A sector specialist has advised practitioners and trustees to ensure pension documentation is as flexible as possible when an SMSF is supporting more than one income stream in the event the minimum yearly payment is not satisfied.
Smarter SMSF education and technical manager Tim Miller stressed doing so is now particularly important in light of the amendment to Taxation Ruling 2013/5 whereby an income stream needs to be commuted if the minimum payment standards are not met.
To emphasise this point, Miller put forward a scenario where an SMSF is maintaining two income streams with different minimum payment obligations.
“If you have [two income streams and] the minimum on one pension is $40,000 and you set up monthly payments of $5000, it means [at the end of the year] $60,000 [has been paid against that pension]. If you’ve got another pension and the minimum on that one is $15,000, and that $60,000 [paid in relation to that other income stream] is deemed from the documentation to be counted against the first pension, you can’t just allocate the excess from one pension to [the other],” he told attendees at the ASF Audits Technical Seminar 2025 held in Melbourne recently.
“So what I would say in that instance is be very flexible in your pension documentation to never allocate a specific amount to [one particular] pension.
“So for all our pension documentation [you should consider] utilising wording such as ‘the trustees will ensure that [one] minimum is paid first [with] any excess [then allocated] on a needs basis to the members’.”
According to Miller, this approach will give trustees the ability to cover off as many minimum pension obligations as possible as a result of one regular payment.
“If you [still fail the minimum pension requirement, you can] pick which pension you want to fail [in a situation where there are multiple income streams].
“I would suggest having the taxable pension fail rather than the tax-free one.”
