Pension failures – navigating the “new” rules

The more we talk at Heffron about the impact of failing to pay the minimum pension, the more problems we uncover.  Today's problem - what if my client was still making personal contributions? Does failing to pay their minimum mean they’ve now also lost their tax deduction for those contributions? 

One of the many implications of the ATO’s update to TR 2013/5 is that a “failed pension” (eg one where the minimum pension wasn’t paid) no longer remains a separate super interest.  The ATO’s reasoning being that a super income stream only remains a separate super interest when the pension is “payable”.  And in their view, the pension ceases to be payable when it stops for tax purposes. 

For many SMSF members, the impact of the combining of their super interests may be minimal.  For example, Sue’s fund failed to pay her the required minimum pension in 2024/25 – in fact the fund paid her no pension at all in that year.  She has only one pension account – a retirement phase account-based pension.  The proportions established on commencement of the pension in 2020 were 85% tax free component and 15% taxable component.   

In August 2025, Sue is alerted to the failure.  She immediately instructs the trustee to pay her the pro-rated minimum for 2025/26 for the “failed pension”, then commute it and start a new one with the commutation proceeds.  The tax free proportion of the new pension will not be 85%.  Instead, the balance of “failed pension” account effectively rolled back to accumulation phase on 1 July 2024 (the start of the year in which the minimum wasn’t paid).  Any growth in the value of the account between 1 July 2024 and August 2025 will be taxable component, reducing the tax free proportion of Sue’s new pension. 

Not desirable for Sue, but not disastrous.   

But for members with multiple super interests, particularly those still contributing to super, the consequences could be wider reaching.   

For example, Sue’s husband Geoff is also a member of their SMSF.  Like Sue, Geoff was drawing a retirement phase account-based pension from their SMSF but the minimum wasn’t met in 2024/25.  Geoff was required to be paid $50,000 for that year but the fund only paid him $20,000 in March 2025.   

Unlike Sue, Geoff also has an accumulation account.  He’s 68 and semi-retired but occasionally does contract work.  In fact, he met the work test in 2024/25 so contributed $30,000 to super in November 2024 intending to claim a tax deduction for at least part of it.  Geoff hasn’t completed his “notice of intent” yet but will do so before he lodges his 2025 income tax return in October 2025.   

But in fact, Geoff won’t be entitled to as much of a tax deduction as he thought.  His fund’s failure to pay him the required minimum pension in 2024/25 has put a stop to that.   

You might be wondering why – surely Geoff simply needs to give his notice of intent before he instructs the trustee to commute his failed pension and start a new one?   

Well, it’s a bit more complicated than that.  Failing to pay Geoff his minimum pension for 2024/25 has meant: 

• The balances and tax components of his failed pension and his accumulation account merged on 1 July 2024. 

• The $20,000 paid to him in March 2025 is treated as a lump sum from the combined interest. 

• As his contribution was made in November 2024 (ie before the lump sum), to be entitled to a full deduction, his notice of intent needed to have been given to his fund before the lump sum withdrawal. 

Fortunately Geoff will still be entitled to a partial deduction based on the proportion of the contribution remaining in accumulation phase.  Geoff would be wise to ensure he provides his notice of intent before instructing the trustee to pay him his pro-rated minimum for 2025/26 from the “failed pension”.  This is because this payment will in fact be treated as a lump sum for tax purposes, further reducing the proportion of the contribution remaining. 

Unfortunately Sue and Geoff are just one example of the flow on administrative implications of the ATO’s update to TR 2013/5.   

I’ll be exploring these implications in further detail in our upcoming Super Intensive Day, alerting you to not only the problems but also the practical work arounds.  We’ll be covering not just retirement phase account-based pensions but also death benefit pensions, transition to retirement pensions and legacy pensions.