The real issue is not whether the rule exists, but whether all conditions are satisfied before anyone assumes the pension can continue.
Why the 1/12 rule still matters
Taxation Ruling 2013/5 moved the goalposts for the consequences of failing to meet the minimum pension payment standards. If the minimum is not met and no exception applies, the pension is treated as having ceased at the start of the income year for both superannuation and income tax purposes.
Against that backdrop, the ATO’s 1/12 exception remains highly relevant because it is still the only practical self-assessed pathway for preserving a pension after a small shortfall in limited circumstances.
ATO conditions for pension shortfalls
The starting point is the ATO’s guidance on the exception to minimum pension payment requirements (QC 103944). The exception generally applies only where all conditions are met.
First, the underpayment must arise from an honest mistake resulting in a small shortfall of no more than one-twelfth of the annual minimum, or from matters outside the trustees’ control.
As this new guidance has not been tested, there is no guarantee that the ATO will apply the exception that way in practice.
Second, if the pension was in the retirement phase, ECPI would have continued had the minimum payment actually been made.
This condition is easy to overlook, but it matters because the exception is directed to preserving a pension that would otherwise have remained valid. If there is some other reason the income stream could not have continued, the exception does not rescue the pension shortfall.
Third, once the trustee becomes aware of the shortfall, prompt remediation must occur. That generally means making a catch-up payment as soon as practicable, usually within 28 days, in the current income year, or treating a payment made in the current income year as having been made in the prior year.
The ATO also requires that, had the catch-up payment been made in the prior year, the minimum standards would have been met. For all other purposes, the catch-up amount is treated as though it had been paid in the prior income year.
One fund, one use
If the fund has previously relied on the exception, trustees need to write to the ATO and request that the Commissioner exercise discretion.
That distinction is critical in multi-pension funds. If multiple pensions in the same SMSF are underpaid in the same income year and the fund meets all conditions, the exception may be available only in respect of those pensions in that year.
But it does not create a rolling entitlement to use the rule again later. SMSF advisers and auditors should therefore be careful not to think about the exception on a member-by-member basis. The question is whether the fund has already used its one opportunity.
If one condition fails, the exception fails
The broader point is that the 1/12 rule does not operate in isolation; it sits within the wider pension standards framework and must be tested alongside the other relevant limits.
When self-assessment is no longer available
The ATO considers each case on its merits, and industry experience suggests relief is not readily granted unless the facts are compelling, such as an illness or personal injury.
That makes contemporaneous evidence essential. Trustees and advisers should expect the ATO to scrutinise bank transactions, payment calculations, trustee minutes and pension documentation as a starting point.
A bare assertion that the shortfall was accidental will rarely be enough. The trustees should be able to prove not only what happened, but why the exception criteria were genuinely satisfied.
