An SMSF specialist has reminded practitioners there may a need to pay a pro-rata minimum pension amount before a failed income stream can be properly commuted.
Specifically, Accurium head of SMSF education Mark Ellem was referring to situations where trustees have failed to meet the minimum payment requirement for a particular pension and so must commute it and commence a replacement income stream under the terms of Taxation Ruling 2013/5 should they want the retirement-phase interest to continue.
Ellem pointed out in these situations there is usually a time difference between the end of a financial year and the date when trustees detect they have breached the payment standards prompting the decision to commute the failed pension.
He warned against thinking a pro-rata minimum pension was not necessary for a failed pension on the basis of the inability of the trustees to claim exempt current pension income for it.
“The ATO says while [the pension] can’t recommence to meet the SISA (Superannuation Industry (Supervision) (SIS) Act) requirements, it hasn’t ceased for SIS purposes, and we need to validly cease it for SIS purposes first. So we need to do a valid commutation,” he told attendees of the SMSF Association Audit Day 2025 conducted yesterday.
“If we look at the SIS rules to do a valid commutation, there’s an argument that says you need to pay a pro-rata minimum.”
Further, he highlighted the significance of observing the need to pay a pro-rata minimum pension amount for trustees.
“If we don’t have a valid commutation [of the failed pension], then do we have a valid new [replacement] pension when we started it?” he said.
“So we still might be in the same pickle that we ended up in for not paying the minimum pension in the prior year in the first place.
“So while the jury might still be out on whether or not you need to pay a pro-rata minimum before you commence the new pension, it probably is a conservative approach [to do so] at this time until we receive advice otherwise.”
