When an account-based income stream fails to meet the minimum pension standards required under Subregulation 1.06(9A) of Superannuation Industry (Supervision) Regulations 1994 (SISR) it will not have met the requirements of being a superannuation income stream in that year.

ATO guidance is quite clear that the income stream will be taken to have ceased for income tax purposes at the start of the financial year and will lose eligibility to claim exempt current pension income (ECPI) in that year. Further, any payments made will be treated as lump sums for tax and SISR purposes.

What remains uncertain is how and when the income stream could again be a superannuation income stream and eligible for ECPI.

What we know from the ATO

The ATO states in TR 2013/5 Income tax: when a superannuation income stream commences and ceases, item 101 that:

If in the following year the relevant rules are again complied with this in effect results in the commencement of a new superannuation income stream and the proportioning rule must be applied to that new superannuation income stream when it commences.

The ATO also answers the following question on their webpage SMSFs: Minimum pension payment requirements–frequently asked questions:

What if the trustees have failed to meet the minimum pension payments in one year but in a subsequent year are prepared to meet the minimum pension requirements as required under the SIS Regulations?

If the relevant rules are again complied with in a following income year, this results in the commencement of a new pension. The trustee will need to revalue assets at market value and recalculate the minimum pension payment required at the start of the new pension.

From this it is clear the ATO expects a new income stream to be commenced and the trustees need to recalculate the tax components of the income stream in order to again have an income stream eligible for ECPI. However, the ATO guidance is not definitive on whether the pension can recommence automatically the following year provided the minimum pension standards are met leaving a number of practical questions unanswered.

Outstanding questions for recommencing the income stream 

1 – What date does the pension recommence? 

It is often several months into the new financial year before the trustee realises the pension standards were not met in the prior year. If at this point we assume that the pension recommences automatically then a 1 July commencement date would be the desired and intuitive outcome. The new pension will need to be reported for TBAR meaning quarterly reporters will need to ensure a TBAR is completed by 28 October. Where the failure to meet pension standards in the prior year is not identified until after 28 October this could lead to a late reporting penalty.

Alternatively, if the pension commencement is not automatic then a new pension may need to be commenced at the point the mistake is uncovered. For example, if a prior year shortfall was identified in September would this mean that any payments made in the current year should be treated as lump sums from accumulation until new pension documents and a TBAR done to commence the new income stream? The fund would also not be eligible for ECPI until the new income stream commenced.

2 – What are the terms of the new income stream?

If the new income stream does automatically recommence in the following year then do all the terms of the income stream stay the same or does the trustee have a choice to alter the terms? Indeed, are new pension documents required setting out the terms of the income stream? If so, can those documents be done in arrears to assume the pension recommenced on 1 July?

3 – Did the pension balance become an accumulation balance in the year the standards were not met?

We know that the pension will cease for tax purposes at 1 July of the financial year the pension standards were not met. What is uncertain is whether the pension balance should be treated as part of the accumulation interest from that time for tax and accounting purposes or does the income stream remain separate from the accumulation interest over that time. This will be important when working out the tax components of the accumulation interest for any payments made in the year and for working out the tax components of the new pension in the following year.

Generally, if a pension is fully commuted back to accumulation phase tax components of the commuted income stream will mix with the components of any existing accumulation interest and tax components would change over the year with earnings and any contributions received.  Then when a new pension is commenced the tax components are recalculated based on the accumulation interest at that time. If the same process is followed here it means that at the date the new pension commenced the tax components would be recalculated and they would be different to that of the original income stream.

4 – What is the balance of the new pension?

If the pension automatically recommences, is the starting balance equal to the balance of the previous income stream, or could the trustee choose to recommence with a different amount?  If the balance needs to be a continuation of the previous income stream and the answer to question 3 was that the balance does combine with any accumulation interest for the year, then it makes it tricky to work out an appropriate ‘end of year’ balance for the previous pension interest. If the new pension balance is a choice the trustee needs to make, then how can the new pension commencement happen automatically?


A common industry approach where a pension fails to meet the pension standards is to consider the pension having recommenced eligibility for ECPI from 1 July of the year after the pension standards were not met. However, the amount of documentation completed to support this pension commencement is likely to vary across the industry.
With the ATO placing greater emphasis on documentation and the new TBAR regime requiring pension commencements for some SMSF trustees to be reported to the ATO quarterly we would encourage and welcome further guidance from the ATO on the requirements for commencing a new pension following a failure to meet the minimum pension standards.

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