What happens if I underpay my SMSF Pension?
Underpaying your pension from your self managed super fund (SMSF) can be a nightmare. One of the major rules is that the pension paid must meet a minimum requirement and if there is a shortfall the pension is considered to have “failed”.
A small underpayment may be overlooked for pension requirements, but the margin is tight. The ATO allows SMSF trustees to self-assess if:
- the shortfall is no more than 1/12th of the minimum pension (e.g., $1,667 on a $20,000 minimum),
- it is a one-off occurrence,
- the concession applies per fund, not per person or account,
- a catch-up payment is made, generally within 28 days of becoming aware of the shortfall, and
- the error was due to an honest mistake or circumstances beyond the trustees control e.g. the trustees being injured in an accident and unable to pay the final pension payment before 30th June or the trustee using the incorrect pension percentage as they relied on the previous year percentage but the pension member turned 75 before 30th June changing the pension percentage from 5% to 6%.
What happens if my SMSF pension fails due to underpayment?
Failed pensions do not receive tax breaks. There is no tax exemption on the earnings from a failed pension.
Pension payments from a failed pension are treated as a lump sum payment to the member and not a pension payment. There are no tax consequences for a member who is over 65 or between 60 and 65 and “retired” as the lump sum payment is tax free.
However, imagine an SMSF pension member who is receiving a transition to retirement pension (TRIS). Typically, such members are between 60 and 65 years old and have not yet retired, meaning their pension account remains preserved and cannot be accessed as a lump sum payment. The SMSF trustee breaches the payment standards, and the member could be taxed at their highest marginal rate because these payments may be treated as illegal early access to superannuation.
Can I just restart my pension at 1st July?
In the past a pension could automatically restart on the 1st July and the tax breaks were reinstated. The tax free % component was recalculated, often being reduced.
From the 2024/25 year things changed
The failed pension can no longer be automatically restarted and is tainted forever. The failed pension must be stopped, and a new pension can be started but must meet the pension requirements at that time. For more information about the changes from 1st July 2024 check out our article on it.
What does that mean?
The failed pension continues forever without tax breaks until it is stopped. The biggest issue is timing as often the accountant is the first to find out when they start to prepare the financials many months after 30th June.
The pension can be stopped and then a new one started provided the member has met a condition of release at that time. A member who is at least 65 can start a new pension at any time. However, if the member is between 60 and 65 they must be retired or start a TRIS.
The accumulation account and a member’s failed pension account are now required to be mixed together. The specially crafted pension account which may have 100% tax free component is now merged with their accumulation account with 100% taxed component. A member’s estate planning is now impacted, and the member’s adult children may find they have a large tax bill when they inherit their parent’s superannuation. Tax free components do not attract tax when paid out to an adult beneficiary.
Example – failed pension due to underpayment of pension
Susie is the sole member and director of the trustee of her SMSF. She was 63 on 10th February 2025 and taking a TRIS from her fund. She is still working and not intending to retire until after she turns 65. No non-concessional contributions were made to the fund after 30th June 2024. She has an accumulation account valued at $350,000 with 100% taxable component and a TRIS valued at $560,000 with 100% tax free component at 1st July 2024. Her pension minimum for 2024/25 was $22,400. The fund’s accountant started processing the fund’s 2024/25 financials in November 2025 and found out the SMSF trustee only paid her $20,000. The shortfall was more than 1/12th of the required amount. The value of Susie’s pension account at 30th November 2025 was $670,000 and her accumulation account was $430,000. Susie’s total super balance at 30th November was $1,100,000.
The pension was stopped on 30th November 2025. Susie is able to start a new TRIS on the 30th November 2025.
The $20,000 is considered a lump sum payment which she is not entitled to as she does not have a condition of release. She is over 60 but not yet retired.
The payment is considered an illegal early release of super and the $20,000 is included in her personal tax return and taxed at her top marginal rate which was 25% resulting in additional tax of $5,000.
The SMSF trustee breaches Regulation 6.17 of the SISR and the auditor has a discretion as to whether they report it in an auditor’s contravention report as the breach is not an automatic reportable breach. It is included in the fund’s audit report as a Part B breach and also included in the fund’s annual return.
Susie starts a new TRIS on 30th November with $670,000 with a tax free component of $341,091 ($560,000/$1,100,000 x $670,000) and taxed component of $328,909. Her accumulation account consists of $218,909 ($560,000/$1,100,000 x $430,000) tax free component and $211,091 taxed component.
Susie may also have to pay a pro-rated pension payment from the 1st July 2025 until 30th November 2025 when the pension is stopped. The pension payment may also be included in her tax return in 2025/26 as an early illegal release of super.
N.B. the lump sum payment of $20,000 and the pro-rated minimum payment to the 30th November also should be considered reducing the tax free component but has not been taken into account in the above example.