a separate superannuation interest has its own unique tax characteristics, even though other accounts in the fund may have different benefit tax components, tax-free and taxable.”

When a pension stops because the minimum payments have not been met, the member is exposed to those tax components, Crump said.

“[They are exposed] to what I call the winds of time which means that the taxable component increases with investment earnings.”

“So, instead of having a wonderful, potentially high tax-free component, you start to erode that with taxable income adding to your taxable component.

Additionally, he said, the member will also have a transfer balance cap issue if the pension is treated as having been stopped.

“You have to report the fact that the pension has stopped, and then you have to get back into pension mode and think about how to do that.”

“Paying the minimum is part of rewarding good behaviour. You get a reward of no tax on the investment income supporting that pension, but the reward is in response to the good behaviour of meeting minimum pension requirements.”

He added that the tax privileges are if it's the only account in the fund and it's within the relevant limits, currently $1.9 million when started, which means a member will pay no tax on the investment income and get franking credits back.

Crump said that for the ATO to determine if a pension has been started, it needs to see periodic payments, and it is an expectation that the minimum will be paid for at least a couple of years.

“You need to go back to not just the federal law, but what I call tribal law, which is the trust deed, and see how the trust deed specifies whether a pension is in place.”

“Generally, it says there's a document, so you need to find the document to evidence the pension has started, and to whom the pension is being paid, whether it's paid on death, how much is being paid, whether that's prescribed in the rules, and then to actually see payments being made.”

He added that the ATO wants to see a series of payments, and if only one payment is made, it does not necessarily indicate that it will be treated as a pension having commenced.

“Making one payment and then winding the fund up, winding up the pension, because you've got some wonderful exempt current pension income for capital gains tax relief, for example, isn't going to cut it.”

“The ATO wants to see it's a genuine effort to make regular payments going forward.”

Keeli Cambourne
June 24 2025
smsfadviser.com