Clinton Jackson, partner at Cooper Grace Ward Lawyers, said the ATO’s view now is that when a pension stops, steps need to be taken to recommence that pension for later financial years.
“Previously, they were happy with just continuing to recommence by paying pension late, but they actually now require documents to be prepared to evidence that restart,” he said.
“Now, although we don’t necessarily agree with the ATO’s approach, for compliance purposes, if we want to make sure we can apply our ECPI for tax purposes, then it is definitely good behaviour to follow the ATO’s current view.”
Under the pension standards, a member is required to do certain things, including making a minimum pension payment for each one it is running.
“What that means for each member will depend on their own circumstances. The minimum pension is calculated based on their starting balance in their pension account, the member’s age, and the start date for that pension. Each member will have a different minimum pension payment,” Jackson said.
“Why it’s important is the ATO’s view is if you do not make that minimum pension payment for the year, then your pension is deemed to have ceased at the start of the year that you failed to make that minimum pension. For example, if you didn’t make the minimum pension payment in the 2025 financial year, then your pension is deemed to have stopped on 1 July 2024.”
This has quite significant consequences because if the member doesn’t have their pension in play for the year, then they are ineligible to claim their current pension income exemption.
“That means for members of the fund that they are paying tax or earnings that would otherwise be tax-free, at the normal accumulation rate of 15 per cent,” he added.
“The ATO does have some administrative powers that allow it to overlook the failure to make the minimum pension payment for a year. The main one, which is readily available on application to the ATO, is where if the fund fails to make a minimum pension payment, and that failure has only been because of a small underpayment.”
Jackson said the ATO’s view of a small underpayment is something that’s less than one-twelfth of the minimum pension payment for the year. Where such a small error has been made and it has been remedied as soon as the trustee became aware of it, the ATO will generally allow that underpayment to go through and not affect ECPI.
However, he warned that the process can only be taken if the fund has not previously applied for the same concession.
“If there is a bigger failure to make a minimum payment, such as not paying the minimum pension or it’s more than one-twelfth, the ATO still allows for relief if the failure to meet the minimum entry requirements was due to something outside the trustee or member’s control.”
“In my experience, this is a fairly high bar, and you need to put a fairly compelling case in front of the ATO for it to accept that failure to make a minimum pension payment in those circumstances.”
