Lately, we’ve come across several superannuation funds that have failed to meet their minimum pension requirements. This is more than just a minor oversight – it is a compliance breach of Regulation 1.06(9A) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). In some cases, if the shortfall is material, it can even result in a Part A qualification in the fund’s audit report, which can have significant tax implications.
Why minimum pension payments are important
SMSFs that are in the pension phase must pay a minimum pension amount to members each financial year. Failing to do so means the fund risks losing its tax-exempt status on earnings related to that pension account, potentially resulting in a higher tax liability.
The impact of non-compliance
If an SMSF does not meet its minimum pension payment requirements:
- The income earned on the assets supporting the pension account may no longer be tax-exempt.
- The SMSF may face additional tax liabilities.
- The audit report may include a Part A qualification if the tax amount is deemed material, signalling significant non-compliance to the ATO.
What trustees should do
There are common reasons for failing to reach minimum pension payments, like miscalculating the minimum pension amount or having cash flow issues in the fund. But to avoid compliance issues, trustees should:
- Monitor pension payments throughout the year to ensure they are on track to meet the minimum requirement.
- Review balances and recalibrate payments if necessary, particularly towards the end of the financial year.
- Seek professional advice if there is a shortfall, as in some cases the ATO may allow rectification under specific circumstances.
Addressing a breach
If a minimum pension requirement has not been met, trustees should act quickly. Possible steps include:
- Identifying whether the shortfall was due to an administrative error.
- Seeking guidance on whether an exemption applies, particularly if the shortfall was small or occurred due to circumstances beyond the Trustees’ control.
- Making up the payment in the following financial year, but only if the fund remains in pension phase.
The takeaway
Failing to meet the minimum pension payment is not just an administrative slip – it is a compliance breach with potential tax consequences. Trustees must stay vigilant and ensure their funds comply with the regulations to avoid unnecessary penalties and audit qualifications.
Meeting the minimum pension payment requirements is not just about avoiding penalties; it’s about ensuring the ongoing tax effectiveness of an SMSF. Regular reviews, accurate calculations, and professional oversight are key to staying compliant and protecting the fund’s financial position.
If you have any queries relating to the minimum pension requirements, please contact us to discuss.