The lessons from Don Argus' SMSF versus the ATO

Former corporate high-flyer Don Argus’ Federal Court fight with the ATO is a lesson for all SMSF trustees paying pensions.

Summary: Former NAB chief executive Don Argus and his wife Patricia are challenging an ATO assessment of their SMSF. The tax office says the pension fund did not pay a sufficient pension, meaning the fund is taxed at 15%, rather than being tax-free. SMSFs face minimum pension payments that vary depending on the age of the members in order to preserve their tax-free environment.

Key take-out: SMSF trustees need to know what their minimum pension payment is. Try to automate the process of payment, so that insufficient payments do not occur in any given period.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

The point of this whole superannuation system from a member’s perspective is that, come the time of turning on a pension, we get paid in largely tax-free dollars.

And the reason that we get paid tax-free dollars – and are taxed at concessional rates during the accumulation phase – is that the government wants our super to look after us in our retirement.

In return for low, or zero, tax rates, the government sets a few requirements around these pension payments. These include minimum payments that need to be made by the pension fund to members.

In some cases, they also set maximums (for transition to retirement pensions).

If you don’t pay out the government-legislated minimum, then you are continuing to keep money in a zero-tax environment. The government, via the Australian Tax Office, is missing out on revenue.

The ATO doesn’t like missing out on revenue.

Failing to meet the minimum pension payments for a member from a pension fund is a particular risk really only encountered by SMSF trustees, as APRA-regulated funds (all other funds, except for SMSFs) generally have automated systems to ensure these payments are made to their pension fund members.

One of the roles of SMSF trustees with a member in pension phase is to make sure those minimum pension payments are made.

A payment that is not made could be the result of an oversight or a miscalculation. It matters not. The ATO doesn’t like it.

And the penalties can be quite severe, as has recently been discovered by former National Australia Bank chief executive and BHP Billiton chairman Don Argus and his wife, Patricia. The ATO can determine that an entire pension fund itself needs to pay tax on the income of the fund.

According to media reports, the ATO issued a tax assessment of the Argus’ SMSF, the Alamiste Superannuation Fund, based on the pension fund not having paid a sufficient pension in FY2010.

The Argus family are challenging the decision in the Federal Court. “The applicants apply to have … the taxable income of the fund for the income year ended 30 June, 2010 (reduced) by $1,176,991 from $2,251,071 to $1,074, 080 or to such other amount as the court orders,” it has been reported.

The understanding is that the ATO has alleged that the members were not paid their minimum pensions for the financial year. As a result, the pension fund is taxed at 15% (with capital gains reduced by one-third).

Meeting the minimum pension payment amounts generally requires the trustees to know the balance of the pension fund at the start of the financial year, or at the moment the pension is turned on.

(Starting and stopping a pension fund during the course of the financial year comes with its own pro-rata pension payment provisions.)

Because members can be of different ages – and might not be on a pension together at the same time – the member balances on which the pensions must be paid apply to each member’s balance.

Minimum pension payments apply in bands, from those who are under 65 to those who are 95 and over, as in Table 1.

Table1: Minimum pension payments                  


Minimum pension payment (%)

Under 65       














For most SMSFs, making the minimum pension payment will require the trustees to know what the closing balance was for the pension fund in the previous year.

If the balance of the pension funds was $1.2 million, then the relevant percentage for each member’s account must be paid out.

Let’s assume that the pension fund balance of one member, aged 76, was $800,000. A second member, aged 70, had a balance of $400,000. The older member must be paid a minimum pension of $48,000 (6% of $800,000). The younger member must receive a pension of at least $20,000 (5% of $400,000).

When you reach a condition of release – these two members would have satisfied a condition of release on turning 65, which they both have – there is no maximum. They could literally withdraw the lot.

Most people would not do so, because to draw the money out into their personal names would mean that any earnings on the funds that are now outside of super would be taxed at marginal tax rates.

A tax-free environment

Super funds in pension phase pay no tax. No tax on earnings. No tax on capital gains. And, if a pension is paid out to a member older than 65, then no tax is paid on the actual pension payment either.

The government wants you to take out money from your pension fund each year to tax it again – in some ways, to bring the money back into the “system” that pays tax, such as GST on purchases, or into the investment world, where you pay tax on earnings.

They do not want you to be able to keep super fund money in a tax-free pension account forever. They either want you paying tax at 15% in accumulation phase, or paying tax when it comes out, in the form of GST or on investment earnings.

For SMSF trustees, the lesson from the Argus case - whatever the outcome with the ATO - is that you need to know what your minimum pension payment is and to try to automate the process of payment so that insufficient payments do not occur in any given period.

As soon as you know the balance in your pension fund account, on which the minimum pension payments are made (most usually in your annual SMSF accounts), then set up the payment or adjust your ongoing payments to make sure you meet the minimum.

Payments can be made as frequently as required, or as infrequently as once a year.

Don’t forget that those on transition-to-retirement pensions are in a different position. TTR pensions must make a minimum payment of 4% and a maximum payment of 10% of the value of the pension fund.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Bruce Brammall Financial and the author of Debt Man Walking. E:

  • On average, Australian pre-retirees expect their super savings to run out 10 years into their retirement, although they expect their retirement to last an average of 23 years, according to research by HSBC. The gap is the fourth-largest globally, according to the survey of 16,000 people in 15 markets.

More Australians expect they will never be able to fully retire than any other nationality surveyed, at 16% of Australians compared to an international average of 10%.

The survey found that 36% of Australians who are already retired think their preparation was insufficient. Some 31% of retirees surveyed experience a lower quality of life in retirement after being forced to rein in spending.

  • SMSF advocacy groups have welcomed comments by assistant treasurer Josh Frydenberg calling for robust governance for large industry and retail super funds.

SMSF trustees can have greater confidence following Frydenberg’s support for the key principles of superannuation, said SMSF Professionals’ Association of Australia CEO Andrea Slattery.

SMSF Owners’ Alliance executive director Duncan Fairweather backed calls for a majority of board members of public offer funds to be independent, according to media reports.

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