If a retirement phase income stream, such as an Account Based Pension (ABP) does not meet the Superannuation Industry Supervision (SIS) pension and annuity standards, it is taken to have ceased at the beginning of that financial year for taxation purposes. In addition, a debit will arise in the member’s transfer balance account for transfer balance cap purposes.
Taxation consequences of not meeting minimum standards
To qualify for tax-free status, a retirement phase income stream must satisfy the minimum pension standards in the SIS regulations1. For example, the minimum standards require an ABP to pay a minimum amount of income payments during a financial year (among other requirements2).
If an income stream fails to meet any of the minimum standards it will be taken to have ceased at the start of the relevant year for tax purposes3. This means any income or capital gains derived from the assets set aside to pay the pension will be fully assessable to the super fund. In addition, any payments made from the pension will be treated as superannuation lump sum benefits rather than income stream payments.
Note - there may be limited circumstances where the ATO will allow the superannuation interest to be treated as a superannuation income stream even though the minimum pension standards have not been met. Please see ATO document - SMSFs: Minimum pension payment requirements – frequently asked questions for more information.
Transfer balance account consequences of not meeting minimum standards
Where an income stream fails to satisfy the minimum standards, it will also result in the income stream ceasing to be in the retirement phase and will trigger a debit in the member’s transfer balance account4.
However, the timing of any debit will generally occur at a different time to when the superannuation income stream ceased for taxation purposes. That is, for the purpose of determining whether a member has a transfer balance account and the timing of any credits and debits, a fund is required to assume an income stream satisfied the minimum standards up until the time it’s possible to determine, based on the relevant facts and circumstances available at that time, that it had failed those standards5.
For example in relation to an account based pension, where a fund failed to pay a member any pension payments during a year, the income stream will cease to be in the retirement phase for transfer balance cap purposes from the end of 30 June, as it’s only possible to determine the income stream failed the minimum standards from that time.
Alternatively, where a fund failed to pay a pro-rata pension payment prior to a member fully commuting their account based pension, the income stream would cease to be in the retirement phase from the time of the full commutation.
In this case, the value of the debit for transfer balance cap purposes will be the value of the superannuation income stream interest immediately before the time it was possible to determine it had ceased to be in the retirement phase6.
Additionally, any transfer balance account events that occurred prior to the income stream failing to meet the minimum standards, such as a credit for the commencement of the income stream in that year, will continue to be valid as they occurred prior to the time the income stream ceased to be in the retirement phase.
CASE STUDY 1
Lewis commences a $1.3m ABP on 1 July 2023. His transfer balance account is credited $1.3m on that date.
On 30 June 2024 (in the same financial year) Lewis' account based pension had an account balance of $1.352m.
In July 2024, it is discovered that the fund had only paid 50% of the annual minimum amount required for 2023-24 and therefore failed the minimum standards on 30 June 2024.
As a result, Lewis is taken not to have commenced a superannuation income stream on 1 July 2023 for tax purposes.
However, for transfer balance account purposes, the original $1.3m transfer balance account credit on 1 July 2023 will stand and $1.352m will be debited from his transfer balance account on 30 June 2024.
As a result, Lewis will have a transfer balance account value as at 30 June 2024 of -$52,000.
CASE STUDY 2
At 1 July 2024, Maureen has an existing ABP in her SMSF.
On 15 January 2025 (same financial year), Maureen fully commutes her ABP to rollover to another fund. However, prior to commuting she forgets to pay herself a pro rata pension payment. As a result, the pension failed the minimum standards as she did not receive a pro-rated minimum payment for the part-financial year prior to full commutation.
Maureen’s income stream therefore ceases to be in the retirement phase on 15 January 2025 and the account balance of her ABP will be debited from her transfer balance account on that date.
Normally a commutation is a transfer balance account debit, however in this situation a debit does not arise for the commutation on 15 January 2024 as the income stream ceased being in the retirement phase immediately before the commutation7.
SMSF transfer balance account reporting implications
Where an income stream fails to satisfy the minimum standards in a year, an SMSF will need to report a debit to the ATO for that event via a Transfer Balance Account Report (TBAR) within the required timeframe.
From 1 July 2023, all SMSFs are generally required to report all transfer balance account events by no later than 28 days after the end of the quarter the event occurred..
For example, where an SMSF member’s ABP failed the pension standards in October 2023, the fund would be required to report the related debit by no later than 28 January 2024.
Endnotes
1. Income Tax Assessment Act (ITAA) 1997, s 307-70. Income Tax Assessment Regulations 1997, reg 995-1.01(1), Superannuation Industry (Supervision) Regulations 1994, reg 1.05(1) Meaning of annuity, reg 1.06(1) Meaning of pension or 1.06A(2) Standards for certain innovative superannuation income streams.
2. See the ATO website for Minimum pension standards for account based pensions.
3. ATO TR 2013/5 Income tax: when a superannuation income stream commences and ceases, paragraphs 96-101.
4. Section 294-80 ITAA 1997
5. Section 294-50 ITAA 1997
6. ATO LCR 2016/9 Superannuation reform: transfer balance cap, paragraph 55E (Example 3B)
7. ATO LCR 2016/9 Superannuation reform: transfer balance cap, paragraph 55K.
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Disclaimer
The information contained in this update is based on the understanding Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) has of the relevant Australian laws as at the article date. As these laws are subject to change you should refer to our website at www.cfs.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including AIL, nor CFSIL, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
AIL and CFSIL are also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.