Timing’s everything: SMSFs and minimum pension payments

As an SMSF trustee, it’s your responsibility to ensure that all members receiving an account-based pension are paid their minimum pension amounts by 30 June each financial year. If you don’t meet the minimum pension payment amounts in full and on time, this could result in adverse tax consequences for the member.

Calculating the minimum pension payment

The minimum pension payment amount is calculated using the following formula that takes into account the member’s age, their account balance, and the start date of the pension: 

Minimum payment amount = account balance × percentage factor

The percentage factor is set according to your age on 1 July in the financial year the pension amount is to be paid (or the commencement date for a new pension that does not commence on 1 July). Once an income stream is started, minimum annual payments are calculated using your account balance on 1 July each year, multiplied by a percentage factor that increases as you age. The current percentage factor is 4% if you are under age 64, or 5% if you are 65 to 74 (percentages for other ages can be found on the ATO website).

Timing is everything

To ensure that the minimum pension standards are met, you must ensure that the minimum payment is received – as cash, a cleared cheque, or an EFT credit to a bank account account – before the financial year ends. If the end of a financial year falls on a weekend or a public holiday, as a trustee you must ensure that all payments are made in advance of 30 June, and the benefit payment must be recorded as debited from the SMSF’s account and credited into the member’s account. 

You must make payments at least once per financial year, and the first payment must be made no later than the end of the financial year in which the pension commences.

Consequences of getting it wrong

Failing to meet the minimum pension standards means:

• the income stream will be taken to have ceased at the start of the year for income tax purposes;
• payments made during the year will be considered to be super lump sums for both income tax and super purposes and taxed accordingly;
• the fund won’t be able to claim ECPI (exempt current pension income) for that year or subsequent years; and
• there will be transfer balance account consequences for the member.

To restart a member’s payments, a new income stream will need to be recommenced, requiring asset revaluations, recalculations of the minimum pension payment, recalculation of the tax-free and taxable components of the new income stream, and new transfer balance account reporting.

Source: www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-smsf-benefits/income-stream-pension-rules-and-payments