Retrospective pension calculation amendment needed: IFPA

The IFPA is calling for a legislative amendment to remove the need for retrospective calculations of tax components for pension interests that fail the minimum standards in a particular income year.

In its pre-budget submission to Treasury, the Institute of Financial Professionals Australia said the updated TR 2013/5 included an unexpected amendment, confirming the ATO’s view that where a pension fails to make the minimum payment it ceases only for income tax purposes and must be commuted for superannuation purposes before a new pension can start again.

“This gives rise to several practical issues particularly when dealing with the unnecessary complexity created by the proportioning rules when there is a pension underpayment,” it stated.

The submission continued that in June 2024, the ATO released an update to TR 2013/5, clarifying when a superannuation income stream starts and stops.

“This update has significant implications for SMSF trustees who fail to meet the pension standards within a financial year,” it stated.

“Under the revised ruling, failing to comply with pension standards results in the pension ceasing for income tax purposes, though not necessarily for superannuation purposes. This distinction introduces unnecessary complexity for trustees without delivering any practical benefit, increasing the administrative burden on both trustees and the broader system.”

The IFPA acknowledged that failing to meet the minimum pension requirement has tax consequences, including impacts on the transfer balance account, and concerns remain regarding the ATO’s position that a failed pension must be commuted and restarted as a new pension to claim exempt current pension income moving forward.

In conjunction with the Joint Bodies, the IFPA submitted concerns around this in October 2024, particularly regarding the unclear legislative basis of the ATO’s position and the fact that a pension is a contractual obligation.

“The commissioner’s stance on when a pension ceases due to failure to meet the minimum payment remains problematic. TR 2013/5 lacks clear legislative backing and relies on SIS Regulation 1.06(9A) (‘Meaning of a pension’), which does not explicitly outline the tax consequences for non-compliance with the pension standards. This reliance appears to be an overreach, adding complexity without delivering practical benefits,” it stated.

“Additionally, we view a pension as a contractual agreement between a trustee and a member. If the minimum pension payment is not met, the pension itself does not cease, rather, the trustee is in breach of its contractual obligation, with any unpaid amounts remaining a debt owed to the member. This interpretation aligns with contract law principles, and if adopted, it would resolve many of our concerns. We strongly urge the ATO to reconsider its approach on this matter.”

It also recommended that the government maintains current industry practice that when a pension fails to meet the minimum payment requirements, it should cease to qualify for an ECPI deduction for that income year.

“As a result, the fund would lose its ability to claim ECPI on that pension account for the full income year, with all earnings for that year allocated to the member’s taxable component rather than retaining the proportions established when the pension commenced,” it stated.

“This would avoid the fiction that the pension has ceased. As such the pension would continue to be treated as the same pension for superannuation purposes, including for eligibility under the Age Pension and Commonwealth Seniors Health Card. Additionally, if the minimum pension requirements are met in the following income year, that pension would again qualify for an ECPI deduction without requiring a commutation and recommencement of a new pension. The tax-free and taxable proportions would also not be required to be recalculated accordingly.”

Additionally, it recommended the introduction of a legislative safe harbour stating that the ATO’s current “small underpayment” exception (the one-twelfth rule) is not legally binding and can be withdrawn at any time.

“To provide greater certainty, we recommend that the government legislate an expanded exception (such as a two or three-twelfths threshold), allowing members a more reasonable opportunity to rectify an underpayment before their pension is deemed to cease for tax purposes,” it stated.

“We believe these measures will provide much-needed clarity, reduce unnecessary administrative burdens, and ensure consistency with both industry practice and legislative intent.”

Keeli Cambourne

February 12 2026

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